June was another record-breaking month for U.S. inflation, with the Consumer Price Index reaching 9.1%. While American families struggle with the rising cost of living, the Department of Labor (DoL) has promised regulatory changes to the classification of independent contractors that will only increase inflationary pressures on the U.S. economy and exacerbate the financial struggles of millions of Americans.
Ever since the creation of tax form 1099 in 1917, American companies seeking labor have had two options. They can either classify workers as traditional employees or as independent contractors. Traditional employees are paid either an hourly rate or a salary, regular working hours are covered by federal and state employment laws and are typically directly supervised by their employers. Independent contractors, however, are typically paid when specific tasks are completed and have more control over their schedule. Unlike employees, however, independent contractors are also typically not covered by state or federal employment laws and cannot unionize. Despite these drawbacks, 59 million Americans worked as independent contractors in 2020, representing 36% of the workforce.
Given independent contractors are not covered by federal and state labor laws and cannot unionize, Democratic lawmakers have made a concerted effort to classify them as employees. The overt hostility toward independent contracting employment became apparent when Biden’s DoL announced they were rescinding a Trump administration rule that provided clarity to employers and contractors in favor of a more opaque test that would make it harder for companies to classify workers as independent contractors.
Both labor models have their benefits and drawbacks, however, independent contractors are typically cheaper than traditional employees, making them an attractive source of labor. Because independent contractors “avoid paying payroll taxes, unemployment insurance, workers’ compensation, and disability, as well as benefits that include pensions, sick days, health insurance, and vacation time,” they can save businesses up to 30 percent in labor costs.
Traditional employees, however, are considerably more expensive for businesses, especially small businesses that have fewer financial resources. According to the Small Business Administration, when benefits and taxes are factored in, the cost of a traditional employee is typically 1.25 to 1.4 times the salary. Additionally, the Bureau of Labor Statistics reported that labor compensation jumped 4.8 percent year over year in March 2022, meaning companies are having to spend more to produce goods and services.
With the substantial savings independent contractors can offer, it’s unsurprising that small businesses, especially those with under 10 employees, “are increasingly relying on the services of independent contractors as an integral part of their business.”
For consumers, the increased labor costs inevitably mean increases in the price of goods and services, further exacerbating inflationary pressures in the economy given labor costs are factored into the price consumers pay.
For small businesses, rewriting the rules over who is and who is not an independent contractor means they will be denied access to this cost-effective form of labor and would force them to increase the price of their goods and services, further increasing inflationary pressures and diminishing the paycheck of American consumers.
At a time of high inflation, independent contracting also offers a reprieve from rising costs. Studies routinely show that one of the draws of independent contracting is the opportunity to earn extra income. With the prices of goods and services increasing, this additional income could mean the difference between maintaining a standard of living or not being able to make ends meet.
Inflation is currently the number one issue affecting voters. Yet, proposals to crack down on independent contractors will only make inflationary pressures in the economy far worse, further diminishing Americans’ purchasing power and economic security. It also risks denying Americans the opportunity to earn extra income to help offset the rise in prices and maintain the standard of living they are used to. For an administration that has promised to step up its efforts to tackle inflation, cracking down on independent contracting is a step in the wrong direction.
Instead, by choking access to independent contracting, the administration almost guarantees that high inflation, which was supposed to be transitory, will remain entrenched in the economy.
This op-ed was published in the Economic Standard.