This memo was drafted in June 2019 for informational purposes for the City of Philadelphia Department of Commerce. It does not in any way represent the Department of Commerce’s opinion or policy on this matter.
Executive Summary
Despite huge growth over the last eight years, the gig economy is a controversial subject with supporters and detractors across the country. Those in favor say it provides flexibility and scalability for talented workers to earn income on their own schedule. Those opposed see greedy corporations placing the risk on employees while withholding some of the reward they’d receive if they were truly “independent.” Philadelphia is home to many thousands of gig economy workers, and faces a difficult challenge in balancing reform and protections for workers with preserving this vital source of income for non-traditional employees. By working closely with employee rights’ groups and freelancers of all shapes and sizes, new incentives and penalties should be developed to better manage the gig economy labor market, as opposed to banning it outright.
What is the Gig Economy? How does it interact with the larger labor market?
The gig economy is a term used to describe a wide variety of temporary, part-time, flexible labor contracts, which can have varying degrees of complexity. For example, adjunct professors or high-skilled freelance workers are just as much gig economy members as Uber drivers and Rover dog walkers. When viewed in this more holistic way, as much as one third of Americans already have a “gig” as part of their professional life. Workers choose gigs because of the flexibility and, in some cases, to get into a new job or back to work quickly without dealing with traditional hiring processes.
Employers also benefit in many ways from the arrangements possible in the gig economy. For example, an employer who cannot afford to continue hiring full-time employees as they scale may use gig economy workers to fill in the gaps. Another way the employer may benefit is by expanding their available talent pool. A graphic designer, for example, may not be able to move across the country to design them a logo full-time, but would gladly contract with the firm remotely using technology as a bridge. Both parties benefit a great deal in this scenario – the freelancer gets a client and the organization gets a cost effective brand identity.
What is the Gig Economy’s impact on Philadelphia?
According to a Brookings Institute report, two major elements of what most consider the gig economy – ride sharing and room sharing – are growing in Philadelphia. From 2012 to 2014, ride-sharing work grew by 6% and rooms grew by 2%. From the report: “The spread of nonemployer firms between 2010 and 2014 occurred mostly in the largest metro areas. No less than 81 percent of the four-year net growth in nonemployer firms in the rides sector took place in the 25 largest metros, while 92 percent occurred in the largest 50 metros.” Despite being significant and growing quickly, the report makes it clear that app-based employment is not displacing payroll employment.
This data is a combination of Census Bureau’s survey measuring Nonemployer Businesses by census tract and corresponding NAICS codes – meaning with some minor manipulation, it would be easy to monitor long-term. Collection and reporting of this data should accompany any initial meetings internally, and can also be leveraged to plan an effective hearing should one be called (i.e. inviting appropriate industry representation, not just Uber).
What does the California case study demonstrate?
In April 2018, the California Supreme Court ruled “that employers must treat workers who do work related to a company’s ‘usual course of business’ as full-fledged employees.” As an example of the standard, a plumber hired to fix a sink at a business would not be considered an employee. However, if a clothing company hired a worker to sew at their home, they would be entitled to a minimum wage, breaks, and other employment benefits. This ruling only applied to a shipping firm called Dynamex, but set a precedent that could impact many types of workers in California, including care givers, dog walkers, hair stylists, and ride-share drivers. It would make gig work illegal in the current state it exists, and require companies to take on significant costs and risks, including minimum wages, additional payroll taxes, and benefit contributions. An MIT professor estimated an increased cost per employee of between 25% to 40%.
In May 2019, following protests by Uber drivers related to the company’s forthcoming IPO, California lawmakers passed legislation which provided stricter guidelines for worker classification. For workers to be classified as independent contractors, companies will have to prove the following three conditions:
- That they don’t control or direct the person’s work
- That the worker’s services aren’t related to the company’s main business
- And that the person is engaged in an “independently established trade, occupation, or business of the same nature” as the work performed.
These conditions would almost certainly make many popular app-based gigs classifiable as full-time employment. Examples include Lyft, Uber, AmazonFlex, GrubHub, Postmates, Care.com, and Wag. The bill seems to get these workers closer to their demands from the protests – mainly better wages, job security, and better treatment from their corporate higher-ups. It’s important to note that the demands vary from place to place depending on the local issues.
What should regulatory goals should Philadelphia pursue?
Gig economy work can be very important and meaningful in the life of Philadelphia’s residents. There are certainly drawbacks as evidenced in the California case study – companies are effectively transferring the burden from themselves to the employee who bears much more of the risk than traditional workers. Legislation like that in CA will completely turn the tables and put the burden back on employers. However, a very basic economics model of supply and demand tells us that as the cost of these workers increases, the demand for their work will decrease as well. Large, well-funded organizations will be able to weather this storm, but small and medium-size businesses will be hit the hardest by these new regulations.
Philadelphia should be cautious in how they regulate this transfer of burden from employee to employer, as we could lose critical, low-skill and low-barrier-to-entry jobs for vulnerable residents. According to a 2018 survey by UpWork, an online freelance marketplace, 42% of freelancers said they like gig economy arrangements because they aren’t able to work for a traditional employer. Whether it be those who recently lost jobs, have family obligations, or other hurdles to traditional employment, the gig economy provides an opportunity to be productive and earn income with little commitment or training. Another finding from their survey showed that gig economy work is valued by those who are of retirement age or older for all of the same reasons mentioned above. It would be more harmful than good if Philadelphia made this kind of work impossible.
Conclusion/Recommendations
The gig economy is growing rapidly, but now finds itself on shakier ground that it did a year ago. While abuses of employee rights should be fought, outlawing a type of work arrangement will not necessarily solve the core issue. Organizations must be held accountable for treating employees fairly regardless of their size, scale, or employee base. Philadelphia should prioritize policy solutions that better manage this labor market, but not ban it outright. Some recommendations for how to proceed could include:
- Holding a hearing that includes a wide variety of gig workers – not just ride-sharing, but adjunct professors, care givers, etc. – and specifically addresses how to preserve their way of working while improving their outcomes
- Research and develop incentives for employers to provide pathways to full-time employment (for those who want it) and protections for part-time and gig economy workers
- Host convenings of on-the-ground advocates such as the Freelancers Union, and other worker’s rights groups, to gain insight into current demands and potential solutions from around the country
- Continue to pursue pro-worker policies such as the increased minimum wage, enforcement of worker protection laws, and social safety net programs
Joe Buckshon 