In the Freelance Economy, One Size Does Not Fit All

By Shahar Erez

In the wake of a devastating global pandemic, the U.S. labor landscape is on the precipice of a fundamental shift. There’s been a growing amount of buzz around Biden’s Protecting the Right to Organize (PRO) Act, which aims to make long-term tectonic shifts in the way independent contractors and gig workers are classified.

Specifically, this piece of legislation would use the outdated “ABC test” to determine how freelance workers get classified.  If the results of California’s ill-fated Assembly Bill 5 (AB-5) legislation — also based on the ABC test — are any indicator, the passage of the PRO Act could have devastating consequences for freelancers across the country.

What is the PRO Act?

This piece of legislation includes two main components. First, it would make it easier for freelancers and contract workers to form unions. Second, it would change how independent contractors are defined and classified in the United States.

The second part of the proposal poses potentially major problems for independent contractors in the U.S. The core issue with this proposed legislation is its “one-size-fits all” approach to classifying freelancers.

“Instead of using the IRS standard, which can tell the difference between an independent contractor and an employee, this proposal uses a far narrower standard from the 1930s — called the ABC test — that can’t,” writes Judi Ketteler, a freelance writer, for NBC News.

Per the drafted legislation, anyone performing a service for an organization will automatically be considered an employee, unless:

1. Their performance is not controlled or directed by the employer in connection to the service they’re providing
2. They are performing services outside of the employer’s core business functions
3. The independent contractor is “customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed”

Essentially, the “B” prong would make it highly difficult for, say, a freelance journalist to continue writing and contributing multiple pieces to a single outlet. Since publishing articles is a core part of that business, the writer would either have to work full-time for the publication, or not at all. In fact, we’ve already seen the devastating consequences of this unfold under California’s AB-5 law.

In an economy, where just one year ago organizations in all industries quickly had to pivot to relying on a hybrid workforce of independent contractors and full-time workers to stay afloat, Biden’s PRO Act threatens these same businesses’ ability to stay agile in the face of major future disruptors.

Different Freelancers Require Different Projections

While the intention to create a landscape where gig workers experience fair pay and more protections is honorable (and necessary), the PRO Act will not accomplish this.

What legislators seem to be forgetting is that the segment of the workforce that’s considered independent contractors is not a homogenous one. Rather, it’s made up of two vastly different groups: highly skilled independent contractors and low-skilled independent contractors.

Upwork’s 2020 Independent Workforce Report points out that highly skilled independent contractors charge more than minimum wage, with a median hourly wage of $25. Conversely, a study from Berkley shows that lower-skilled independent contractors (think: Uber or DoorDash drivers) earn much less on average — as low as $5.64 per hour.

While the intention of the PRO Act is to provide this second group of workers with a greater number of protections, to try to apply the same sets of rules, regulations and protections to both groups, creates a disconnect between government agencies, freelancers and organizations.

What’s more, 79% of freelancers want to retain their independent contractor status, rather than become full-time employees, according to the Bureau of Labor Statistics. However, the PRO Act would remove this option for many freelancers.

It’s Time to Consider a More Nuanced Approach

To successfully protect the more vulnerable group of gig workers without wiping out the lion’s share of options for highly skilled contractors, freelancers need a policy that acknowledges the difference between these two groups. To do that, legislators must examine workers through two core parameters: bargaining power and income.

Bargaining power: Highly skilled freelancers have the ability to negotiate rates, write their own contracts, and ultimately have autonomy and control over their own earnings. Low-skilled contractors don’t. Typically, low-skilled freelancers work for a large service provider (like Uber or Lyft) and if they don’t agree to that organization’s terms — including hourly rates — there’s no option to negotiate a better deal. They simply can’t work for them.

Income: Highly skilled freelancers on the whole charge much more than minimum wage, as previously mentioned. Low-skilled freelancers, on the other hand, are much more vulnerable to exploitation, with wages that hover right around the minimum wage in most cases.

In establishing protections for freelancers, it’s critical to consider what position the workers are in. Biden’s PRO Act, which aims to reclassify most gig workers and highly skilled independent contractors as traditional employees, would be detrimental to the 50% of freelancers who are considered high-skilled contractors. In addition to losing their autonomy, they would also lose the ability to set their own terms and would face greater competition with the general workforce.

What’s more, an entire segment of lower-earning part-time gig workers would lose the ability to pick up side hustles for companies like Uber and Lyft.

Indeed, lawmakers must reconsider this one-size-fits all approach and recognize the differences between highly skilled contractors and gig workers if they want to avoid massive economic and workforce interruptions.

In the meantime, businesses can help by making every effort to properly classify their contract workers (using the IRS’s 20-factor test), as it was this issue of abusing this classification system in the first place that spurred the push towards this legislation. Otherwise, the nation as a whole will miss out on the benefits of having this $1.2 trillion segment of the workforce.

Shahar Erez is the CEO of Stoke Talent, and an experienced executive with solid engineering, product and marketing leadership backgrounds backed up by sound results. He has more than 15 years of experience in various management positions in a wide range of organizations building stellar teams and leading them to new levels of success in highly competitive markets.