If America enters a recession as more and more are beginning to predict, there could be a very large and potentially devastating problem that I have yet to see addressed. That problem is the profound rise of the "independent contractor" that has taken place - particularly since the financial crisis.
One of the primary reasons for a working individual to be termed an "independent contractor" is so the employer involved can avoid paying normal employee expenses such as unemployment compensation and workers compensation taxes on them. Just because an employer classifies a worker as an independent contractor does not mean they are one. There are various tests that must be met for this to be the case. One of which is whether the employer exercises direction and control over the person. Basically, if an employer tells a worker what to do, how to do it, when to do it, and provides any equipment to do it - they are in control of the person's activities.
So why does this pose a large and potentially devastating problem? Well, if a large number of supposed "independent contractors" were to lose their jobs due to a recession, they would not be entitled to unemployment insurance. This due to their improper status as independent contractors (the equivalent of being self employed).
Historically, economic recessions have been softened by laid off individuals receiving unemployment insurance to somewhat offset the lost wages. But to be eligible, the worker must have "wage credits" within the UI system on which to base a UI claim. These wage credits are the result of an employer paying a quarterly UI tax on his employees. When workers are misclassified as independent contractors these benefits are not available to them. As a result, one of the most important programs to help households cope and to assist the economy through maintaining purchasing power is lost. The magnitude of this issue will only be known as a recession unfolds.
For some insight on this problem, just consider the case of FedEx ground and Home Delivery drivers. FedEx considers them to be independent contractors despite meeting almost all the "direction and control" tests to clearly establish them to be employees. There have been numerous jurisdictional decisions where authoritative bodies have declared these drivers as employees of the company. But FedEx has somehow been able to maintain this policy. It is actually a substantial aspect of their business model. So numerous case-by-case rulings have found these drivers to be entitled to the same benefits as any other employee, yet FedEx continues this policy company-wide. Imagine being a laid off FedEx ground driver, filing a claim for unemployment insurance, being denied due to lack of any "wage credits", and then having to wait for months to have the denial overturned to be awarded the benefits.
Again, it's unknown how many Americans may be impacted by this scenario in the event of a recession. But it would have an adverse impact on affected households, the local businesses who depend on their spending habits as customers, and at the national level. Not to mention the bureaucratic nightmare involved to properly determine entitlement.
Hopefully the magnitude of this problem won't be severe. But take a minute to consider a couple of things: How many people do you know who are classified as independent contractors in a multitude of various industries? If you were an employer, how tempted would you be to minimize costs by terming someone as an independent contractor to save substantial sums and paperwork headaches required for "regular employees"?
Time will tell. Don't let anyone tell you nobody ever recognized or publicized this potentially devastating issue. I tried to.
- Birney K. Brown
