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Construction Workers and the Gig Economy

Construction Workers and the Gig
Mark Erlich
Last September, California Governor Gavin Newsom signed Assembly Bill
5, which imposes stringent criteria to determine whether a worker is an
employee or an independent contractor. What may seem like an arcane def-
inition of employment law generated enormous controversy. The California
Chamber of Commerce, business associations, and gig economy employ-
ers strenuously opposed the bill. Uber, Lyft, DoorDash, and other similar
companies argued that AB 5 posed a fundamental threat to their business
model, one that relies on drivers to operate as independent contractors.
The outsized nature of the California economy and the pervasive influ-
ence of Silicon Valley drew national attention to the legislative battle. Prior
to the attention focused on AB 5, the debate over the legitimacy and legality
of independent contracting had been limited to employment professionals,
union activists, academics, attorneys, and federal and state wage enforce-
ment agencies. But the misclassification of employees as independent con-
tractors is not a new issue, nor is it restricted to ride sharing and gig firms.
Silicon Valley executives may justify the status in terms of work schedule
flexibility and the opportunity to “be your own boss,” but in reality, employ-
ers misclassify workers simply to save money and minimize accountability.
A firm that designates its workforce as independent contractors evades
responsibility for the payment of state and federal taxes as well as work-
ers’ compensation insurance premiums, resulting in up to 30 percent sav-
ings in labor costs. Workers lose basic rights including legal entitlements
to minimum wage and overtime payments, paid sick leave, unemployment
insurance in case of layoff, workers’ compensation benefits in case of an on-
the-job injury, anti-discrimination protections, and the right to form a union
and collectively bargain. Misclassification is a business model that depends
on tax, insurance, and payroll fraud. It is an assault on a century of hard-won
workers’ rights.
On December 30, Uber and Postmates filed suit to block the law, claim-
ing that is was a “thinly veiled attempt” to harm gig economy businesses. In
February, a federal judge denied the companies’ request for a preliminary
injunction to prevent enforcement but the underlying suit is still on the
docket. The CEOs of Uber, Lyft, and DoorDash have threatened to spend
hundreds of millions of dollars on a referendum campaign to undo AB 5.
The litigation and threats garnered headlines, but the bill may have just as
large an impact on more traditional industries, such as construction, truck-
ing, hospitality, and janitorial services. In particular, non-union construction
employers have misclassified their workers for decades in order to lower
costs, largely motivated by the desire to avoid the high workers’ compen-
sation premiums that accompany work in a dangerous industry. They now
have a well-established system in which workers function as employees in
every respect but are classified as independent contractors. The practice
has been one of the principal elements underlying the loss of union market
share and the inexorable decline of wage and safety standards in the U.S.
construction industry.
Misclassification was an integral part of the broader abandonment of the
post–Second World War social contract, the fissuring of the economy, and
the business community’s strategy of shedding obligations for employees
through the increasing use of outsourcing, subcontracting, and franchising.
In many ways, misclassification was an easy stratagem to use in construc-
tion, an industry with large numbers of legitimate sole proprietors and inde-
pendent contractors.
Construction workers in New York City in 2017 (Gordon Zheng/Wikimedia Commons)
Federal and state laws contain a variety of definitions of what consti-
tutes an employee versus an independent contractor, but the simplest
common-sense distinction is that if workers operate under the direction
and control of another, they are employees. The solo plumbers who install
or repair toilets or water heaters at a residence may well work on their own,
scheduling appointments, ordering materials, performing the work, and
collecting payments. But the thousands of drywall carpenters, wood fram-
ers, painters, roofers, and other trades workers who show up every day at
multi-million-dollar project jobsites working under the direction of a fore-
man with company-provided power tools and materials are no more inde-
pendent contractors than any conventional employee. Today, there are
an estimated 300,000 construction workers in the United States who are
improperly classified as independent contractors and another 1.2 million
construction workers who are paid off the books in cash.
The legal sanction for misclassification can be traced back to 1978,
when Congress granted a “safe harbor” in the tax code to employers that
operated in industries where the use of independent contractors was a
“long-standing recognized practice.” Decades later, in 2014, a high-level
Internal Revenue Service officer argued that the safe-harbor provision
served as a green light for construction contractors to transform the indus-
try into what he termed the “Wild West.” In 1987, a Q&A fact sheet at the
largest national construction employers’ convention posed the question:
“What if I decide just to give up and have no one in my business other than
independent contractors and leased employees?” The very existence of the
question provided its own answer. The wide acceptance of misclassifica-
tion created a cottage industry of lawyers, accountants, and consultants
that advised contractors how to increase profits by moving their workforce
off payrolls. In 2001, the American Bar Association’s Construction Lawyers
Guide included a five-page boilerplate independent contractor agreement
for construction employers to use with their workers.
Two important changes happened to the role of misclassification in
the economy around the turn of the twenty-first century. The first was
driven again by developments in construction. The growing participa-
tion of immigrant workers—in particular, undocumented workers—in
construction eliminated much of the need for legally sophisticated inde-
pendent contractor agreements with individual trades workers. Between
1990 and 2000, Pew reported that the proportion of Hispanic male work-
ers in construction increased four times as fast as the increase of white
male workers. By 2006, nearly one-third of recently arrived foreign-born
Hispanic workers were in construction. By 2014, undocumented immi-
grants made up 15 percent of the total national construction workforce,
actually outnumbering immigrant workers with valid working papers.
These vulnerable workers received low wages and feared reprisals in the
face of all-too-common instances of wage theft. High-priced lawyers and
accountants were replaced by labor brokers who trafficked workers from
Mexico and Central America to construction sites in the United States. A
system of extensive paperwork and the issuance of 1099 tax forms at the
end of each year was replaced by payments in cash with little or no report-
ing or recording of the transactions.
The growth of the gig economy also shifted the perception of the use
of independent contractors. Instead of independent contracting being sim-
ply a cost-saving (and potentially illegal) method of employment that eradi-
cated workers’ rights, the classification was increasingly promoted as a
desirable alternative to the dreary rat-race of employee wage slavery. As the
founder of Pasona, one of the world’s largest temporary staffing agencies,
said in 2007: “Be a regular worker—and be exploited for the rest of your
life.” As an alternative, he proposed the life of an independent contractor,
which supposedly offered the allure of independence, individualism, flex-
ibility, and entrepreneurialism. The ideological spin attempted to transform
independent contracting from an obligation-evading scam into a transcen-
dent model for twenty-first-century employment. As the managing direc-
tor of a nonprofit school charged with teaching low-income workers how to
develop skills for the new sharing economy told the San Francisco Chronicle
in 2017: “Everyone can be their own CEO.”
But the bloom appears to be off the rose for many gig companies. Uber
and Lyft’s much ballyhooed IPOs landed on Wall Street with a remarkable
thud. More important, gig workers are increasingly challenging working
conditions and company policies. Among the many creative job actions of
2019, Uber and Lyft drivers staged a twenty-four-hour strike in May and in
February of this year launched a global network of app-based drivers. Also
in February, U.S. District Judge William Alsup of the North District of Cali-
fornia ordered DoorDash to engage in individual arbitration with over 5,000
couriers who claimed they were misclassified as independent contractors.
Ironically, DoorDash had proposed a class-wide lawsuit in order to avoid the
$10 million in arbitration filing fees after initially insisting on arbitration as
an alternative to class-action litigation. “This hypocrisy will not be blessed,
at least by this order,” wrote Judge Alsup.
Since the inception of the ridesharing firms, executives had told their
drivers that the highly prized flexible scheduling aspect of their work was
contingent upon the status of independent contracting. For the most
part, drivers hesitated to challenge this misleading legal claim as long as
“the money was decent,” according to Los Angeles–based Rideshare Driv-
ers United organizer Ivan Pardo. “But once pay began dropping to sub-
minimum wage levels in 2017 and 2018,” continued Pardo, “drivers began
to re-evaluate their relationship with the employers. And as conditions
deteriorated further in 2019 and AB 5 entered the scene, drivers in Califor-
nia began to see reclassification and a union contract as the best path to
secure better pay and fair treatment.”
AB 5 codified a 2018 California Supreme Court ruling that established
the “ABC test” as the determinant of employment status. The ABC test pre-
sumes a worker is an employee unless three clear and simple criteria (the
contractor is free from control and direction by the hiring company, per-
forms work that falls outside the usual course of its operations, and is “cus-
tomarily engaged” in similar independent work) are met. It is the cleanest
and strongest of the numerous definitions in state and federal law and had
been adopted in Massachusetts in 2004. In the past, much of the regula-
tory emphasis had been on construction misclassification because the vio-
lations were so obvious, egregious, and extensive. In fact, the ABC test is
already in place for construction in New York and New Jersey. New York,
New Jersey, and Illinois are also considering expanding the test to gig econ-
omy employers as a result of AB 5.
At the federal level, the U.S. Department of Labor (DOL) had also
become more actively engaged in the discussion of misclassification after
the 2014 appointment of labor market policy expert David Weil as the DOL’s
Administrator of the Wage and Hour Division. In 2015, Weil issued a lengthy
Administrator’s Interpretation (AI) that concluded, based on the Fair Labor
Standards Act definitions, that “most workers are employees.” Weil nego-
tiated a series of memoranda of understanding with state enforcement
agencies to coordinate federal and state actions against employers that
misclassified. Now based at Brandeis University, Weil weighed in on the AB
5 discussion in a July 2019 Los Angeles Times op-ed, arguing that rideshare
drivers were in fact employees who happened to work under “a manage-
ment system based on software rather than human beings.
Unsurprisingly, as with numerous other Obama-era policies, the Trump
administration has reversed course on this and deleted the AI from the DOL
website. In April 2019, the general counsel of the National Labor Relations
Board (NLRB) determined that Uber drivers are independent contractors.
Two weeks later the DOL concluded that the workforce of an unidentified
firm that operated in the “on-demand” or “sharing” economy should be
considered independent contractors. Again, as with so many developments
in the Trump era, a significant number of states have taken the opposite
stance and actually ramped up enforcement activities regarding payroll
fraud and wage theft. The same month that the NLRB and the DOL released
their opinions, Michigan, Montana, and Wisconsin announced the creation
of taskforces to combat employee misclassification. In response to the fed-
eral rulings, New Jersey labor commissioner Rob Asaro-Angelo suggested
that the DOL “opinion letter has zero effect on how the New Jersey Depart-
ment of Labor enforces state laws.
A number of state agencies have recently filed valuable civil and crimi-
nal cases against violations in the trades sector, alongside examples of
private class-action suits and litigation. In the last several months alone,
the District of Columbia’s attorney general’s office settled with a major
electrical contractor for $2.75 million for the misclassification of 535 work-
ers, the New York City district attorney’s office indicted a construction labor
broker for defrauding $1 million in workers’ compensation premium pay-
ments, a Minnesota construction contractor pleaded guilty to labor traf-
ficking undocumented workers, and the New Jersey Department of Labor
fined Uber $649 million for misclassification. On the other hand, industry
lobbyists have successfully pushed through gig company “carve-out” bills in
seven red states that allow independent contracting for transportation net-
work companies and similar gig firms by exempting that sector from state
employment laws.
The size of the gig economy should not be exaggerated. A recent study
by the U.S. Bureau of Labor Statistics reported that only 1 percent of the
nation’s workforce performs “electronically mediated work.” Construction,
to take just one example, is a much larger industry and has been plagued
by misclassification for far longer. But construction is perceived as an
archaic industry, resistant to change and largely untouched by the won-
ders of technology. In this view, ridesharing and other forms of platform
work represent the future, both in terms of algorithmic sophistication and
the organization of labor.
The vast majority of American workers are still on payrolls and operate
under the terms and conditions of the standard employment model. Yet the
modern workplace has become more precarious, both in terms of declining
job security and the disappearance of traditional benefit plans. The post-
war notion of a paternalistic employer obligation to a workforce has largely
evaporated. Much of the current debate on the future of work revolves
around robotics, artificial intelligence, and the other shiny transformative
toys that technology can produce. There is far less discussion about the
future of worker protections.
Certainly, the overheated reaction of employers to the passage of AB
5 is a recognition that their favored business model may be at risk. David
Nelson, the public policy director of the California Asian Pacific Chamber
of Commerce, direly predicted that “forcing ride-share and delivery drivers
to become employees would significantly limit the availability and afford-
ability of these services to exist.” The impending lawsuits and the proposed
ballot initiative to reverse AB 5 will determine the viability of the new law.
The stakes are high. In the words of a pro-AB 5 spokesman, “we’re going to
spend what it takes to win.”
The adoption of the ABC test in a number of states represents an alter-
native path to the individualistic vision of workers left to fend for them-
selves. The test is not a silver bullet, and its value should not be overstated,
but it does help preserve basic worker protections. Even the strongest
examples of legislation, however, are only meaningful if there is a parallel
commitment to aggressive regulatory enforcement of the laws at both the
federal and state levels.
AB 5 took effect in California on January 1. Despite a significant number
of occupational carve-outs in the bill, the state’s Legislative Analyst’s Office
estimates that roughly a million workers may need to meet the ABC test
to continue as independent contractors. Governor Gavin Newsom’s budget
allocates $21.68 million to enforce AB 5, but it is still too early to determine
how the law will be interpreted and implemented. In any case, there is no
chance of coordinated federal enforcement under the current administra-
tion. Officials in a number of states are also reluctant to be overly aggres-
sive, for fear of appearing to quash innovation and alienate an influential
and high-profile sector of the economy.
Enacting and enforcing strong employment laws is a precondition for
elevating worker standards. Uber and Lyft drivers cannot form unions unless
they are considered employees, and the likelihood of a return to a high-
wage unionized construction industry in every part of the country is slim
without a sustained attack on all forms of payroll fraud. Treating workers as
employees establishes a floor for basic protections. The broader challenge
will be to use that floor as a springboard to organize the growing number of
precarious occupations.
Mark Erlich is a Wertheim Fellow at the Harvard Labor and Worklife Program and retired
Executive Secretary-Treasurer of the New England Regional Council of Carpenters.
... According to the Bill, drivers working on the platform (especially Uber, Lyft, and Deliveroo) would be classified as employees, not independent contractors. This legal status obligated employers to provide many standards, especially the minimum wage (Erlich 2020). According to Erlich, misclassification is a business model that depends on tax, insurance, and payroll fraud. ...
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For the last four decades, the neoliberal economy has improved a distinctive capital accumulation regime by creating new types of work. Of course, this regime is not only constituted by the transformation of working but the collapse of work powered by social, political, and economic protection also finalized the conflict between capital and labor in favor of capitalists. Temporary, part-time, agency, subcontracting, outsourcing, zero-hours contracts, multi-jobs, on-demand, and gig working types became the hallmark of the new economic order... The gig economy is a part of the digital platform economy and is making a significant “contribution” to the increasingly common non-standard forms of employment. In the new working regime that is low-paid, temporary, insecure, precarious, without social protection, the rights of the workers have been left to the mercy of the capitalist market... In this chapter, it is shown how platform work that compels employees to precarious working and fragile living conditions are legitimized through digital media. This is the process itself, which we call here the evaporation of risks. While platforms create a working world full of risks for gig workers, they also evaporate the risks that they create with various mechanisms and discourses...
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