'These Laws Are Failing'
We don't need more freelance busting. We do need policy ideas to support today's independent workforce. In this Q&A, economist Liya Palagashvili offers some.
I met Liya Palagashvili in April 2023, when we were both witnesses on the same panel testifying before Congress. The topic that day was policy threats to independent contractors, and she brought her expertise as a labor economist from the Mercatus Center at George Mason University.
She was, in a word, awesome.
Palagashvili explained, in her written testimony, how one out of every three Americans works outside of traditional employment today, either for their primary or secondary source of income. A year later, during another hearing, she explained in her written testimony that the subject matter is personal to her because her father is one of us. He lost his independent-contractor role in January 2020 and was offered a job as a full-time employee, but turned it down, wanting to remain his own boss.
She told Congress: “What my father’s story illustrates is that regardless of worker-classification policies that may tip the scale in one direction or the other—such as the Department of Labor’s recent independent-contractor rule or California’s Assembly Bill 5—there will still be millions of U.S. workers who will continue to engage in independent contracting or self-employed work just because they want to. Indeed, according to the Bureau of Labor Statistics, almost 80 percent of all independent contractors prefer their work arrangement over an employment arrangement, and fewer than 1 out of 10 would like to be employees.”
More recently, in January 2024, Palagashvili was the lead author on a study about California’s AB5. She also did a deep dive into this study on her Substack, Labor Market Matters. Palagashvili and her team documented what so many independent contractors had been telling lawmakers for years—that this type of freelance busting is hurting far more than it is helping.
Palagashvili and her team documented that after AB5 went into effect:
self-employment decreased by 10.5 percent on average for affected occupations;
overall employment decreased by 4.4 percent on average for affected occupations;
AB5 did not necessarily lead to the hoped-for growth in traditional employment.
Last month, Palagashvili and her team put out a policy brief that reiterated how awful freelance-busting policies are—”Far from delivering their intended results, these reclassification policies tend to harm the independent workforce”—and offered seven ideas that they believe would be better.
I asked Palagashvili some questions about those ideas, and about whether she thinks lawmakers might consider any of them in the near future.
Here’s our conversation.
Q&A with Liya Palagashvili
Your new policy paper aims squarely at some of the biggest challenges independent contractors have faced in recent years.
You’re calling for seven types of reforms as a way to better align federal policy—which is based on traditional jobs--with the needs of more and more Americans today as we choose to be self-employed.
Just how far apart do you think our nation’s laws are right now from the way that tens of millions of us are actually earning a living?
Our current legal framework on labor-related issues, including the provision of work-related benefits and the classification of employees versus independent contractors, was formed primarily in the period between the 1930s and 1970s. Tax incentives were created to encourage our fringe benefits to be tied to W-2 employment jobs, and labor laws were designed in a way that restricted the flow of benefits to non-payrolled workers.
Back then, this was not a big issue because most workers were traditional employees. But now that the circumstances have changed, these laws are failing a large and growing sector of the workforce.
Today, about 10 percent to 29 percent of workers engage in independent work as their primary source of income, and up to 39 percent use it as a supplementary source of income. Many workers also now have multiple sources of income. This is far different than the world of the 1950s where most workers were employees, staying at the same company or within the same industry for their entire lives.
Work is much more fluid today, and we’ve disrupted the notion that “a job” must be provided by “a company.” Each one of us provides a work opportunity for someone else when we hire a music tutor, or order handmade pottery on Etsy, or hire a graphic designer on Fiverr to help with a personal project.
Now, in this new economy, we can rethink and redesign our labor laws to better address and serve all types of workers—not just W-2 employees.
One of your recommendations is to let independent contractors register as such, and ensure that federal regulators treat us accordingly. This is the top priority, in my opinion, given all the recent attempts to redefine so many of us as unionizable employees against our will.
Is the goal of this recommendation to make the desire of the individual—our preference to be self-employed—a more significant factor than any kind of other factor or test that regulators might try to impose on us?
Our idea is that the optional self-certification would not interfere with a federal agency’s existing worker classification test, but it would be recognized by all federal agencies as stating the worker’s intent to be independent.
Businesses would still be required to comply with each federal agency’s worker classification determinations. The optional self-certification process would serve as an additional measure that independent workers could undertake to provide assurance of their status.
One of your recommendations is to stipulate that no federal agency can use the presence of benefits to determine whether a worker is an independent contractor or an employee.
Is your idea that even if a person is an independent contractor, a company should be able to offer access to benefits like health insurance without risking government prosecution for misclassification?
Yes, that’s the idea. Our laws shouldn’t punish hiring parties who want to voluntarily provide benefits or contributions to contractors. Benefits being tied to W-2 employment is a legal construct, but it doesn’t have to be this way.
That idea would be brand-new, right? What do you think would make a company want to offer benefits to somebody who is not an employee?
Yes, the idea of a hiring party providing benefits to a freelancer is a fairly new concept. Typically, employers only provide benefits to their employees, but that’s partly due to our labor laws and our policies governing the provision of workplace benefits.
Imagine something as simple as this: Fiverr, a freelancer platform, could set up a 5 percent fee that will go into a benefits fund (a specific or general fund) for freelancers. Of that fee, 2.5 percent would be paid by the platform, and 2.5 percent would be paid by the client or customer who is hiring the freelancer. A third contributor could be the worker himself, and larger companies could set up various “matching contributions” plans to encourage greater savings. Or imagine Fiverr doesn’t make any contributions, but only facilitates the contributions between the hiring party and/or freelancer.
Companies or hiring parties may want to voluntary provide these benefits as part of retention incentives. Or, if there are tax advantages for the self-employed worker as per our recommendations, then the worker may ask the hiring party to put some share of their compensation in the form of benefits.
Also, regardless of tax incentives, existing research shows that some (though certainty not all!) value the benefits more than the equivalent cash payment. In any case, the relationship between the two parties should allow for the possibility of benefits contributions.
Several of your recommendations involve health insurance. I’ve been a freelancer for two decades now and have always bought an individual health-insurance policy. The challenge for me has never been access to an individual policy, but instead the cost.
While employees who have health insurance subsidized might pay a couple hundred bucks a month for their health-insurance premium, freelancers like me are paying close to $1,000 a month for a middle-tier, silver-level plan that doesn’t even include dental or vision. And that’s before all the deductibles for actual doctors’ visits and treatment. A senior-age friend of mine is paying $1,400 a month.
How would your recommendations help to improve not only access to benefits, but also cost?
One reason why an individual health insurance policy is so expensive is because there is a lack of access to group rates. Group rates can lower the price of health insurance through shared risks—so instead of each person buying insurance on their own, the group pools their risk (and the risk is spread out), which makes the overall insurance cheaper for each person.
Also, larger groups have more power to negotiate better rates with insurance providers. The bigger the group, the more attractive it is to insurers, who are often willing to offer better terms to secure the group as a client.
This is why one of our healthcare recommendations is to legalize Association Health Plans (AHPs), which work by allowing small businesses, self-employed workers, and independent contractors to band together by geography or industry to obtain healthcare coverage as if they were a single large employer.
In other words, imagine freelance writers could form an association and the freelancers could buy health insurance through that group (similar to how employees buy health insurance through an employer). Currently, AHPs are not legal except with a few notable exemptions, but legalizing them could provide a way to help independent contractors see improved costs of health insurance.
We also offer two other health-related recommendations in the federal policy guide—one that would improve individual coverage health reimbursement arrangements (ICHRAs) to allow self-employed workers to use pretax dollars to purchase health insurance on the individual market, and another one that relaxes restrictions on health savings accounts to enable greater participation by self-employed workers.
Another of your recommendations is to create tax-advantaged universal savings accounts (USAs) to enable flexible savings options.
This USA concept is new to me. I think you’re saying that unlike with a 401(k) or IRA, these USAs would let independent contractors access our savings whenever we need it, without penalties, even if we are not at retirement age. Has this idea of USAs been tried before, or is it a new concept?
Yes, several other countries have the “USA” concept—in the United Kingdom, for example, they are called Individual Savings Accounts (ISAs), or in Canada, they are called Tax Free Savings Accounts (TFSAs).
The idea is that we currently have tax-advantaged retirement savings options, but those come with restrictions and also penalties if you access them before your retirement age. But USAs (as well ISAs and TFSAs) enable individuals to open tax-advantaged investment accounts that can be accessed even before retirement and for any purpose, without any restrictions or penalties.
It’s a great way to incentivize workers to save while also giving them the flexibility to access their savings based on their individual needs.
Would these USAs be like interest-bearing savings accounts or certificates of deposit, where there’s a pre-defined rate of return, or more like long-term saving vehicles that involve stock-market investments and fluctuations?
USAs are essentially Roth IRAs, but the funds can be taken out for any reason and at any age, without penalty.
For example, individuals can access their funds to buy a house, start a business, or to help cover emergency expenses. Similar to Roth IRAs, you’d be able to invest in securities like mutual funds, certificates of deposit or money market funds. It’s a tax-advantaged, flexible investment option.
You have testified numerous times before Congress on independent-contractor issues. It’s clear that lawmakers take your ideas seriously.
Do you think there is a chance that lawmakers might be responsive to some, or all, of these ideas in the near future?
I am optimistic about lawmakers adopting some or all of the recommended portable and flexible benefits reforms. Several states have already begun adopting our ideas, and recently, federal policymakers have shown a lot of interest as well.
Portable benefits are a bipartisan idea—and they are the only sustainable solution to help and empower the growing independent workforce without increasing instances of true misclassification.