The nature of work is increasingly precarious and fragmented for many Americans. As documented in the 2016 Century Foundation report “Protecting Workers in a Patchwork Economy,” this includes those participating in the growing “gig economy,” as well as those working outside the purview of traditional employment, like taxi drivers. These workers often lack access to critical benefits, such as unemployment and health insurance, retirement packages and paid leave. And the number of vulnerable workers is growing. From 2005 to 2015, the share of the workforce in non-standard jobs jumped from 10.1 percent to 15.8 percent.
Portable benefits are one proposal to support workers in the patchwork economy. With a portable benefits approach, benefits are tied to the worker, moving with the worker regardless of company or customer. Contributions to workers’ portable benefits may be funded by the companies who act as intermediaries between workers and customers, or the customers themselves. To date, the conversation has focused on the gig economy, but it can be applied to much broader swath of independent workers. In fact, the most successful existing portable benefits programs in the United States are among unionized construction workers and actors, groups that each have many employers.
The portable benefits approach has attracted the attention of politicians as well as organized labor and business leaders in the gig economy. Efforts to make progress on portable benefits, including organizing workers, are gaining traction. This commentary focuses on recent legislative efforts to enact or enable portable benefits. Since February 2017, portable benefits legislation has been introduced in Washington State, New Jersey, and at the federal level, with New York and California also showing interest in the approach. However, not all portable benefits bills are created equal, and recent legislative efforts have illuminated key differences amongst portable benefits proposals.
Work Classification and Portable Benefits
It’s hard to talk about portable benefits without addressing worker classification. The provision of benefits to a worker by an employer is one of the defining characteristics of the traditional employee-employer relationships. This includes social insurance programs like unemployment insurance and workers compensation, and traditional employer based benefits like paid sick leave and health insurance. Portable benefits advocates would like to see the approach used to provide benefits to workers outside of the traditional employment relationship, particularly independent contractors. But this has not been without controversy. Firms in the gig economy, for example, have called for portable benefits to be paired with an assurance that their workers are independent contractors or put in a third category of independent workers exempted from standard labor laws.
This is no small matter. Many of the workers currently paid as independent contractors are cheated out of traditional benefits, because they are misclassified. When employers misclassify employees as independent contractors, they avoid contributing to benefits and paying the federal and state taxes that fund social insurance programs. When workers are misclassified, employees also lose out on legal protections and rights, like minimum wage laws and the right to join or form a union. According to the Department of Labor, “the misclassification of employees as independent contractors presents one of the most serious problems facing affected workers, employers and the entire economy.” A 2000 study found that between 10 to 30 percent of employees are wrongly misclassified.
Many of the workers currently paid as independent contractors are cheated out of traditional benefits, because they are misclassified.
Gig-economy businesses often classify their workers as independent contractors. Many gig-economy workers and labor rights activists contend that these workers are employees. As the National Employment Law Project (NELP) argues, these businesses “screen, train, supervise, dictate pay and assignments, and discipline and fire workers—just like any other employer.” Consequently, businesses like Handy, Uber, and Postmates are facing a slew of misclassification lawsuits.
In New York State, such businesses have seen portable benefits legislation as an opportunity to neutralize misclassification litigation. Earlier this year, Handy circulated draft legislation to introduce portable benefits to New York. The draft legislation would enable marketplace platforms (business that facilitate the provision of services to clients from contractors using a digital platform) to opt into to providing workers with portable benefits. However, the legislation would require workers to be classified as “independent contractors” in order to be eligible to access benefits. In exchange, businesses would be required to contribute at minimum 2.5 percent of the fee for the services provided by the worker, with the option to charge the contribution directly to customers. For a worker earning $40,000 a year, that would amount to only $1,000 a year in benefits. By comparison, employers pay roughly 7.65 percent of an employee’s income in taxes for just Social Security and Medicare payments.
Despite interest from New York state legislators like Assemblyman Joseph Morelle (D), the legislation never made it the state assembly, facing strong criticism from workers, unions, labor rights activists, and lawyers. Still, portable benefits remain a priority for the state, with New York Governor Andrew Cuomo planning to convene a task force responsible for “studying creative options and making a recommendation for the State to help ensure all workers in New York, regardless of their industry, trade or skill, have affordable access to benefits.”
The Labor Movement and Portable Benefits
Some labor movement advocates are excited about the potential of portable benefits to provide social insurance for a range of workers. Unions see the approach as means of organizing workers who are ineligible to join or form unions under the National Labor Relations Act, like independent contractors. However, gig-economy businesses’ insistence that their workers are independent contractors, combined with policy proposals like that of Handy, make some wary that portable benefits may be used to misclassify gig-economy workers. As Rebecca Smith, NELP deputy director, told The Century Foundation (TCF) in a July interview: “All workers should have a full suite of benefits that follow them from job to job, and workers’ organizations should play a central role in ensuring benefits are delivered. But the program design must result in a net gain, not a net loss, for workers. The starting point is employer compliance with existing social benefits.”
Given concerns about portable benefits legislation being used to broadly classify gig-economy workers as independent contractors, the labor movement has been working to develop its own models for portable benefits. In February 2017, Washington state Representatives Jessyn Farrell (D) and Derek Stanford (D) introduced a portable benefits bill, House Bill 2109. The bill was heavily informed by David Rolf, president of Service Employees International Union (SEIU) 775NW and venture capitalist Nick Hanauer, who co-authored a manifesto on Portable Benefits in 2015. The legislation would require contracting agents that facilitate the provision of services and payment for fifty or more individual workers to pay into a portable benefits fund. Contracting agents would be required to contribute the lesser of 25 percent of the total fees collected from consumers or $6 for every hour of service provided, with the option to pass the cost of contributions directly on to consumers. The benefits fund would provide workers with industrial insurance (workers compensation), and the option to allocate contributions to other benefits like health insurance, paid leave and retirement benefits.
Unlike the Handy proposal, the Washington bill does not require workers to be classified as independent contractors by the state in order to eligible to receive portable benefits. Rather, companies would be required to provide benefits to workers who receive a 1099 form from the IRS, the form used to report payments made to a worker who is not an employee. As the Department of Labor notes, use of a 1099 form does not classifying a worker as an independent contractor under the Fair Labor Standards Act. The Washington portable benefits bill further states that the provision of portable benefits may not used to determine a worker’s employment status. The bill does not require any pre-screening for valid classification under state law, so it’s possible that misclassified employees would participate. But this type of portable benefits program would raise the cost of hiring a 1099 worker, blunting the incentive to misclassify.
In addition, the bill requires that benefits funds be managed by a qualified non-profit organization and that one-half of the organization’s board of directors must be made up of workers or workers representatives from organizations fully independent from the contracting agent. This component was critical to SEIU, as many workers outside the traditional employment relationship are legally prohibited from unionizing. Requiring that the administration of benefits funds include workers, provides workers the opportunity to act collectively to ensure their best interests, independent from the business without fear of reprisal. It enables the organizing of workers outside the traditional union model.
The portable benefits bill in Washington State has yet to advance in the legislation process. TCF spoke with SEIU 775 Director of Strategic Campaigns Andrew Beane, and Legislative and Policy Director Lani Todd in July, who believe that while the implementation of portable benefits is the ultimate goal, the bill was introduced to learn how labor could begin making progress on portable benefits. Coalition building around the bill has been complex, particularly given the concerns about portable benefits and misclassification, with some other local unions initially coming out against the legislation. At the same time, SEIU noted that it found unexpected support from the tech sector in the form of traditional software companies, rather than gig-economy businesses. The union was particularly excited to see portable benefits legislation introduced in New Jersey by assemblyman Troy Singleton (D) in March 2017. The New Jersey legislation replicates the Washington bill almost verbatim, and SEIU hopes to see more states follow Washington’s lead.
Many Questions Remain
Outside of the misclassification debate, another challenge is a lack of research on what a portable benefits model should look like in the United States. While there are some local models, a host of policy questions remain unanswered: What benefits should be provided through portable benefits? Who should be responsible for the delivery and administration of portable benefits funds? Are benefits best tailored to sectoral, local, or state needs?
Federal legislation introduced by Senator Mark R. Warner (D-VA) and Representative Suzan DelBene (D-WA) in May 2017 aims to address these issues. The legislation addresses the recommendation from a major portable benefits advocates, the Aspen Institute, that the federal government expand a 2016 Department of Labor research grants program that provided over $150,000 in grants “to organizations to support the planning and research of portable retirement benefit plans for low-wage workers.” As introduced, the federal companion bills would authorize $20 million competitive research grants program through the Department of Labor. Grants would be provided to nonprofits, and state and local governments to develop and evaluate portable benefits pilots.
Labor advocates are concerned that the federal legislation does not require portable benefits pilots to demonstrate strong fiduciary responsibility or a commitment to including workers in the administration of benefits, and that the bill does not articulate what class of worker the pilots are intended to cover. Still, supporters of the legislation see it as an important step in understanding how to make portable benefits work in the United States. As Ethan Pollack, associate director of research and policy for the Future of Work Initiative at the Aspen Institute emphasized when speaking with TCF in July, “The current social safety net is the result of evolution. In order to get portable benefits right, at this point in the process, the federal government’s best role is to support state and local governments and nonprofit organizations to experiment with the creation and delivery of portable benefits.”
The portable benefits approach is receiving a lot of attention from workers, advocates, businesses and political leaders. While the movement towards portable benefits is still in its infancy, it’s exciting that both worker advocates and leaders in the gig economy are driving the development of portable benefits models. Still, the desire of businesses to use portable benefits legislation to classify workers as independent contractors is at odds with the objectives of many workers’ advocates, setting the stage for continued debate and the development of diverging models. As portable benefits move from policy papers and books into the real world, continued experimentation with models at the local and state level will be critical to understanding how portable benefits could work at the national level.