What If We Extend Employee Benefits To All Workers?

It’s no secret that companies are reducing the number of employees in their workforce and relying more on workers in the Gig Economy, including independent contractors, consultants, and freelancers. Employees make up only half of the workforce at some tech companies and are already the minority at Google.

This change in workforce composition is significant because our labor laws and regulations support only one type of worker: employees who hold a traditional job with a single employer. All other workers are penalized by being taxed additionally, and stripped of the benefits, subsidies and protections still offered only to employees.

Three Strategies to Support Everyone Who Works

If we were designing a labor market from scratch today, we wouldn’t create one that provides benefits and protections only to full-time employees. It wouldn’t make sense given the many ways that people choose to — or must — work: independently, part-time, on the side, as a contractor or freelancer, or on-demand. An estimated 30% to 40% of today’s workforce are independent workers, either part- or full-time, and the numbers are only expected to grow. If we were designing a labor market today, we’d create a system that supports everyone who works.

 There are many ways to update our labor market so it supports our entire workforce, but three meaningful policy changes will get us closer to creating a labor market that supports everyone who works:

Eliminate the Self-Employment Tax

Full-time employees and their employers split the bill for Social Security and Medicare taxes. Employees pay their half through automatically deducted payroll taxes. Independent workers pay double the Medicare and Social Security taxes that employees do because they are taxed additionally and separately through the aptly named Self-Employment Tax. The Self-Employment Tax requires them to pay the employer side of Medicare and Social Security taxes as well as the employee side. It is levied on everyone who works independently, whether by choice or circumstance, whether full-time, or through a side gig

Eliminating the Self-Employment Tax would level the playing field so that all workers pay only the employee side of Medicare and Social Security taxes.

There are many options for replacing revenue from this tax. One is to require employers to pay the employer side of Medicare and Social Security taxes for all workers they hire, not just employees. This option is administratively straightforward since it leverages corporate back office systems and processes already in place. Another approach is to replace the revenue by incrementally reducing the massive federal government tax subsidies on employer-provided health insurance.

Extend Health Insurance Tax Breaks to All Workers

The federal government distributes about $300 billion in subsidies for employer-provided health insurance through a variety of tax breaks. For example, employers don’t have to pay payroll taxes on the value of the health insurance they provide, and they can deduct the cost of premiums as a business expense. Their employees also receive health insurance coverage as a tax-free benefit.

There are numerous ways to rectify this federal favoritism towards employees. One strategy is to reduce the tax breaks awarded to employers — by setting an upper limit on their business expense deduction for health insurance or collecting payroll taxes on the value of the insurance coverage they provide — and use those savings to extend tax benefits to independent workers.

Another option is to actually implement some version of the twice-delayed ACA “Cadillac Tax,” which imposes a 40% excise tax on employers who provide high-cost health insurance plans with premiums that exceed specific thresholds. The revenues from that tax could be used to extend tax breaks and lower the premium costs for individually purchased health insurance.

Extend Basic Protections to Everyone Who Works

Our labor laws and regulations provide a number of protections to help employees create a safe and stable working life. Two basic ones that make sense to extend to independent workers include income protection and protection against harassment and discrimination.

Unemployment insurance protects workers’ incomes if they lose their job. But, a growing percentage of today’s workforce doesn’t need unemployment insurance if they lose a job, because they don’t have a traditional job. They need income insurance if they lose a significant amount of work. The basic idea of income insurance is the same as unemployment insurance: to provide a minimum level of financial stability without creating incentives to stop working. One approach to consider for creating income protection for independent workers is to require companies to pay pro-rata income protection payments for all of their workers, not just their employees.

Our current labor laws also protect employees from harassment and discrimination at work. This right to work in an environment free from harassment and discrimination is not currently extended to independent workers. It is a relatively straightforward change in policy to extend discrimination and harassment protections to all workers. Such a bill was introduced by Congresswoman Eleanor Holmes Norton (D-D.C.) last year, but has languished since. Quickly passing this or similar legislation is one approach to protect all workers.

Labor and tax policies that support only employees in traditional jobs make less and less sense in a workforce that is increasingly made up of independent and alternative workers. Creating a labor market that supports everyone who works requires extending the benefits and protections awarded to full-time employees to all workers. It’s a monumental undertaking, but a necessary one if we want to maximize the potential of our increasingly independent workforce.


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