The whole sector won’t enjoy broader success until its companies learn how to combine flexible work with better treatment. Why you can trust us By Steven Hill 5 MIN READ

More and more businesses are exploiting what is known as the “1099 worker loophole”—hiring workers as “independent contractors” instead of as regularly employed workers. In some cases, companies have laid off all or most of their regular workers and then hired them back, but as independent contractors.

In some cases, companies have laid off all or most of their regular workers.

Merck, one of the world’s largest pharmaceutical companies, has been a pioneer of this strategy. In 2008, when it came under pressure to cut costs, it sold its Philadelphia factory to a company that fired all 400 employees and then rehired them as independent contractors. Merck then contracted with the company to carry on making antibiotics for them, using the exact same employees.

And it’s not just Merck. Arizona public-relations firm LP&G fired 88 percent of its staff and then rehired them as freelancers working out of their homes, with no benefits. And Out magazine, the most-read gay monthly in the U.S., laid off its entire editorial staff and then rehired most of them as freelancers, with lower salaries and no benefits.

By hiring contractors instead of regularly employed workers, businesses can reduce labor costs by as much as 30 percent, according to the Bureau of Labor Statistics. That’s because they don’t have to provide health care, Social Security, paid sick leave, or even workers’ compensation after an injury.

Now from Silicon Valley comes an intensification of this economic trend: the so-called “gig economy.” Companies like Uber, Airbnb, and Upwork are allegedly liberating workers to become “micro-entrepreneurs,” who are “able to seamlessly integrate work with life,” as TaskRabbit founder Leah Busque put it in the Huffington Post. In reality, these workers have ever smaller part-time jobs (called “gigs” and “micro-gigs”), with low wages and no benefits or job guarantee, while the companies profit handsomely.

The gig economy treats a worker’s labor like just another ore to be fed into the company machine. Workers are paid only for the exact minutes they are producing a report, or designing a logo, or cleaning someone’s house. It’s as if a star quarterback got paid only when throwing a touchdown pass, or a chef was paid by the meal. There’s no annual or monthly salary. It takes us back to the days of the piecemeal, patchwork economy, which was more prevalent in previous centuries.

These new ways of working are crying out for regulation.

The prototype for the new digital company is Upwork, which is based in San Francisco. Its mere 250 regular employees use technology to oversee 10 million contractors and freelancers all over the world. A vast range of workers can be found on Upwork, including architects, engineers, lawyers, website and app designers, translators, software developers, and logo and graphic designers. U.S. workers bid for jobs alongside workers from India, Thailand, Philippines, and elsewhere. The workers auction themselves off, underbidding each other in a global race to the bottom. Upwork represents a new low in globalization, taking the logic of NAFTA and free trade, and intensifying it on a virtual shop floor.

Given the precariousness of gig work, including the low pay and uncertain hours, a lot of gig workers are constantly wondering if there isn’t a better deal somewhere else. Worker reliability has become a real challenge, and a number of companies in the startup economy have begun to struggle. Some, like HomeJoy (home cleaning), SnapGoods (gear rental), and SpoonRocket (home delivery of fast food) have gone out of business. These companies failed because apparently their CEOs never learned the old business secret that “you get what you pay for.” They didn’t understand that the quality of the human worker is crucial to their success and depends on how well the workers were treated and rewarded. These companies showed their workforce no allegiance or loyalty, and they engendered none in return.

Rebecca Smith, deputy director of the National Employment Law Project, says working for gig economy businesses is like going back to the exploitative system of piece work, popular in 19th century England, in which workers were paid not by the hour or year but based on how much they produced. Companies like Upwork, TaskRabbit, Postmates, and Uber, she says, talk as if they are different from old-style employers simply because they operate online. “But in fact,” as Smith told the SF Weekly, “they are operating just like farm labor contractors, garment jobbers, and day labor centers of old.”

To be sure, if you are under- or unemployed, working a gig job is better than sitting on the couch, despondent and flat broke. Workers who need or want a flexible schedule also appreciate gig work (though after a few months of constant hustling, you might find stable employment looking more attractive). But these new ways of working are crying out for regulation. The whole sector won’t enjoy broader success until its companies learn how to combine flexible work with better treatment.

If U.S. companies want good workers, they need to offer decent jobs.

Fortunately, we are seeing some potential solutions. One is a stock photography website launched in 2013 called Stocksy United, which, besides providing stunning images, also is a worker-owned cooperative. Stocksy has quickly grown to 900 photographer-members, each owning a share of the company, which comes with voting and governance rights. Unlike many billion-dollar “unicorn” startups that pay their workers peanuts, the Stocksy member-photographers keep most of the money from sales of their work. The company’s revenue doubled in 2015 to $7.9 million, with more than half paid out in royalties. The company also paid dividends to all its members.

Etsy, an online sales platform that connects professional craftspeople to customers, is another company that appears to be offering a fair deal, with Etsy taking a reasonable fee of 3.5 percent for each sale. Uber, by contrast, takes 25–30 percent of each fare.

Meanwhile, many observers are keenly watching the launch of a new ridesharing company called Juno, which was founded by Talmon Marco, the CEO of the popular text and voice app Viber. The plan is to compete against Uber by treating its drivers better, including offering higher wages and stock options.

Meanwhile, as a way of fostering flexible work with better treatment, I’ve proposed a plan that would create a portable safety net for all workers, regardless of how they work. While traditional benefits are usually tied to a single employer and often depend on working full-time, a portable safety net would include all workers and accrue benefits even if a worker is employed by multiple businesses on a temporary, freelance, or part-time basis. Every business would contribute a “benefits fee” for each of its workers, pro-rated to the number of hours worked for that business. It’s like what many businesses do now for Social Security and Medicare, but this plan would also cover health care, injured worker and unemployment compensation, and provide a few days of paid sick leave and vacation. The worker would be able to port her or his “individual security account” from job to job.

Some Silicon Valley CEOs, such as Logan Fox of Lyft and Apoorva Mehta of Instacart, as well as labor and NGO leaders like David Rolf, Anne-Marie Slaughter, and Nick Hanauer, have signed on to a statement of principles based on my blueprint (proposed in my book Raw Deal: How the Uber Economy and Runaway Capitalism Are Screwing American Workers). While there’s little hope that a paralyzed federal government will advance such a bold plan anytime soon, we can legislate this new social contract at the local and state levels. Cities like San Francisco and Seattle have already started discussions about the possibilities.

At the end of the day, if U.S. companies want good workers, they need to offer decent jobs. We can make this new digital economy work, but only if we have the right laws and regulations shaping it, and new pro-worker companies leading it.

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