🚨 Emergency Update: New Worker Classification Threatens Self Employment and the Freelance Economy
🚨 Emergency Update: New Worker Classification Threatens Self Employment and the Freelance Economy
I'm in disbelief and pissed that I have to write this...but the right to work is at risk for every single one of us
Disclaimer: This was written for speed, please excuse typo’s, emotion, and lack of structure.
Leaders,
On Tuesday the Labor Department released their proposal to clarify when workers should be classified as employees rather than independent contractors (*it’s a 184 page doc 🤯).
This is a massive decision with long term implications.
What the proposal does:
Rescinded Trump-era rule that focused on worker control and opportunities for profit.
Added requirements focused on investments by the worker and the employer, the degree of permanence of the working relationship, the extent to which the work performed is an integral part of the employer’s business, and the degree of skill and initiative exhibited by the worker.
Immediate impact: This deters adoption, adds complexity, and increases cost of hiring independent contractors.
*The signal is louder than the noise. Instead of adhering to above, small businesses will stop hiring freelancers to avoid the audit, large companies will pay middle layers to manage the risk, and the freelancer themself will be locked out of access and squeezed since the middle layer takes the margin.
Long term impact: This significantly hurts the long term health and opportunities for both the US workforce and US businesses. While other countries like the UK make it easier to work with and be an independent contractor, the US is adding complexity and signaling it wants to get rid of the choice to work how you want.
Was I Surprised?
Surprised directionally…no. They tried this with the PRO Act, then snuck it into Build Back Better.
Surprised that they actually did it…very. This is political suicide and economic suicide for over 50 million Americans.
Below is a great timeline of how this happened 👇
Why Is The Biden Administration Doing This?
Taxes and Union membership, that’s it.
For full time employees, employers pay 12.4% for Social Security, 2.9% for Medicare, 6% for Unemployment, and are easy to collect taxes from as they withhold their employees portion.
For independent contractors, companies aren’t responsible for tax or withholding according to ADP.
That means that the government needs to individually go after over 30 million individuals if they want to collect their tax contribution. Which…ironically the Inflation Reduction Act allocates $80 billion to the IRS to add 87,000 new IRS agents.
It’s cute that Jessica Looman, acting head of the DOL’s Wage and Hour Division said, “What we anticipate is that this will really help provide guidance to both avoid and prevent misclassification”.
The reality is more how Jason Calacanis said it, “when you have old school Democrats in, who are very pro Union, they’re kind of living in the 1950’s…they are dictating people how they work, and where they work.”
Why Does This Long Term Hurt The US Workforce?
There are 3 massive problems that this proposal for some reason ignores.
1: The shift to freelancing is already here globally
We’re not in a vacuum. Whether the US wants it or not, our global economy is inevitably shifting from the default being full time/in office to the default being freelance/remote (default meaning 50-80% of the workforce).
On April 6, 2023, the UK will repeal it’s IR35, an equivalent restricting law.
The impact - is that if there’s a US writer or UK writer, I will personally always have to tell my clients to go with the UK writer, and that breaks my heart.
2: The added requirements cut the knees out from freelancers and bring us back to the 1950’s.
Regarding ‘degree of permanence of the working relationship’…
good freelancers and good leaders create a never ending relationship that’s driven by demand, not being locked into a 40 hr forever commitment.
Regarding ‘the extent to which the work performed is an integral part of the employer’s business’…
freelancers are the best at what they do, and become partners with their clients, not value-less drones.
Regarding ‘the degree of skill and initiative exhibited by the worker’…
we all start somewhere, how can someone grow from a beginner to an expert when the government doesn’t let you start?
3. California tried this and it’s been disastrous.
As an American, it is insanely embarrassing telling clients the 3 countries we recommend they stay away from are Iran, Russia, and California.
Why? Because in 2019 California passed AB-5, a bill that used the ABC test to classify:
(A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
(B) The person performs work that is outside the usual course of the hiring entity’s business.
(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
According to freelancer Kathy Lang, “I can tell you that if you are a transcriptionist in California, you can no longer work here, period…no transcription company will hire you if you live in California. I spent thousands of dollars to learn how to do this and it’s how I made a living for years until AB 5 happened. The industry is completely dead here.”
Nail In The Coffin…
This law ignores 3 realities.
1. Businesses need freelancers.
According to HBR, 90% of leaders are prioritizing independent workers.
According to Mercer, 60% of executives say they will substantially replace full time employees with independent workers in the next 3 years.
I’ve personally seen small businesses that are 80% freelancers, and reputable brands between 500-1,000 employees that are 70% freelancers.
This doesn’t get rid of hiring, it just makes it harder for small businesses, further locking out talent pipelines from them.
2. Freelancers choose, are more secure, and happier freelancing.
66% of full time freelancers believe they are more secure than traditional workers
78% Say they are healthier working independently
51% say there is no amount of money that could convince them to take on a traditional job
3. The next generation is choosing freelancing.
68% of newcomers were Gen Z or millennials, and 55% of newcomers were female
4.Every skill is increasingly becoming performed in a freelance capacity.
This chart says it all.
Who Wins?
The lawyers
The politicians
The consultants
The existing top 1% of freelancers
As someone that’s freelanced for 10+ years, this disproportionately helps me, and that breaks my heart.
Why it helps me: I’m already an approved freelancer within the enterprise walls. I have business insurance. I’m incorporated. So when they want a freelancer, they get an even more limited pool that I’m in. Meaning I can raise my rates, embrace more favorable terms, all at the expense of the company and other freelancers (obviously I would never do this but to ignore incentives is like denying evolution).
Why this breaks my heart: Freelancing has saved me multiple times, and everyone deserves this right. It helped me break into a career (tech) that my undergrad education couldn’t. It helped me build things that on my own I couldn’t (the book, software products). It saved my ass by having a pipeline of opportunities when things went south rather than being beholden to one employer.
How You Can Help
Share your experiences so we can cut the narrative that freelancers are exploited. Yes…some employers have exploited contractors. But that’s not the majority.
If you want to learn more about the mechanics of this all, check out Jason and Azariah’s Leader Portal.
