Independent Contractors: Efficient, Effective & Valuable!
Author: Robert A. Peterson, McCombs School of Business, John T. Stuart III Chair in Business Administration, The University of Texas at Austin
Corresponding author: John T. Fleming, Project Lead, Author – Ultimate Gig Ideas & Design Group, LLC
Important Note: The authors developed this paper based on research conducted to support Ultimate Gig, the book, published by Emerald Publishing, U.K. March 2021. This paper cannot be reproduced or disseminated without the written permission of the authors.
Preface: Current discussions as to how independent contractors will be defined will probably span several years before consensus is gained among stakeholders including public policy makers, firms, and the people who choose to work as independent contractors –gig workers.
Recent news articles have focused on opinions, including those of the new Secretary of Labor, regarding how independent contractors should be defined. In the November 2020 election, voters in the State of California chose to maintain the independent contractor definition and status of transportation gig workers. The voters rejected government attempts to classify independent contractors as company employees with the passage of the now famous Proposition 22.
Independent contractors have become a topic of conversation simply because there is a growing number of people who, desirous of flexible work opportunities, are choosing to work as micro entrepreneurs or independent contractors. We are, in mature and free economies throughout the world, experiencing a transformation in how work can be accomplished. However, conversations relative to independent contractor classification, on the surface, tend to focus on who is, and who should not be, classified as an independent contractor, and there are many myths emerging in the conversations. Many business models are challenged by the possibility that independent contractors should be classified as employees because some pundits think that firms utilizing independent contractors are abusing them by not providing benefits similar to those of an employee. However, the underlying conversation may be more about ensuring that taxes and fees are paid more than whether workers should receive benefits when they choose to be independent contractors.
Workers choose to be independent contractors for important reasons. They seek flexibility and freedom in how their work can be accomplished, and they do not want to be held to the rigidity of traditional work hours. Often, workers who choose to be independent contractors cannot work traditional hours or they are choosing to be their own boss and work when and how they desire. Freedom of choice is certainly a precious freedom. All those involved in attempting to define an independent contractor need to be aware of the fact that, in this country, freedom is a very important component of the fabric of our free enterprise system. It is also important to understand why the conversation relative to who is, and who should not be, classified as an independent contractor has hit the news in recent weeks.
The gig economy is growing. This phenomenon, which attracts people from all walks of life to flexible work opportunities, is not new. A society reeling from a global pandemic is searching for how to keep America working when many jobs and opportunities have been eliminated. The pandemic is not responsible for the major shift from traditional work to more flexible work opportunities. The pandemic simply accelerated the transformation from a more traditional economy to one that thrives on flexibility.
The needs associated with family life or caring for someone near and dear may prevent working at specific times on specific days. The great majority of those who work in the gig economy as independent contractors are striving to convert underutilized time and/or assets into income earning opportunities. The great majority are not seeking to replace full-time work with their gig. Some are seeking to replicate or create a full-time income earning opportunity based on micro enterprise principles. However, this segment of independent contractor represents approximately 10% of gig workers, not 90% as some mistakenly believe.
The research conducted to support Ultimate Gig reveals clear reasons why gig workers choose their gig. These reasons should be understood. They reveal both the needs and desires of a broad class of workers.
THE GIG ECONOMY IS BUILT ON INDEPENDENT CONTRACTORS
The “gig economy” is fundamentally a heterogeneous collection of individuals and firms engaged in a wide variety of mostly ad hoc or short-term income-opportunity activities and tasks (e.g., Duszynski, 2020). As Kuhn & Maleki (2017) have noted, gig workers have been called micro-entrepreneurs, independent contractors, freelancers, sellers, partners, and so on.
Iconic gig economy firms include Uber, Airbnb, Lyft, Upwork, and TaskRabbit, firms that provide digital labor platforms for matching supply and demand as marketplace intermediaries. In addition, “traditional” companies such as Amazon and Walmart use gig workers for a variety of tasks. For example, at the beginning of 2021, Albertsons, one of the largest grocery store chains in the United States, announced that it was laying off delivery employees in many areas of the country and replacing them with “third-party logistics providers” (i.e., gig workers).
According to Fleming (2021, p. 2), nearly 57 million Americans, some 40 percent of the workforce, are engaged in the $1.4 trillion gig economy, and the “gig workforce” is growing at a (pre-pandemic) rate more than three times greater than the “traditional workforce.” Although the gig economy is sometimes referred to using such terms as the sharing economy (e.g., Gobble 2017), the platform economy (e.g., Farrell, Greig, & Hamoudi, 2018), the on-demand economy, or the precarious work economy (e.g., Montgomery & Baglioni, 2020), in reality these terms describe subsets of the gig economy. Apart from the fact that gig workers are, by definition, independent contractors, not company employees, the use of such terms indicates that consensus has not been achieved regarding what constitutes the gig economy or the workers who populate it. This absence of consensus has led, in turn, to limited insights and misunderstanding regarding the gig economy and its significance.
UNDERSTANDING GIG WORKERS/INDEPENDENT CONTRACTORS
Although a plethora of research has been conducted on the gig economy, much of this research has focused on firms offering a labor platform such as Uber (e.g., Chen, Chevalier, Rossi, & Oehlsen, 2020), Amazon Mechanical Turk (e.g., Keith, Harms, & Tay, 2019) or Airbnb (e.g., Zervas, Proserpio, & Byers, 2017), or on a particular subset of the gig economy, such as thesharing economy (e.g., Habbi, Davidson, & Laroche, 2017; Kathan, Matzier, & Veider, 2016). Similarly, research on gig workers has often been limited to specific categories of workers such as direct sellers (e.g., Gleim, Johnson, & Lawson, 2019).
To date there has not been a comprehensive study of gig workers. Indeed, virtually no research has been conducted to identify gig workers generally and document their gig-related behaviors, demographic characteristics, and motivations in a form useful for business managers and public policy officials. This research lacuna simultaneously reflects an absence of information as well as a plethora of misinformation regarding gig workers, to the detriment of managerial decision making. The present paper reports the results of studying a general sample of gig workers in the United States and presents several managerial and public policy insights and implications emanating from the research. These insights and implications should inform and improve managerial decision making regarding the nature, scope, and growth of the gig economy and the gig workers who participate in it.
Standard, accepted research methods and techniques were used when conducting the study. Specifically, data for the study were obtained by means of a (double-blind) survey administered to a random sample of adult members of a large internet panel company in July 2020. After being screened for geographic area (United States) and age (18 years of age or older), panel members were asked several quality-control screening questions. The ultimate sample consisted of 1,001 adults who self-identified as gig workers in that they reported working at least one gig in the 12 months prior to the study.1 Approximately half of the gig workers surveyed were males (515 or 51.5%), and half were females (486 or 48.5%). No age or gender quotas were employed when collecting data.
In addition to standard demographic characteristics, data were collected on the number and types of gigs worked, whether working a gig involved an online platform, how a gig fit into overall work, time spent working a gig, and experience with a gig.2 Data were also collected on 16 possible reasons for entering the gig economy as well as gig earnings and uses of earnings.
Who are Gig Workers/Independent Contractors?
Contrary to what might be considered common beliefs, gig workers do not simply engage in a single, part-time work activity. Rather, a majority of gig workers—55 percent—work more than one gig, and nearly a third—31 percent—work more than three gigs. A plurality of gig workers, 41 percent, work their gigs by means of an online platform, whereas a third (34 percent) work offline; the remainder work their gig(s) through an online/offline combination. Thus, media depictions of gig workers as primarily individuals connected to an online platform and performing transportation or delivery tasks are not accurate.
Across 14 types of gigs studied, gig workers often pursue professional services (accounting, law, consulting), with 16 percent of gig workers pursuing this type of gig. This was followed by selling products or services that the gig workers make or produce themselves (11 percent of gig workers). Ten percent of gig workers do free-lance computer work (including data entry and website development). Of those gig workers working two or more gigs, 73 percent work different types of gigs. For example, one gig worker works both a free-lance computer gig and a ride-sharing gig, whereas another gig worker works both a direct selling gig and a music gig, illustrating variety in the types of gig combinations worked.
Gig workers are more likely to be millennials than baby boomers. Thirty-five percent are less than 35 years of age, whereas 26 percent are 55 years of age or older. Further, gig workers tend to be well-educated. Seventy-one percent report having a college degree or more. Nearly three quarters of the gig workers surveyed, 72 percent, consider their gig work to be part-time work; 28 percent consider their gig work to be full-time work. More specifically, 62 percent of gig workers say they spend less than one day per week on their gig work, and 58 percent report that they expected to earn less than $500 per month when entering the gig economy. Approximately 80 percent of gig workers actually earn what they expected to earn when entering the gig economy, with 10 percent earning more and 10 percent earning less. These figures are consistent with the primary reason gig workers sought out their gigs: “I wanted to make a little extra money.” Three-quarters of gig workers say this was their motivation for entering the gig economy. Other reasons for seeking gig work include “I wanted to enjoy both work and life more” and “I wanted freedom to work from wherever I want.” Sixty percent of gig workers state that each of these latter reasons motivated their gig work.
Thirty-seven percent of gig workers primarily use their gig earnings to pay household bills. Another 31 percent save or invest their gig earnings, whereas 1-in-6 (16%) use their gig earnings to improve their personal lifestyle. Gig workers appear to like working their gigs. Eighty-seven percent rate their overall experience working their gig as “very” or “somewhat” positive, and 86 percent are likely to recommend their gig to a friend or colleague. When asked whether they would choose working a gig or being a W-2 employee in the future, 43 percent of the gig workers say they would choose gig work, 35 percent say they would choose W-2 employment, and 22 percent say they are indifferent. Thus, it appears that a plurality of gig workers prefer gig work to being an employee, and working a gig is not simply marking time between two W-2 employee positions.
Contrary to claims regarding the inability of gig workers to obtain health and retirement benefits, 90 percent of gig workers report having health insurance, approximately the same percentage (92%) as the general public. Of those gig workers having health insurance, 33 percent have health insurance through a non-gig employer, 22 percent have health insurance through a spouse or partner, and 22 percent have private health insurance. Other sources of health insurance include Medicare (18%) and Medicaid (8%). At the same time, 57 percent of gig workers report having life insurance, whereas 71 percent report saving for retirement. Approximately 50 percent of gig workers having life insurance obtain it through a private plan, 33 percent obtain it through a non-gig employer, and 26 percent obtain it through a spouse’s or partner’s employer. Of those gig workers saving for retirement, 53 percent save through a retirement plan from a non-gig employer, 41 percent have a personal savings account or savings plan, 38 percent have a Roth or other individual retirement plan, and 19 percent have a retirement account through their spouse’s or partner’s employer. 3
Insights from the Research
The present research offers empirical evidence documenting the heterogeneity of the gig economy based on a self-identified sample of gig workers. This heterogeneity is expressed through the diversity and number of gigs worked, the type of customers served (organizations versus consumers), and the behavioral, demographic, and motivational characteristics of gig workers (including full-time gig workers and part-time gig workers). Perhaps the most obvious insight from the present research is that although it is commonplace to only think of gig workers as Uber or DoorDash drivers or Airbnb providers pursuing a gig through an online platform, the present research reveals that such thinking is not only myopic; it is also misleading. Any portrait of gig workers must avoid such coarse descriptions to be decision-relevant.
For example, consider direct selling. Direct selling is often considered the original form of gig work. (The direct selling company Southwestern Advantage has a documented creation date of 1868.) Regardless of whether it is deemed an industry, a business model, or a channel of distribution (see Peterson, Crittenden, & Albaum, 2019), direct selling entails independent contractors (distributors) marketing the products and services of companies (e.g., Herbalife, Mary Kay, Amway, Tupperware, USANA) to consumers away from a fixed retail location, usually through one-to-one or digital communications, and typically on a part-time basis. As such, direct sellers constitute but one specific non-platform-based subset of gig workers/independent contractors.
IMPLICATIONS OF THE GIG ECONOMY
Granular examination of the survey data in conjunction with systematic observations of the gig economy from a macro perspective lead to several interesting observations. It is possible to speculate that the rise of the gig economy, especially in concert with the 2020-21 COVID-19 pandemic and the trend toward work digitization, will have profound, long-term, economic as well as social implications. Indeed, it appears that the pandemic has both exacerbated and accelerated the transition from a traditional (industrial) economy to a gig-facilitated digital economy in the United States. Firms were made aware during the pandemic that physical work spaces were not as necessary as once thought, and when this knowledge is combined with benefits accruing to firms who use gig workers, new business models are inevitable.
Certainly gig workers/independent contractors generally seek to gainfully exploit their under-utilized personal resources and assets such as unused time, personal property (e.g., an automobile or a home), knowledge, or skills by transferring them to income-producing opportunities. A majority of gig workers pursue more than one gig; a minority limits itself to using a single online platform to obtain gigs. However, most gigs do not involve sharing vehicles or domiciles. Rather, gigs involve activities such as professional services carried out for an organization or selling products to consumers that are personally made. As a consequence, it is necessary for managers and public policy officials to simultaneously take a broader yet more nuanced perspective of the gig economy than simply assuming it consists of transportation gigs if its implications are to be fully understood and addressed prescriptively.
The Nature of Work is Redefined
Consider the prospective impact of the gig economy on how work is defined and compensated. The gig economy has increased the number and variety of work choices available. Much gig work is performance-based. Rather than being strictly compensated for hours worked or by a weekly or monthly salary, gig workers are most often compensated on the basis of completed tasks (e.g., completing a software application, delivering a customer to a location, renting an unused bedroom). Thus, the gig economy is forcing employers, workers, customers of the employers and workers, and even government regulators and officials to reconsider the nature and even the definition of work—what in fact constitutes “work”—where work is performed, how work is performed, when it is performed, and how it is compensated. Firms that are able to successfully incorporate a gig-based business model will prosper in the future; those that cannot successfully incorporate such a model will likely fail.
Uber, Lyft, and similar labor platforms ushered in a new, disruptive transportation model that put traditional taxi companies and drivers at risk. Customers of such labor platforms now use their mobile phones to hail a ride nearly instantaneously while simultaneously knowing where in their trip they are at any one moment and when they can expect to arrive at their destination. All this at a price typically less than traditional taxi fare (and often known in advance), without cash changing hands, and incorporating an easily accessible virtual record of the trip. Relatedly, the pandemic created opportunities for disruptive platform-based food delivery innovations primarily using gig workers. Over time, other industries will be disrupted, occupations will be redefined, and employees likely replaced by gig workers.
Service industries as diverse as childcare, dog-walking, and long-haul trucking have long been populated by gig workers and are increasingly being consolidated through third-party digital platforms. Professions that can be characterized by pay for performance, such as college instruction and architecture, are likely not far behind. Given the rethinking of tenure, the rising costs of higher education, and the increasing frequency of online instruction through adjunct instructors, it is easy to envision future college instructors—gig workers—simultaneously teaching at several different institutions and being paid on a per course basis. Similarly, given that architects often are compensated on a project basis and can work from anywhere, it would not be surprising to see architectural firms consisting primarily of gig architects and lean employee support staffs. Occupational changes will likely be the norm rather than the exception in the future, and broad economy- and society-related disruptions due to the gig economy and its digitization are inevitable.
The present research documents that individuals engage in gig work in part because they want to control their work schedules and their desire for “personal time” in their lives. Specifically, gig workers seek flexibility associated with their work location and work hours. In addition, the research reveals that nearly a third of gig workers pursue three or more gigs either because they are looking for variety or attempting to find income-producing opportunities they would enjoy, not merely working a gig to earn “a little more money” (although “extra money” is indeed an important motivator). Moreover, a plurality of gig workers report that, when choosing work in the future, they would choose a gig over W-2 employment. Consequently, firms that want to hire gig workers need to mindfully adjust their recruiting and hiring strategies to address the desire for flexibility as well as be able to implement a business strategy that results in productive workers and satisfied customers. Doing so may require restructuring not only the human resources function in a firm but the overall firm structure itself. In brief, strategies to attract and retain (gig) workers most likely to contribute positively to the firm need to be rethought in the context of applying both positive and negative, financial, and nonfinancial, work incentives.
Employee turn-over, long viewed negatively when evaluating the health of a firm, can no longer be viewed with the same understanding or definition in the context of the gig economy. Gig-related turnover may simply indicate that individuals have chosen to do something else after learning what they wanted to learn from a gig. Such individuals simply move on in pursuit of their preferences as to how and when they work or whether their goal has been achieved. Not all forms of work will be everlasting to every worker. Using employee turn-over as any kind of metric in relation to the gig economy needs to be carefully assessed as to its relevancy and implications.
Benefits and Responsibilities
The number of gig workers in the United States is increasing more rapidly than the number of traditional 9-to-5 employee jobs. Since gig workers are independent contractors without an employer-based benefit safety net (sponsored health insurance, retirement plans, etc.), this creates a need for new forms of corporate and organizational governance as well as new safety-net products and services that in turn require structural adjustments be made to accommodate this workforce while simultaneously meeting the needs of society. Firms using gig workers will probably be flatter and less hierarchical than firms with employees, and the “command and control” procedures associated with managing employees will be less relevant given the absence of employment contracts.
Traditional employee benefits such as health and life insurance and retirement plans directly provided by or mediated through firms are not currently available to gig workers. Although the present research shows that 90 percent of the gig workers surveyed have access to health insurance, the source of the insurance differs markedly across gig workers and consequently the coverage and price may vary substantially. Approximately 57 percent of gig workers have life insurance, a percentage slightly higher than Americans in general (54 percent), whereas 71 percent report saving for retirement, slightly less than the national average of 74 percent. These percentages rebut arguments that gig workers are lacking safety-net benefits and imply claims that gig workers are not being treated fairly by gig-providing companies might be a bit misplaced. This is especially the case for part-time gig workers who are also employees. Even so, these percentages suggest that possible mechanisms or innovative business models effectively and efficiently providing incremental safety-net benefits for gig workers should be considered, and firms that can provide or facilitate such benefits will likely have a competitive advantage.
Further, the independent nature of the gig worker-firm relationship means that there must be shared responsibility for ensuring compliance with such issues as income tax reporting and ethical behavior in the marketplace. This is a core challenge for all stakeholders. In a traditional employee-firm relationship, the firm provides employees with W-2 forms, withholds taxes, social security and other retirement payments and the like, and imposes policies to guide employee behavior. For gig workers whose customers are firms or organizations, a W-2 form is replaced by a 1099 form. However, for gig workers whose customers are consumers, such documents may not exist. Tax compliance is a major revenue concern for all levels of government, and ensuring that gig-work income is reported and appropriate taxes paid remain unresolved issues. Also, appropriately mandating and monitoring ethical behavior of (independent) gig workers who may be perceived as representatives of a firm by customers and potential customers are activities fraught with difficult issues and hidden costs but imperative for competing successfully.
Moreover, the shift to gig workers creates an issue that seems to be often overlooked: who is responsible for ensuring that future (gig) workers will obtain the necessary knowledge and master the special skills required for firms to successfully compete locally, nationally, and internationally? Traditionally, firms have provided both basic and incremental training for their employees to carry out their job functions. But if a firm’s workers are gig workers, there is less incentive for the firm to train such individuals; loyalty will always be a beneath-the-surface issue. Training instead will likely take place simultaneously through newly created, perhaps special-purpose, organizations that offer training paid for through firm or worker contracts, through a changing emphasis in college and university curricula, or even by means of self-training (“do-it-yourself”) protocols. If a firm assumes the responsibility of training the gig workers/independent contractors it attracts, the gig workers may have to pay the firm for the training (this is a model often used by large real estate brokerage companies). Such training is not envisioned to be an insurmountable obstacle as direct selling companies have provided training for their independent contractors for years, and mostly free of charges and fees.
At its essence, the gig economy is a channel mechanism for reducing complexity in that digital platforms increasingly simplify linking gig workers and their customers, whether organizations or consumers. As such, these digital platforms are mediating vehicles that serve a market-matching function. Although a substantial percentage of gig workers, 34 percent, do not presently use an online platform or website for their work, given personal contact restrictions caused by the pandemic, the seeming desire to work from home, and the new applications platforms being developed, it would appear logical that this percentage will decrease over time, even as the absolute number of gig workers increases. Coupled with the increased use of matching platforms by new and existing platform companies as well as more traditional firms creating their own internal platforms (e.g., Walmart and Amazon), and the fact that millennials (who probably are more technically adept than, say, baby boomers) exhibit a higher incidence of gig work than older individuals, the size and impact of the gig economy and utilization of independent contractors can only grow. Indeed, it is possible to conjecture that the increasing size and impact of the gig economy may well result in a restructuring of the current industrial economy. A very different marketplace has a very different purchasing behavior. Access to products and services via a platform is now an expectation. We foresee more, not less, intermediaries working as independent contractors. In some cases, they will make platforms accessible to customers in a more personalized manner. This new way of working in the gig economy will continue to grow activating even more work opportunities which provide freedom and flexibility in how the work is done.
Finally, the digitally-driven gig economy is creating a profound change in where people choose to live. Since workers no longer have to live within commuting distance of a physical workplace where they are employees of a firm, there is an increasing tendency for workers to move to smaller, often remote and more livable cities and earn a livelihood through one or more gigs. The consequences of such a transition are enormous for both firms and society.
- A “gig” was defined as a flexible work arrangement that allows people to work how, when, and where they want to work. Even full-time and part-time employees may sometimes work gigs in their free time.
- Fourteen different gig types were studied. These ranged from physical labor to digitally-based tasks.
- Percentages total more than 100 percent because gig workers frequently have more than one source of insurance or possess more than one retirement plan.
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