The Unseen Industries in the Independent Contractor Debate
The designation of employee vs. contractor affects far more than just gig workers
This article is second in a three-part series on the worker classification debate. The first article can be found here.
Recent news headlines suggest that the ongoing debate over how to classify independent contractors is not going away anytime soon. The current Department of Labor (DOL) announced in May that it will no longer seek to enforce the Biden administration’s rulemaking that favored classifying workers as employees rather than contractors. The Biden rule, in turn, had reversed a more pro-contractor rulemaking from the first Trump administration. Trump 2.0 appears poised once again to swing the pendulum back toward favoring independent contracting.
This debate continues to broil at all levels of government—from localities to states to the halls of Congress and DOL. But much of the political shouting over the past decade of this debate has focused specifically on the gig economy and the use of independent contracting status by gig platforms. This overlooks the fact that broad swaths of the traditional American workforce also operate via 1099 contracting arrangements and largely find themselves ignored in the debate.
The general preoccupation with gig economy work in the independent contracting debate is understandable. California’s notorious A.B. 5 law—which served as the prototype for the national push to reclassify contractors as full-scale employees—was a thinly veiled attempt to target the gig economy. In turn, a ballot proposition sponsored by gig companies ended up overturning the law’s application to app-based transportation and delivery platforms.
To the extent California lawmakers did focus on other industries during the fallout from A.B. 5, they mostly did so through a controversial and political process of handing out exemptions to the law for favored industries. As a result, not only did A.B. 5 have a deleterious impact on California’s broader economy—as documented by researchers at the Mercatus Center and elsewhere—but it also had a disproportionate impact on industries that lost out in this political game of picking winners and losers.
While certain professions—like freelance writers, artists and photographers—were exempted under California’s law, other professions—such as nursing—did not receive a direct exemption. In the end, relying solely on the whims of a legislative body to secure an exemption from this type of statutory requirement is akin to Winston Churchill’s oft-repeated warning that “[a]n appeaser is one who feeds a crocodile hoping it will eat him last.”
To wit, A.B. 5 included a strict “ABC test” that classified workers as employees unless three specific requirements were met: namely, the worker must be free from control and direction by a company, perform work outside the normal course of the company's business and be customarily engaged in an independently established trade or business. When this test was imported into the federal PRO Act bill (introduced in the last Congress) that sought to similarly narrow the definition of who could qualify for contracting status, the Golden State’s list of exemptions didn’t make it into the bill. Likewise, the Biden DOL’s rulemaking, while not a full-on ABC-style test, nonetheless discouraged contracting arrangements and did not contain the breadth of carve-outs that California’s bill did.
In a world where an ABC-style test is enacted federally, a whole host of professions with long-standing traditions of operating under independent contracting arrangements could find themselves in the regulatory crosshairs.
One prime example is the financial advisory industry, which uses both W-2 (employee) and 1099 (contractor) models for advisers. Financial advisers were explicitly exempted from California’s A.B. 5, but not from the federal PRO Act or Biden DOL rulemaking. Estimates vary as to exactly how many financial advisers operate as contractors, but figures range anywhere from 1 out of 7 to over 50%. There are potential advantages and disadvantages to any employment model, but those advisers who operate under 1099 status prefer the flexibility offered by that arrangement.
An independent contracting model allows advisers to switch between firms while taking their client base with them—the type of worker empowerment one would expect to be championed on the political left. Contracting status likewise allows advisers to set their own hours and hire their own staff, as well as maintain their own office space. While advertising and social media use are heavily regulated by numerous federal agencies in the financial advisory space, W-2 advisers tend to face even more restrictions in what they can say publicly because of additional policies enacted by their firms.
Independent advisers are also more likely to work with lower-net-worth individuals. According to a report compiled by the Financial Services Institute, 78% of independent advisers believe that becoming a W-2 adviser would cause their account minimums to increase and restrict their ability to work with smaller accounts, while 77% believe their commissions and management fees would increase from such a switch. Overall, the advisers surveyed in the report estimated that over 30% of existing clients would be lost on account of these increased account minimums and fees.
The real estate industry is another sector that has long organized itself via 1099 contracting arrangements. According to the National Association of Realtors, 87% of its 1.5 million members are classified as independent contractors. Since the early 1980s, real estate agents have been classified as non-employees for tax purposes under federal law, which further underscores the contracting traditions of the industry.
While real estate agents were able to secure an exemption under A.B. 5, once again the PRO Act and Biden DOL rulemaking contained no such exemption, leading some to speculate that an assault on the sector’s independent contracting model could lead to an industry contraction of 50% or more.
Perhaps the scariest example of a traditional industry that could be affected by a crackdown on independent contracting is health care. The industry has often used so-called PRN nurses or agency nurses—many of whom are 1099 workers—to fill staff shortages on an as-needed basis, and in recent years the use of independent nurses and home health aides has only increased in the health care sector. As covered by The Wall Street Journal, over 100,000 nurses dropped out of the workforce or retired during the pandemic, making the health care supply shortage particularly acute.
On cue, apps such as ShiftKey and CareRev have gained in popularity as platforms for hospitals to contract with on-demand nurses during difficult-to-staff hours and weekends. Nurses were not directly exempted from A.B. 5, and a sudden move to restrict independent contracting status in federal legislation or rulemaking could cause acute care shortages in hospitals across the country.
When one thinks of the American middle class, it’s not a stretch to think of moments like selling a home to upsize with a baby on the way, working with a local financial adviser to save for retirement, or having your child’s broken arm mended at the neighborhood hospital. All these moments and industries could find themselves in the crosshairs of forced worker reclassification efforts in the years ahead.
So far, Uber and Lyft drivers have gotten most of the attention. But any drastic and sudden restructuring of the American workforce will affect far more than the gig economy.
C. Jarrett Dieterle is a nonresident senior fellow at the R Street Institute and a legal policy fellow for the Manhattan Institute.
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