Accelerating the Death of Real Jobs

AP Photo/Richard Vogel, File

A driver displaying Lyft and Uber stickers on his front windshield drops off a customer in downtown Los Angeles. 

This article appears in the Summer 2018 issue of The American Prospect magazine. Subscribe here

For the past three decades, employers have used numerous techniques in their quest to reclassify their workers as independent contractors rather than as employees. Doing so enables them to avoid paying minimum wages, overtime premiums, expense reimbursements, workers’ compensation, health insurance, and numerous other statutory obligations. It also makes it illegal for their workers to form a union.

To this end, employers have adjusted job titles, rearranged job duties, removed company logos from delivery vehicles, and even abandoned required company uniforms in order to portray their workers as independent contractors. These types of employer strategies have generated a massive amount of litigation. For example, in the “gig economy,” the issue of worker classification is a recurrent and festering controversy, generating hundreds of lawsuits against Uber and other on-demand employers. And the issue is far from settled. Just this past April, the California Supreme Court rendered a decision that adopted a broad definition of “employees,” one that would bring many types of on-demand workers within the employee category.

The recently enacted Republican Tax Act could boost the trend toward converting employees into independent contractors. The Tax Act contains a provision that allows workers to lower their taxes simply by converting from employee to independent-contractor status. The provision permits sole proprietors to subtract 20 percent from their income before their tax is calculated. To be eligible, the individual must have taxable income of less than $157,500 if filing singly, or less than $315,000 if married and filing jointly.

On its face, the “pass-through deduction” could prove to be valuable to some workers. The Tax Policy Center shows how the tax provision would work (see chart).

The 20 percent deduction for independent contractors in the Tax Act is in addition to other tax advantages that independent contractors receive. As “sole proprietors,” workers who are classified as independent contractors are eligible for a number of deductions that are available to small-business operators, such as deductions for use of their car, home office, phone, and other items regularly used in their business.

The new deduction only applies to workers who meet the criteria of independent contractors. To be an independent contractor, their work has to be done outside of an “employment relationship.”

Moreover, the deduction does not apply to individuals whose work is in certain service industries. Specifically, the pass-through deduction excludes those independent contractors who earn more than the specified maximums and provide services in the fields of health, law, consulting, athletics, financial services, brokerage services, or any service provider “where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.” Nonetheless, the deduction would apply to many blue-collar jobs that lie at the intersection of employee and independent-contractor status, or in jobs in which the question of employee status is contested.

Some tax analysts predict that the new pass-through deduction for sole proprietorships will induce workers to try to get themselves reclassified as “independent contractors” rather than employees. Indeed, the Tax Policy Center advises employees to negotiate with their employers to get themselves converted to sole-proprietorship status in order to take advantage of the new law. And some analysts predict that it will make it easier for employers to reclassify workers because they can use it to convince their workers that reclassification is in their best interest. For example, Mike D’Avolio, a tax analyst who advises small businesses wrote an article in his newsletter entitled “New Tax Law Offers Many Perks for Self Employed.” Another libertarian financial blogger writes of the deduction, “Who knew that changing your employment status could be so lucrative?”

Despite the Tax Act’s 20 percent deduction and the other tax advantages of independent contractor status, however, there are serious drawbacks and perils for workers in the tax law. If individuals convert from employee to independent-contractor status, they lose any employer-provided health insurance, pension contributions, or other benefits they get as employees. Moreover, they lose the protections of federal and state labor and employment laws, including protection for overtime pay, minimum wage, health and safety on the job, workers’ compensation, rest breaks, expense reimbursements, anti-discrimination protection, and a host of other statutory rights.

In addition, as independent contractors, they will be required to pay both their own share and the employers’ share of the Social Security tax, as well as Medicare taxes, amounting to more than 14 percent of their income. And most importantly, they lose the right to form a labor union and bargain for improved terms and conditions of work. Thus the new tax deduction for independent contractors could prove to be a big disappointment for workers who permit themselves to be reclassified on that account. Their financial gains are dubious, and the ultimate impact is worker disempowerment.

In sum, the Republican-crafted Tax Act contains a Trojan horse, giving employers another weapon in their war against the labor laws and unions. But why should we be surprised?

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