Employee Benefits in the Gig Economy

RMI 610

4/3/19

Employee Benefits in the Gig Economy

“Humans are the networked species. The first species to network across genetic boundaries and thus seize the world. Networks allow us to cooperate when we would otherwise go it alone. And networks allocate the fruits of our cooperation. Overlapping networks create and organize our society. Physical, digital, and mental roads connecting us all.”

-Naval Ravikant

INTRODUCTION

On January 9, 2007 Steve Jobs introduced the original iPhone to the world, ushering in a new era of mobile personal computing. A year and a half later Apple would go on to create the App Store, which gave third-party developers a way to distribute digital applications on the iPhone.  It did not take long for imaginative individuals and companies to take advantage of this new technology platform that enabled people to communicate and connect at any moment across a robust network of devices. Companies that are now well-known, like Uber, quickly sought to capitalize on the potential for new peer-to-peer mobile networks where mobile software could connect the supply and demand for services directly. These networks have led to major growth in independent contract work, where workers operate independently from a traditional employer, and instead find short-term “gigs” to earn a living. With a growing segment of the population looking to the gig economy for work, it’s important to understand if employee benefits are evolving appropriately to accommodate the modern labor market. What, if anything, needs to change to support the gig economy workforce with sufficient employee benefits?

INDUSTRIAL REVOLUTIONS & EVOLVING EMPLOYMENT DYNAMICS

        In order to determine how employee benefits should adapt to suit the current market environment and gig economy, it is important to first understand how employee benefits originated and how they have evolved. One of the major factors that contributed to the growth of employee benefits was the 19th century industrialization period where the U.S. moved from an agrarian society to an industrialized society. The start of the American Industrial Revolution is often attributed to Samuel Slater whose pirated technology greatly increased the speed with which cotton thread could be spun into yarn (Industrial Revolution). In addition to new manufacturing technology, other major innovations in production such as the factory and wage labor played a large role in spurring this economic transformation in the United States (Industrial Revolution). In this new industrialized world, people no longer remained self sufficient living off the land, but instead looked to the employment and wages of a big company in order to satisfy their needs and the needs of their family (Beam and McFadden). With the fate of families now depending on the company and monetary wages, employers began to offer their employees additional benefits other than wages as a way of improving company morale and productivity which in turn would reduce costly employee turnover (Beam and McFadden). As companies competed for valuable human capital, employee benefits became a useful recruiting tactic. In this environment, employee benefits were advantageous for both employees and employers. Employees were happy to have some risks and burdens lifted by their employer, while the employer was happy to invest in the benefits of their employees because it led to a more productive workforce. Without this symbiotic relationship, it would be hard to see employee benefits growing to the level of prominence they have in today’s labor market..

Today in the year 2019, we continue to go through the fourth industrial revolution, a concept coined by Klaus Schwab of the World Economic Forum. Many suspect this fourth industrial revolution will see transformation far beyond what we saw in the previous periods of industrialization. In this fourth period of industrialization we are seeing technology blur the lines between the physical and digital world (Schwab). Digital technology has slowly invaded all facets of life, implanting itself into devices and being used as a layer atop systems that monitor everything from our agricultural system to our physical health (Schwab). These digital technologies and systems accumulate vast amounts of data that can then be leveraged by interconnected networks to maximize efficiency and improve the overall productivity of whatever industry they are utilized in. The technological developments have improved the world in many ways, but at the same time they have also drastically changed the type of labor needed by many companies. Robotics have decreased the need for manual labor in many instances, and algorithms have supplanted many employees who used to work in analytical roles. In today’s world, companies cannot compete if they ignore technology, forcing nearly every industry to take on a new set of priorities.

        The potential innovations with billions of people connected by mobile devices that have  unprecedented processing power is unlimited (Schwab). So far, technology has delivered great value to consumers with access the digital world. Mobile technology has made possible new products and services that increase the efficiency and pleasure of our personal lives. This technology has become so pervasive that we often take it for granted. The fact that we can have a device that’s small enough to fit in a pocket, and if you touch and poke it in just the right way, you are able to have food delivered right to your door, is truly amazing. Additionally, the ubiquity of these services lead many, including the technology companies powering the apps, to take for granted the actual people that deliver the services. Many would say a positive development of the 19th century Industrial Revolution was that companies began valuing the workers as an important piece of the production process worthy of benefits and support. On the contrary the Fourth Industrial Revolution has degraded the relationships between companies and many of the lower-skilled workers taking gigs, who now, are managed by digital applications and not a person.

THE GIG ECONOMY & EMPLOYEE BENEFITS

        The term “gig economy” was popularized around the height of the 2008-2009 financial crisis, and since then task-based labor has evolved and has grown to become a significant factor in the overall economy (Frazer). A recent Gallup Poll has estimated that around 57 million Americans participate in the gig economy (McCue). The concept of creating an income from short-term tasks has been around for a long time and was often the standard for some economic sectors, such as the music and entertainment industries (Frazer). The gig economy is very broad, and includes workers who are full-time independent contractors such as consultants, and also people who take on part time jobs by driving for Uber or Lyft several hours a week (Frazer).  In some cases, the worker is a small business owner, and in others they’re freelancers who are paid to complete specific projects for larger companies.

In the 19th Century Industrial Revolution, the key to building a successful business was controlling production and distribution, and the greatest gains naturally accrued to the biggest companies (Thompson).  In today’s economic environment, the key to building a successful technology business is engineering the best software that can attract the most consumers and users. As platforms grow in their user base, gig workers are attracted to the companies that provide the worker with the ability to do the most gigs, rather than the best employee benefits or guaranteed wages. Their wages are highly dependent on the volume of requests from those consumers who use the mobile software applications. Many have called this dynamic the two-sided network effect where both buyers and sellers benefit from increased usage and scale in a platform (Sequoia). Using Uber as an example, riders benefit from a larger scale as it becomes easier to find a ride and results in decreased prices. Drivers also benefit as more demand equals less downtime waiting for a rider along with an increased volume of rides to give. In terms of efficiency and productivity, these networks mark a major advancement for society; however, employee benefits and protections have not kept up with the changes.

One of the other major factors in establishing a healthy employee benefits practice is government regulation (Beam and McFadden). While there are regulations in place to protect full-time employees, these gig workers are classified as independent contractors which treats them differently under the law. Currently, independent contractors are not eligible to receive tax-free benefits from the organization they work for (IRS). If the company chooses to offer healthcare benefits to an independent contractor, the contractor must pay income taxes on the value of the benefit (IRS). For gig workers who take on ad hoc tasks as a way to earn supplemental income, this is not problematic. For the growing population that looks to these companies as their main form of income, this arrangement leaves them with significant risks that traditionally had been retained by the employer.