A proposed Biden Administration rule reclassifying gig workers as employees, which intends to expand health and retirement benefits, would have adverse consequences. The proposed rule would reduce opportunities for people seeking flexible work hours, reduce employment options during economic downturns, cause some firms to reduce benefits, and worsen health insurance outcomes for some workers. Modifications to the tax treatment of individual retirement accounts and health insurance premiums would more effectively expand benefits than reclassification of work status.
Introduction: A proposed Department of Labor rule, described here, would make it more difficult for companies to treat workers as independent contractors instead of employees. The proposal would classify workers as employees instead of independent contractors if they are economically dependent on a company.
The purpose of the new rule is to increase health and retirement benefits for people currently employed as gig workers. The proposed reclassification of gig workers to full-time employees does not automatically lead to better benefits for all workers and could have the unintended side-effect of decreasing opportunities in the labor force.
- Cost to firms maintaining current benefits packages would increase.
- Some firms would reduce benefit packages to reduce the increase in costs stemming from the new regulation.
- Some firms would respond to the regulation by hiring fewer full-time employees and more part-time employees.
- Some workers might leave the workforce because they would be unable to obtain employment offering flexible hours.
- Some workers with state-exchange health insurance would lose access to a premium tax credit and could receive a less generous health insurance package from their employer.
The reduction of disparities between the retirement and health benefits received by gig workers and employees could better be achieved through modifications of the tax treatment and rules governing health insurance premiums and individual retirement accounts than by the proposed regulation.
Labor Market and Macroeconomic Issues:
Supporters of the gig economy point out that many workers need or prefer a position that offers flexible hours. This need is especially pronounced for people with young children. Lack of affordable and reliable day care and was the cause of a decrease in workforce participation during the pandemic. The forced reclassification of gig workers to employee status could reduce available flexible positions.
The existence of the gig economy may reduce loss of employment during recessions, if people who lose full-time traditional employment can find work in the gig economy. One recent article explored the relationship between county unemployment and the proportion of county residents working online at a particular platform. The article found that a 1.0 percent increase in county unemployment is associated with a 21.8 percent increase in the number of county residents working on-line at the platform. This finding suggests that new regulations that reduce access to the gig work option could increase unemployment during a recession.
Health Insurance Issues:
Most working-age employees and their dependents obtain their health insurance from their employer and many employers pay a substantial portion of the health insurance premium. Since the enactment of the Affordable Care Act, workers without an offer of employer-based insurance are eligible for a premium tax credit for health insurance on state exchanges. The employer mandate, created under the Affordable Care Act, fined firms with more than 50 employees that did not provide health insurance to their full-time workers.
The reclassification of gig workers as employees would reduce the role of state-exchange markets. There is substantial disparity in the cost and quality of employer-based insurance.
In some cases, the reclassification of a gig worker to employee status will improve health insurance outcomes. In other cases, the converted gig worker would have worse or more expensive insurance.
The reclassification of gig workers to employee status could benefit young middle-income workers with no dependents when employers pay a large share of premiums. Many young adults receiving their health insurance on state exchanges pay 100 percent of their health insurance premium because the premium tax credit is not available when premiums are less than 8.5 percent of income. These workers would realize lower insurance costs if they were reclassified as employees and if their new employer paid a share of the health insurance premium.
In other cases, the reclassification of gig workers to employees worsens outcomes. Many employers offer only one health insurance plan with limited benefits, narrow networks, and high premiums for workers. The existence of the offer of employer-based health insurance makes employees ineligible for the premium tax credit and makes state-exchange insurance unaffordable.
A regulation leading to the reclassification of gig workers to full-time worker would cause firms that do not change their health insurance or employment policies to either increase purchase of health insurance for workers or pay a fine for full-time workers who receive their health insurance from state exchanges.
Some firms would respond to the regulation by reducing hours worked, by increasing the number of part-time employees, thereby decreasing fines under the employee mandate. Some firms would reduce insurance costs by increasing plan deductibles or by adopting a narrow health provider network. Some firms would reduce the amount of their premium subsidy.
A better way to assist workers in the gig economy is to expand and improve subsidies for premiums on health insurance purchased on state exchanges while merging the markets for employer-based and state exchange insurance. Three reforms that deserve consideration are:
- Provide tax incentives for employer subsidies of state exchange health insurance instead of employer subsidies of firm-specific employer-based health insurance.
- Modify the premium tax credit to provide some subsidy for young adults without an employer subsidy.
- Create a new employer mandate consistent with the new subsidies.
The modified health insurance subsidy outlined here reduces costs of state exchange health insurance for all young adults who do not currently receive a subsidy.
The merger of state-exchange health insurance and employer-based health insurance markets and the modification of the premium tax credit will assist workers with multiple part-time jobs and will allow workers to maintain continuous health insurance coverage through periods of unemployment and job transitions.
The merger of state-exchange and employer-based health insurance markets allows all households to search for the most suitable health insurance plan. It prevents a situation where a worker needs specialized care perhaps at a top cancer hospital is tied to a single employer-based plan that does not offer access to the desired provider.
A more complete discussion of this health care reform proposal can be found here.
Retirement Plan Issues:
Many firms offer full-time employees a 401(k) plan. Workers at firms that do not offer a 401(k) plan and gig workers must save for retirement through an Individual Retirement Account.
401(k) plans are more generous to employees than IRAs. First, employers are allowed to directly contribute to a 401(k) plan and/or match employee contributions to the plan but are not similarly allowed to contribute to a worker’s IRA. Second, the maximum allowable employee contribution to a 401(k) plan in 2022, ($20,500 or $27,00 if over 55 years old), is substantially higher than the maximum allowable contribution to an IRA, ($6,000 or $7,000 if over 55).
The reclassification of gig workers to employee status could lead to higher costs for firms and firms could take actions to offset the increase in costs.
Some firms will respond to reclassification of gig workers by reducing the number of workers who are eligible for participation in the firm-sponsored retirement plan. This could occur by increasing the share of employees working part time.
Some firms could reduce employer contributions to 401(k) plans or eliminate the 401(k) plan altogether.
An alternative superior way to expand retirement benefits for gig workers is to increase the generosity of Individual Retirement Accounts and to allow firms to contribute to individual retirement accounts owned by employees and accounts owned by contractors. Specific changes that should be implemented include.
- Allow firms to directly contribute matching funds to Individual Retirement Accounts for employees and for independent contractors.
- Increase allowable worker contribution limits into Individual Retirement accounts to the level that exist for 401(k) accounts.
- Replace tax exemptions and deductions for Individual Retirement Account contributions with a tax credit.
The use of a tax credit for contributions to an Individual Retirement Account favors low-income workers who are in a lower marginal tax bracket. The change from a tax deduction to a tax credit will also disproportionately benefit gig workers who tend to be in a low marginal tax bracket.
Contributions to Health Savings Accounts are also tax deductible. Distributions from health savings accounts used for qualified health expenses are not taxed. The replacement of a tax deduction with a tax credit for contributions to health savings accounts would benefit low-income workers and could also disproportionately benefit gig workers. Firms should also be allowed to make direct contributions to health savings accounts owned by employees and independent contractors.
The pension reforms currently being considered by Congress, discussed here, appear to increase the role of 401(k) plan and could exacerbate the gap between gig and employee pension outcomes. Congress is not currently moving towards the pension reforms outlined in this memo.
Concluding Remarks: The typical gig worker receives less in health and retirement benefits than the typical employee. However, the newly proposed rule that would convert gig workers to full time employees is an economically inefficient solution to this disparity. The new rule would reduce the availability of positions with flexible work hours, reduce labor force participation among parents with young children, and could worsen unemployment during economic downturns. The rule would result in many firms reducing health and retirement benefits. Also, some gig workers that lose access to the premium tax credit for state exchange health insurance could be made worse off depending on the quality of the employer-based health plan received after reclassification.
A better solution to the disparity between health and retirement benefits offered to gig workers and full-time employees could be achieved through modification of rules governing health insurance premiums and rules governing Individual Retirement Accounts.