By Gene Zaino
May. 19, 2016
The independent workforce is growing quickly, but not as quickly as it should be.
While America is seeing a record number of people seeking the freedom of self-employment through contract work, overly complex worker classification regulations and a tax collection system designed for the 20th century economy are hampering growth.
These systems and regulations place unnecessary burdens on both Americans that want to take control of their career as well as the companies wanting to do business with them. If America doesn’t streamline the system governing independent professionals, the country will miss out on millions of jobs and billions of dollars in economic activity over the coming years.
The root of the problem is that it is too difficult for independent workers, who elect to be freed from employee entitlements, to be recognized by government regulators as self-employed. These entrepreneurial Americans, operating as independent businesses, are also difficult to distinguish under the current system from those who are providing commodity services using mobile app platforms (e.g., Uber or TaskRabbit). Current legislation has been largely categorizing these commodity service workers as employees because they are mostly working under the control of the platform providers and expect employee protections and entitlements.
At the same time, there are many other types of entrepreneurial independents who deliver highly differentiated services as independent workers and do not expect — nor want to be — anyone’s employee or receive such entitlements. They want control of their businesses, and are equipped and capable of providing their own entitlements and protections via safety nets. The current system, however, does not differentiate between these varying types of independents and is instead a “one size fits all” approach.
This creates significant burdens on those entrepreneurial independent workers. Their customers are discouraged from buying their services because of the heavy risks, costs and penalties associated with the ambiguous worker classification laws that companies are subjected to. All of this causes economic friction that encourages U.S. businesses to seek independent talent outside of the country, which contributes to outsourcing valuable jobs.
The system is so complicated, in fact, that the U.S. Labor Department can’t accurately count America’s self-employed. The U.S. Bureau of Labor Statistics is currently reinstating a survey last issued in 2005 that attempted to capture these numbers, but only accounted for a small portion of the independent workforce, even before the past few years of the evolution in how Americans work.
It is time to streamline the system with a federally recognized “Certified Self-Employed,” or CSE, designation that would allow solo entrepreneurs to declare their independence from traditional employment. By doing so, they would voluntarily waive traditional employment protections in exchange for the ability to operate unambiguously as one-person independent businesses, with all of the advantages that independence entails. The system would remove roadblocks to smooth and risk-free engagement between independent contractor and client, while differentiating between the truly independent and on-demand workers — like Uber drivers — who are currently treated as employees but exist in legal limbo.
The outsized attention currently paid to commodity service platforms like Uber and Handy, a house cleaning website, because of recent legal disputes has contributed to a widespread misunderstanding of the independent workforce in America. These on-demand workers represent a small fraction of the gig economy at large, and the mounting rulings governing them risk sweeping up the entire independent workforce. Treating all independent workers as the same will exacerbate the problem instead of solving it.
The CSE solution is flexible because it is voluntary. Most independent workers are professional career independents engaging with client enterprises to offer highly skilled work on a contract basis. These entrepreneurs need to be able to build their businesses, access benefits, file their taxes, process transactions and engage with their clients safely. The federally recognized safe harbor CSE classification would accomplish these things by creating a safe environment for private industry to work with the self-employed.
The demand for this system already exists. The independent workforce currently stands 42.1 million people strong and is expected to grow 28 percent to 54 million by 2020. With $1.15 trillion in revenue in 2015 alone — a figure roughly equal to Mexico’s gross domestic product — the economic importance of this population cannot be ignored.
The CSE certification would be governed by the U.S. Small Business Administration, but would rely on private service providers to administer a certification test and provide correct tax submission by CSEs as W-2-based single-employee businesses. Harnessing private innovation to build the support structure would minimize the cost of implementing the CSE system compared with other potential solutions.
There has been much hand-wringing over the future of work, with some people expressing fear that a new era of contract work threatens the traditional employment model. These concerns are misguided. America’s need for traditional employees is not going away; there are many jobs for which the time-tested conventional corporate structure is the best way to organize work, and these jobs will always exist. However, the U.S. independent workforce, made up of entrepreneurs who want to control their own hours and use their ingenuity to build successful businesses, is growing too. Giving independent workers the freedom to innovate benefits everyone.
American entrepreneurship is the key to its competitive edge and has been the envy of the world throughout the history of the United States. If we are to compete for 21st century business in the global marketplace, America needs to remove barriers to innovation. The CSE system gives entrepreneurs the choice to declare independence and provides them with the control they need to succeed. By freeing up U.S. innovators to do business as they see fit, America will define the future of work instead of allowing it to be defined for us.
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