Washington Is Out of Touch with the 21st Century Workforce

The following is a summary of testimony before the House Committee on Education and the Workforce. To access the full testimony, click here.

Chairman Walberg, Ranking Member Wilson, and other Members of House Education and the Workforce Committee, thank you for the opportunity to give testimony on how new administrative interpretations of the Fair Labor Standards Act of 1938 fail to reflect the realities of today’s workforce.

I am a fellow at Economics21 at the Manhattan Institute and am the coauthor, with Diana Furchtgott-Roth, of Disinherited: How Washington Is Betraying America’s Young. I am also the author of the forthcoming Uber Positive: Why Americans Love the Sharing Economy.

The American economy is changing, and millennials’ attitudes about work and their careers are changing with it. The rapid rise of the so-called “sharing economy” embodies many young Americans’ new economic ideal—one driven by technology, convenience, and flexibility.

Companies such as Uber and Airbnb offer the technical platform and support to allow transactions between buyers and sellers easily to take place. For this reason, these types of companies are often referred to as “intermediaries.” Those who partner with intermediaries are classified as independent contractors, not employees.

The flexibility that independent contractor status offers workers is vital to the sharing economy’s success. While some workers use these platforms full time, the vast majority use them for part-time work or supplemental income. About 8 in 10 Lyft drivers choose to drive 15 hours a week or less, and half of Uber drivers use the platform for less than 10 hours a week.

Furthermore, half of Lyft’s drivers work another job while partnering with the company. Similarly, two-thirds of Uber drivers hold another job. Independent contractor status allows the decision of when or for how long to work to be controlled by workers, not companies.

The opportunity to smooth out earnings to meet rent, pay down student loans, or fund a new business venture is a benefit of the sharing economy that must be protected. This is especially critical for the 70 percent of Americans ages 18 to 24 who experience an average change of over 30 percent in their monthly incomes.

But the sharing economy’s rise obscures a troubling economic trend. Once dynamic, the American economy is growing slowly and entrepreneurship is falling. Even though two-thirds of millennials want to work for themselves in the future, less than 4 percent of private businesses are at least partially owned by someone under the age of 30.

One reason for this is that government policy, particularly in regards to labor regulation, ignores the realities of a 21st century economy and continues to hold back millennials’ economic opportunities.

For example, the Labor Department recently issued an administrator’s interpretation, effective immediately, to clarify the definition of independent contractors. It states that “most workers are employees,” not independent contractors. Because it was termed “guidance,” it did not have to go before the public for comment, even though it has the potential to upend the sharing economy.

Currently, workers are either categorized as employees or independent contractors. Employees are given many protections and benefits under the Fair Labor Standards Act that are not available to contractors. In exchange, employers set the conditions of workers’ terms of employment. On the other hand, the independent contractor model provides workers with more control and flexibility.

The Labor Department’s interpretation formally accepts the six-part “economic realities” test for determining whether workers are employees or independent contractors. At the same time, it downplays one of the six criteria, a lack of control over workers’ hours, as a determinant of employment status. This could be devastating for sharing economy companies, which do not control workers’ hours.

Unlike employees, independent contractors are not entitled to minimum wage, overtime pay, unemployment insurance, or workers' compensation. But extending these employment protections to independent contractors makes no sense. When debating the future of worker classification, lawmakers should resist calls to extend employee wage and hour protections to independent contractors.

The difference in treatment is justified because independent contractors work for themselves.

Moving these workers into an employer-employee relationship from their current—but threatened—independent contractor status would substantially hinder the growth of sharing economy, not to mention the flexible work opportunities and immense consumer benefits that it provides.

Since intermediaries do not control workers’ hours, and determining how much someone is actually working solely for the intermediary is difficult (if not impossible), minimum wage and overtime pay requirements are inapplicable to the companies’ workers. Additionally, one of the benefits of the sharing economy is that supply can easily fluctuate to meet ever-changing demand.

Because of the option of flexibility, independent contractor work for intermediaries is often transient, or done in addition to other work. This is why there is little reason to compel employers to fund unemployment insurance benefits. Intermediaries’ workers also usually complete jobs off-site and use their own materials. For these reasons, workers’ compensation systems should remain optional—not mandatory—for intermediaries.

The worker classification question needs to be sorted out by federal legislators, not courts or unaccountable executive agencies. The alternative is the crippling of the sharing economy by executive agencies set on incorrectly classifying the vast majority of new economy workers as employees.

Millennials want to be entrepreneurs, and they desire employment that is flexible, mobile, and individualized. The Department of Labor’s attempt to stifle the rise of promising new business models though regulation is no way to help millennials achieve their vision of the American Dream. In order to promote an entrepreneurial workforce, Congress needs to use its powers to rein in the Labor Department.

Jared Meyer is a fellow at the Manhattan Institute for Policy Research. Follow him on Twitter here.

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