Employee or Contractor? Online Businesses Like Uber Need a New Category

Uber driver Glen Snower checks his phone in Chicago, March 18, 2015. Uber is just one of several new tech companies employing freelancers for on-demand work. Jim Young/Reuters

American workers are quickly shifting toward more independent, self-directed work. It's increasingly easy to find work and develop a flexible lifestyle outside of the bounds of the previous generation's get-a-job-for-life mode.

A key support structure for this shift has been the explosion of the on-demand economy, enabling independent working Americans to supplement or replace their personal income streams.

Shifting our work lifestyles, and relying on platforms like Uber and Airbnb for our income, leaves these on-demand platforms with a difficult decision: Are the individuals providing goods or services in my marketplace to be defined as employees or contractors? And what does that mean about the support we should be providing freelancers to be productive, healthy and empowered members of their community?

From Uber to Instacart to Handy to Thumbtack, there's a unique mix of work requirements to earn your reputation and right to perform on the platform. The line between the 1099 (contractor) and the W2 (employee) is a squiggly one, defined by a rough set of IRS guidelines with somewhere between four and 20 factors.

As a result, platforms must strike a delicate balance between supporting workers but not overstepping IRS boundaries that could dramatically change the economics of their businesses.

On June 19, Uber announced it would appeal a June 3 ruling of the California Labor Commissioner "in favor" of a contractor who argued she should have been treated as an employee—which would require Uber to pay her mileage and toll reimbursements (but not wages).

It's clear there's a long legal road ahead. But we have a shot at a win-win solution. We need to classify those who work in the on-demand economy in a way that reduces headaches, delivers a more secure lifestyle and facilitates platform (and economic) growth.

It's time to define a new labor classification for tax and employment law—one that maintains the freelancer's freedom and flexibility, while protecting worker rights. This new labor class sits between the now-outdated 1099 definition and the restrictive W2. As Senator Mark Warner said earlier this month, "We're not going to slow this desegregation between employer and employee. So we've got to figure out ways to make it work for people better."

The Old World

The IRS crafted the core test for whether a worker is an employee or an independent contractor in the 1980s. Thirty years ago, earning income as an "independent contractor" (a self-employed individual) meant you provided your own equipment, worked on your own schedule and set your own rules to produce a contracted outcome. But it also meant you found clients based on your own credentials, reputation and experience—a public trust you built up over time.

As a reward for that profitable, public trust, you got a lot of perks—you set your own schedule and workload, deducted your business expenses from income taxes and chose which projects you'd take. You had the flexibility to work on hobbies or start side businesses because of that choice.

By contrast, as an employee, the expectation was that certain hours of your week would be set aside to do whatever your employer asked. In exchange, the employer covered your expenses and provided you with certain "benefits," making your compensation package more attractive.

The New World

The Uber case flags a pain-point where our laws lag behind our technology. On-demand freelancers and sharing economy contributors want to work for multiple platforms, they want work-life flexibility and they want to protect their income as they dial-up and dial-down their various sources of work.

Because of the on-demand economy, a new kind of freelancing has become possible that doesn't require you to spend years to acquire skills and reputation. The individual reputation that was built by the sole proprietor in the 1980s has been supplanted by the reputation of a consumer platform.

Freelancers are generally happy to follow the rules the platforms must set to ensure the end-customers get what they expect. Freelancers inherit the platform's reputation and enjoy flexible income, schedule and lifestyle. While the on-demand economy has enabled work flexibility and income diversity for a less-skilled, wider segment of the population, that segment still needs more support.

What Freelancers Love—and We Need to Protect

In the words of Maynard Webb, author of Rebooting Work, "independent contractors can often achieve the best quality of life. They can choose from where they work, whom they work for and for how long."

At Stride Health we hear this every day. Member Peter Giacalone says he thrives on making his own schedule: "Not doing the 8-5, not clocking in and out. I'm more productive when I set my own schedule.... I'm my own boss now, which is liberating."

Our Uber drivers, TaskRabbit taskers and Postmates love the freedom of their work, and the new support structure we deliver that helps them to protect that income stream. Remember, many of them don't want to work for just one company (75 percent of Uber drivers have other sources of income), and many believe they are better off freelancing than full-timing (77 percent of freelancers say they make more money now than they did before freelancing and they report higher levels of job satisfaction).

The United States should protect the flexibility of the freelancing lifestyle and give platforms the ability to continue growing. Regulators in the U.S. should enable the new labor economy, an economy that unbridles the Millennial generation from traditional employment lifestyles that don't suit them and gives them a shot at success in the age of "The Great Decoupling."

What Freelancers Aren't Getting Yet

Freelancers are coming to on-demand platforms in droves, and we're seeing increased competition to retain them. Roughly one in three say they can find a new gig in less than 24 hours. Market pressure on platforms to deliver work and retain workers is building. Consequently, platforms want to connect quality workers with the life-toolkit they need to thrive, protect their incomes and stay healthy while retaining their beloved lifestyle flexibility.

Full-time employees often get protection in the form of employer benefits, but those come with the shackles of a full-time, less-flexible job. But there's very little middle ground today: IRS labor classification guidelines don't strictly define an independent contractor. They also don't address ways a platform company can incentivize contractors without rendering them employees—for example, with contributions to health plans, retirement plans and other downside protection. After all, when these rules were written there were no platforms.

We believe there should be a middle-ground—the On-Demand Contractor—a classification that allows companies to incentivize contractors without forcing them into "employee status." We'd like to see regulators acknowledge the uniqueness of the On-Demand Contractors and the platforms that created them.

Rather than maintaining threatening penalties for crossing unclear lines, we think that platforms should be allowed to offer incentives to On-Demand Contractors, without dooming the economic models that created the on-demand economy.

Other types of regulation are evolving to meet the shifts brought on by on-demand platforms, from transportation to housing to aviation. An employment regulatory shift should be no different. And data now exists to help enforce regulation like never before, à la Regulation 2.0.

Let's take away the risks of platform companies helping too much; let's see if the competitive private market can fill the gaps and provide performance or quality incentives that help platform companies find and retain workers. (Trust me, they want to do this for their contractors—we hear it every day.)

We believe that contractors who want the flexibility to shift among platforms should be allowed to accept contributions toward health, wellness, education, disability, unemployment and similar obligations from multiple platforms. And then carry these protections with them as they shift between platforms.

A new "On-Demand Contractor" labor class would help identify reasonable protections and make our legal reality more consistent with our economic reality. The flexibility the modern freelancer loves can be preserved while avoiding the abuses employment and tax laws were designed for.

What's Missing?

This is a call to action, but we have a long, thoughtful road to discover the optimal solution. I give kudos to Senator Warner and agree that "our goal should be not stopping this transformation but making sure that there's greater opportunities and greater mobility within the gig economy." And kudos to Senator Elizabeth Warren for recognizing: "Our only chance for survival is to innovate our way out of this. We're not going to stop tech so that lots of people will work. That's like saying, 'Let's get rid of heavy equipment and let people dig with a spoon.' That won't work."

This takes public-private cooperation. It also begs for a degree of legislative creativity that we haven't seen in decades: to properly define the set of protections that will enable continued growth of this new economy—and consider which Old-World legal protections still make sense (OK, feel free to chuckle at the suggestion that the Department of the Treasury get creative or Congress get innovative).

Although Uber and the other freelancer platforms have been delivering work and income to freelancers for years on terms most of their workers like, Washington hasn't yet updated the tax and employment rules to accommodate their reality. We have a shot at doing so with a new classification—the On-Demand Contractor.

Noah Lang is the CEO of Stride Health, a health care exchange that partners with companies in the on-demand economy, including Uber, to provide a health care recommendation engine that helps compare health insurance options to find the best fit, as well as assists users in using their health care coverage throughout the year.