The Threat of "Gig" Companies

Since Election Day 2020 most attention in the US has been on the presidential contest and Donald Trump’s avalanche of frivolous lawsuits. Perhaps some scrutiny is due the passage of a California ballot measure, Proposition 22. It undermines worker rights and has the potential for also threatening the solvency of the Social Security Trust Fund. 

Labelled the “Exempts App-Based Transportation and Delivery Companies from Providing Employee Benefits to Certain Drivers” initiative,” Prop 22 overturns a California law that sought to insure workers in the so-called “gig” economy receive appropriate benefits and protections. Borrowed from the musical world where musicians often refer to a performance as a “gig,” the term emphasizes the short-term or temporary nature of a worker’s employment. 

Uber, Lyft and DoorDash designed the ballot measure that won with 58 percent of the vote. Among the leaders in the “gig” economy, these companies, which provide transportation services, want to continue to classify their drivers as “independent contractors” instead of considering them employees as California law would require. 

Workers designated as “independent contractors” are not entitled to the normal benefits employees receive, such as workman’s compensation and wage and hour protections. They also have to pay Social Security and Medicare taxes out of their own pockets. 

The companies justify their position by denying they are transportation companies. They are primarily technology companies in their view---they use smartphones to connect clients with their drivers. Therefore, they should not have to meet the requirements related to licensing, safety checks and employment which generally are imposed on transportation enterprises.  Several states and courts, and other countries, have rejected this assertion consistently since 2009 when Uber was founded. 

It was something of a surprise that Prop 22 passed. Labor unions opposed it since it obviously stripped workers of significant rights. A few weeks prior to election day only 39 percent of the public indicated support for the measure. 

But the companies invested over $205 million in the Yes campaign, bombarding the television airwaves, social media and their own apps with messages touting a minimum wage for drivers and other benefits consistent with a fulltime job. The ads also claimed that most drivers supported Prop 22, but that could have been inspired in part by the companies’ threat to leave California if the measure failed. 

Yes campaign ads also caused some voter confusion. For example, while the companies promised support for a generous minimum hourly wage, the method by which that wage would be computed was not clear. According to one post-election survey 40 percent of voters who cast a Yes ballot thought they were supporting a “living wage” for gig workers, but the promised wage will cover only hours drivers spend ferrying clients, not hours waiting or otherwise engaged in support of the service. 

Based on their success in California, it is anticipate that Uber, Lyft and DoorDash will pursue similar legislation in other states. They have also indicated a desire to seek federal legislation to further their objective. 

The business model of gig enterprises is based on reducing in every possible manner any obligation to share profits with workers, the people who actually provide the services a company delivers. In fairness to gig companies like Uber and Lyft, they are only mimicking to the extreme the negative policies towards workers already being pursued by most of today’s corporate giants. This is a major factor in creating the income inequity that has plagued America for the past four decades. 

But it is not only the workers of these companies that will be impacted as result of Prop 22. 

The Social Security Trust Fund is already under pressure. The latest official estimate is that by 2035 the fund may not be able to pay full benefits to recipients. If companies are allowed to continue to expand the number of workers classified as independent contractors, this problem will be exacerbated. 

Why? Because companies are not required to withhold taxes from wages paid to independent contractors, nor to remit due payroll taxes (Social Security and Medicare). Instead, workers classified as independent contractors are considered self-employed and are responsible for filing and paying all taxes themselves. 

It has been well documented that a significant percentage of self-employed workers misreport their income for tax purposes. A 2018 tax preparer industry survey found that 32 percent of self-employed workers admitted underreporting, while 36 percent “don’t do taxes at all.” 

A 2019 study by the Center for Retirement Research at Boston College estimates that underpayment of Social Security contributions in 2014 amounted to nearly $6 billion. Given the expansion of the gig economy, it seems logical to assume the number of independent contractors has increased in the past six years and the underpayment has grown. 

The failure of independent contractors to fully pay due payroll taxes has consequences. Not only does underreporting lower the Social Security benefit the individual gig worker will receive, but it also threatens the benefits of all beneficiaries by undermining the solvency of the Trust Fund. 

Congress needs to act now to head off this infringement of workers’ rights. No state should be allowed to undermine a federal program, especially one as important to the economic viability of so many citizens as Social Security. Nor should any company be allowed to enrich its management and shareholders at the expense of its workers.