Punching the Clock on a Smartphone App? Murray - Punching the... · Punching the Clock on a Smartphone App? The Changing Nature of Work in America and Regulatory Barriers to Success

Punching the Clock on a Smartphone App?

The Changing Nature of Work in America

and Regulatory Barriers to Success

By Iain Murray

September 2016 ISSUE ANALYSIS 2016 NO. 8

Murray: Punching the Clock on a Smartphone App 1

Punching the Clock on a Smartphone App?The Changing Nature of Work in America and Regulatory Barriers to Success

By Iain Murray

Executive SummaryShould your boss tell you how to vote? To even askthe question is absurd today, but it was not always so.Prior to the Industrial Revolution, workers were longlooked down upon in both law and society. EarlyEnglish attempts at republican democracy explicitlyexcluded employees from being able to vote, becauseemployees were deemed to be servants to their masters,and were presumed to do his bidding in all matters,including voting. Things have improved immeasurablyfor working people since then, but the master/servantframework of labor relations is still with us today, inthe form of obsolete labor and employment laws andregulations.

Is there a way forward for the modern economy?Yes, and ironically, it requires a look back to 1776, andAdam Smiths system of natural liberty. In An Inquiryinto the Nature and Causes of the Wealth of Nations,Smith described how government policies intended topromote certain industries, notably agriculture, werein fact destructive of the overall wealth of the nation.He came to the conclusion that the sovereign powershould step back from such policies, and let anothersystem take over:

All systems either of preference or of restraint,therefore, being thus completely taken away, theobvious and simple system of natural libertyestablishes itself of its own accord. Every man, aslong as he does not violate the laws of justice, isleft perfectly free to pursue his own interest hisown way, and to bring both his industry andcapital into competition with those of any otherman, or order of men. The sovereign is completelydischarged from a duty, in the attempting toperform which he must always be exposed to

innumerable delusions, and for the properperformance of which no human wisdom orknowledge could ever be sufficient; the duty ofsuperintending the industry of private people, andof directing it towards the employments mostsuitable to the interest of the society.

Under this system of natural liberty, independentbusinessmen traded with one another to mutualadvantage. The system relied on three factors:

The division of labor, based on the recognitionthat not everyone can do everything he or sheneeds to prosper, and its corollaries;

Specialization, which allows for innovation inworking methods (encouraging further divisionof labor); and

Exchange, whereby wealth is created by theexchange of goods valuable to all partiesinvolved in a trade.

In Smiths system, employment of workers was rare(he uses the term more for employment of capital),and treated as the medieval employment of a servantby a master. Yet, he famously uses the example of apin factory to illustrate the division of labor:

[I]n the way in which this business is now carriedon, not only the whole work is a peculiar trade,but it is divided into a number of branches, ofwhich the greater part are likewise peculiartrades. [A]nd the important business of makinga pin is, in this manner, divided into abouteighteen distinct operations, which, in somemanufactories, are all performed by distincthands, though in others the same man willsometimes perform two or three of them.

CEIAnalysis-MurrayJobs:Layout 1 8/31/2016 1:39 AM Page 1

2 Murray: Punching the Clock on a Smartphone App

However, the example of the pin factory came with acaveat that was to have a significant effect on the waythe system developed. Smith recognized the drudgerythat factory work entailed and worried about itsdemoralizing effects:

The man whose whole life is spent in performinga few simple operations, of which the effects areperhaps always the same, or very nearly the same,has no occasion to exert his understanding or toexercise his invention in finding out expedientsfor removing difficulties which never occur.He naturally loses, therefore, the habit of suchexertion, and generally becomes as stupid andignorant as it is possible for a human creature tobecome. But in every improved and civilizedsociety this is the state into which the labouringpoor, that is, the great body of the people, mustnecessarily fall, unless government takes somepains to prevent it.

Governments around the world did take pains toprevent such a downfall in living and workingconditions, though the enactment of labor regulations.However, those rules were based on the master/servantrelationship, which increased in scope with the growthof large enterprises during the Industrial Revolution.Today, developed economies are moving away fromthat industrial model to more cooperative arrangements,such as contracting and the sharing economy. Thus,todays economy is bound by laws designed for anearlier industrial era. Yet, to devise a roadmap forupdating employment law, it is necessary to knowhow the large-scale industrial economy arose in thefirst place.

One major factor was the need of firms to lowertransaction costs. While there are costs to every markettransactionnot just monetary, but also the costs oftime and effortin some instances finding a partywilling to provide a needed good or service to abusiness enterprise on a consistent, cost-effectivebasis may prove prohibitive. In such instances, itmakes more sense to hire someone directly to do thework instead. In short, the division of labor createscosts that can make employment more attractive thanmarket transactions. For clarity, this discussion refers

to the costs of commercial, market exchanges of goodsand services as transaction costs and the costs ofsecuring those goods or services through employmentas organizing costs.

The Industrial Revolution, the era of mass production,and the early information technology revolution allmade organizing costs generally lower than transactioncosts. This helped create the era of the large corporationand mass employment, and the master/servant dynamicled to a system of regulation of work designed for thecorporation and employees.

More recently, the IT revolution has reduced transactioncosts to unprecedented levels in many areas. That islikely to continue. As it does, the system of naturalliberty shows signs of reasserting itself over thecorporate employment system. However, regulationsdesigned for the corporate era are being wronglyapplied to what are actually commercial markettransactions. That could thwart the rebirth of a systemthat promises to bring significant benefits and solvethe problems of employment that regulation seeksto address.

It is time to rethink how we regulate work. This paperrecommends a series of regulatory reforms, based onthe common law, to secure the benefits of the systemof natural liberty for generations to come.

In order to enable the system of natural liberty toreemerge on terms set by individuals acting in marketsrather than be strangled at birth by regulation designedfor a bygone era, legislators and regulators will needto make certain policy changes.

First, lawmakers should reconsider all laws that tienon-economic social goals to the employment contract.In particular, Congress should reform the Fair LaborStandards Act to narrow the definition of employmentin order to exempt volunteers and contract staff fromit. No other employment law has such a broad standard.Therefore, harmonizing the FLSAs standard with thoseof other lawssuch as the NLRA, which uses thecommon law master/servant definition of employmentwould be welcome. In order to address legitimateconcerns about potential loss of benefits, legislatorsshould consider policies such as neutral tax treatmentto facilitate the development of private alternatives.



Legislators should also consider reforms to the NationalLabor Relations Act, in keeping with the stated purposeof the Act, to reduce conflict between employers andworkers. Furthermore, removing the adjudicativefunction from the National Labor Relations Board couldlead to a depoliticization of the Boards regulatoryfunction and a reduction in regulation by enforcement.Adjudication of NLRA actions should be transferredto the Article III Courts, which are more insulatedfrom politics than the membership of the NLRB.

Employment regulators should return to the commonlaw tests of employment versus contracting, basedprimarily on control rather than the economic

realities tests rejected by Congress in the 1940s. Thiswould reduce the risks of legitimate contracting beingunfairly designated as employment. In addition,regulators and courts should consider whether aplatform creates a two-sided market, using the criteriaoutlined in this essay, before stepping in to regulatebusiness platforms as employers.

Legislators should also resist demands to create a newcategory of dependent contractors or independentworkers. Rather than creating a government-mandatedportable benefits vehicle, legislators should reformlaws that create penalties on associations and businessesthat attempt to provide such services.



IntroductionShould your boss tell you how to vote?To even ask the question is absurdtoday, but it was not always so. Priorto the Industrial Revolution, workerswere long looked down upon in bothlaw and society. Early English attemptsat republican democracy explicitlyexcluded employees from being ableto vote, because employees weredeemed to be servants to their masters,and were presumed to do his biddingin all matters, including voting.1

Things have improved immeasurablyfor working people since then, but themaster/servant framework of laborrelations is still with us today, in theform of obsolete labor and employmentlaws and regulations.

Is there a way forward for the moderneconomy? Yes, and ironically, itrequires a look back to 1776, and AdamSmiths system of natural liberty. InAn Inquiry into the Nature and Causesof the Wealth of Nations, Smithdescribed how government policiesintended to promote certain industries,notably agriculture, were in factdestructive of the overall wealth ofthe nation. He came to the conclusionthat the sovereign power should stepback from such policies, and letanother system take over:

All systems either of preferenceor of restraint, therefore, beingthus completely taken away, theobvious and simple system ofnatural liberty establishes itself of

its own accord. Every man, aslong as he does not violate thelaws of justice, is left perfectlyfree to pursue his own interesthis own way, and to bring bothhis industry and capital intocompetition with those of anyother man, or order of men.The sovereign is completelydischarged from a duty, in theattempting to perform which hemust always be exposed toinnumerable delusions, and forthe proper performance of whichno human wisdom or knowledgecould ever be sufficient; the dutyof superintending the industry ofprivate people, and of directing ittowards the employments mostsuitable to the interest ofthe society.2

Under this system of natural liberty,independent businessmen traded withone another to mutual advantage. Thesystem relied on three factors:

The division of labor, basedon the recognition that noteveryone can do everything heor she needs to prosper, andits corollaries;

Specialization, which allows forinnovation in working methods(encouraging further divisionof labor); and

Exchange, whereby wealth iscreated by the exchange of goodsvaluable to all parties involvedin a trade.



In Smiths system, employment ofworkers was rare (he uses the termmore for employment of capital), andtreated as the medieval employment ofa servant by a master. Yet, he famouslyuses the example of a pin factory toillustrate the division of labor:

[I]n the way in which thisbusiness is now carried on, notonly the whole work is a peculiartrade, but it is divided into anumber of branches, of which thegreater part are likewise peculiartrades. [A]nd the importantbusiness of making a pin is, inthis manner, divided into abouteighteen distinct operations,which, in some manufactories, areall performed by distinct hands,though in others the same manwill sometimes perform two orthree of them.3

However, the example of the pinfactory came with a caveat that wasto have a significant effect on theway the system developed. Smithrecognized the drudgery that factorywork entailed and worried about itsdemoralizing effects:

The man whose whole life isspent in performing a few simpleoperations, of which the effectsare perhaps always the same, orvery nearly the same, has nooccasion to exert his understandingor to exercise his invention infinding out expedients for

removing difficulties which neveroccur. He naturally loses, therefore,the habit of such exertion, andgenerally becomes as stupid andignorant as it is possible for ahuman creature to become. But in every improved andcivilized society this is the stateinto which the labouring poor,that is, the great body of thepeople, must necessarily fall,unless government takes somepains to prevent it.4

Governments around the world didtake pains to prevent such a downfallin living and working conditions,though the enactment of laborregulations. However, those ruleswere based on the master/servantrelationship, which increased in scopewith the growth of large enterprisesduring the Industrial Revolution. Today,developed economies are moving awayfrom that industrial model to morecooperative arrangements, such ascontracting and the sharing economy.Thus, todays economy is bound by lawsdesigned for an earlier industrial era.Yet, to devise a roadmap for updatingemployment law, it is necessary toknow how the large-scale industrialeconomy arose in the first place.

One major factor was the need of firmsto lower transaction costs. While thereare costs to every market transactionnot just monetary, but also the costs oftime and effortin some instances

Todays economyis bound bylaws designedfor an earlierindustrial era.



finding a party willing to provide aneeded good or service to a businessenterprise on a consistent, cost-effective basis may prove prohibitive.In such instances, it makes more senseto hire someone directly to do thework instead. In short, the divisionof labor creates costs that can makeemployment more attractive thanmarket transactions. For clarity, thisdiscussion refers to the costs ofcommercial, market exchanges ofgoods and services as transactioncosts and the costs of securing thosegoods or services through employmentas organizing costs.

The Industrial Revolution, the eraof mass production, and the earlyinformation technology revolution allmade organizing costs generally lowerthan transaction costs. This helpedcreate the era of the large corporationand mass employment, and the master/servant dynamic led to a system ofregulation of work designed for thecorporation and employees.

More recently, the IT revolutionhas reduced transaction costs tounprecedented levels in many areas.That is likely to continue. As it does, thesystem of natural liberty shows signs ofreasserting itself over the corporateemployment system. However,regulations designed for the corporateera are being wrongly applied towhat are actually commercial markettransactions. That could thwart therebirth of a system that promises to

bring significant benefits and solve the problems of employment that regulation seeks to address.

It is time to rethink how we regulate work. We need to reflect what people actually want from work and how the institution is evolving.

This paper recommends a series of regulatory reforms, based on the common law, to secure the benefits of the system of natural liberty for generations to come.

The Master/Servant Relationship and the Common Law Definition of EmploymentAs noted, the concept of employment was once bound with the idea that employees were mere servants to their employers.5 Workers were not expected to think for themselves, and were therefore not solely liable for harm to others inflicted in the course of their employment; the employers are as well (this is still largely the case).6 The common law, the basis of law in the United States, United Kingdom, and other countries with legal systems derived from the English legal tradition, evolved a series of tests to determine whether a worker is employedby someone in a master/servant relationship, or acts as an independent agent. Those workers who meet the tests, and their employers, are subject to employment law. Those who do not are subject to commercial contract

Regulationsdesigned forthe corporateera are beingwrongly appliedto what areactuallycommercialmarkettransactions.



law. This determination is known asworker classification.

The tests are multiple, vary fromlocation to location and case by case,and generally must take all the relevantfacts into consideration when makingthe determination. Nevertheless, allcommon law countries rely on someversion of this collection of tests.They are, briefly:

How much control does thesupervisor exercise over theworker? An employee willgenerally be supervised anddirected, while a contractor willgenerally be free to determinethe nature of his or her work.

Is the worker obliged towork? If a worker is expectedto arrive at a workplace atcertain times or for certainhours, she is probably anemployee. If she sets her ownhours, she will probably be acontractor. Is the workers timebeing bought rather than his orher skills?

Is the work integral to thecorporations business? If thebusiness could not survivewithout the work, then theperson doing the work isprobably an employee. If it isperipheral, the worker maybe a contractor.

Does the worker manage his orher own financial risk? If thework involves the opportunity

for personal profit or loss, thatis indicative of a contractualrelationship. If the work doesnot involve such financial skills,it is probably an employmentrelationship.

Does the worker provide hisor her own tools, facilities,and equipment? The level ofpersonal investment in thesefactors is indicative of therelationship. A chef providing hisown knives is not necessarily anindication of independence, butproviding his own knives andkitchen equipment and facilitiesmay be.

How much initiative does theworker show? Competing withothers in an open market createsa presumption of independence,while the lack of capacity toexercise independent businessjudgment suggests employment.

Is the appointment permanent,open-ended, or for a fixedterm? Permanency or indefinitework is generally an indicationof employment. Shorter termappointments may be anindication of independence, butmay not be if they are routinelyrenewed.

Is there opportunity fordelegation to others outsidethe organization? Anindependent contractor willgenerally be able to subcontractwith others to delegate the



completion of tasks. Employeeswill tend to be more constrained. Are business expenses bornby the organization or by theindividual? If business expensesare paid for by the organizationoutside of salary or wages, thatis indicative of employment,whereas contractors willnormally be paid a highersum to account for businessexpenses they incur.7

This list is not exhaustive. Somejurisdictions will apply several tests toone or more of these aspects. And therelative importance of the tests hasvaried over time depending on thepolicy aims of the regulators.8 In theUnited States, lawmakers often havelinked other policy aims to theemployment contract. These include,but are not limited to:

Taxation; Provision of health insurance; Anti-discrimination measures; Occupational health and safety; Social well-being instructions

such as provision of leave orlimitation of hours; and

Union organizing and collectivebargaining.

The statutory measures that wereadopted in order to pursue these aimshave often blurred the common lawdefinition of employment and threatento do so again. However, the common

law is clear as to the differencebetween a contractor and an employee.

Of these aims and measures, only thelast two strictly regulate the nature ofthe employment contract as regardsthe relationship between the employerand employee. The others mostlyconcern relationships between theemployer and government (or societyin general), pre-contractual measures,or the worker and the environment.

Nevertheless, the essence ofemployment remains control of theemployee. In law, the employeesurrenders a considerable amountof his or her personal liberty anddiscretion to both the employer andemployment regulators in return forthe financial security the employmentrelationship provides.

Two major employment principlesderive from this presumption ofcontrol.9

Vicarious liability. Employers aredeemed to be responsible for theactions of someone under their control.For example, if someone driving acompany car hits you while on worktime, the employer is responsible foryour damages and medical bills. Thecommon law allows for action againstthe employee solely and directly in thecase of wanton disregard of what he orshe is supposed to be doing, but inmost cases the employee simplymakes a mistake while carrying out


The marketinefficienciesof transactioncosts led to thecreation of firmsas preferableto individualstrading witheach other onad hoc basis.


a superiors instructions, meaningthe employer is liable.10

Fiduciary duty of the employee to theemployer. The voluntary assumptionof the burden of control by anotherimplies that one will not do anythingto harm the other partys interests. Thisis why courts have regularly found thatusing an employers commercialknowledge to set up a competingfirm is a breach of that duty.

The assumption of control has specialrelevance to the evolution of thecorporation and the regulatory reactionsto that development.

The Corporation and theCoaseian/Hayekian FrameworkAs noted, the concept of division oflabor really began to take hold aroundAdam Smiths time. Between thenand the 1850s, there was a gradualmovement in common law jurisdictionsfrom the corporation being primarily afamily business to one based on jointstock ownership. The adoption of lawsthat significantly reduced a majorelement of organizing costs byintroducing the principles of limitedliability11 and the corporate veilincreased the advantage of organizingover transaction.12 The corporationbecame a dominant major form ofcommercial organization, and thepredominant one for businesses thatmade larger profits.13 However, other

factors were at play in the creation ofthe firm as we know it today. The mostimportant of these is transaction costs.

In his 1937 essay, The Nature of theFirm, Nobel laureate economistRonald Coase noted that firms existbecause of the costs associated withmarket transactions.14 Whereas thenatural arrangement for any transactionis to use the market, costs in finding aparty willing to provide the goods orservice may prove prohibitive. Thetransaction may not take place, or, asCoase observed, a party might hiresomeone directly to do the workinstead. Therefore, the marketinefficiencies of transaction costs ledto the creation of firms as preferableto individuals trading with each otheron ad hoc basis. The costs of usingmarket transactions came to be knownas transaction costs. Although theyare also transaction costs of a sort, forsimplicitys sake this paper will referto the costs of employing people asorganizing costs.

Transaction costs come in manyforms. For instance, if I want to find acarpenter to make a table leg, I willneed to research the local market forcarpenters, find one, research to makesure she is reputable, negotiate a priceand delivery date, arrange for deliveryand payment, and (potentially) incurlegal costs if the job is done in a subparmanner or not completed. That is along list of considerations for one



transaction. Each represents a cost,and the carpenter has to go through asimilar set of considerations on herend of the transaction.

Another important factor in markettransactions is opportunity cost, thevalue of alternatives foregone when onecourse of action is taken. For example,if I spend an hour washing dishes, Igive up an hour I could have spentexercising. Opportunity costs arelargely dictated by time. A longer taskgenerally has more opportunity costthan a shorter one. This means thatconsiderations such as time andeffort also factor into transactioncost measurements.

The employment contract reduces theuncertainties involved in organizingan enterprise. Transaction costs pushentrepreneurs toward hiring others todo the service for which they wouldotherwise transact. A business thatneeds a steady supply of table legsmay find it advantageous to hire oneor more carpenters for that purpose,thereby reducing transaction costs. Atthe same time, potential market actorsare pushed toward employment, whichreduces the transaction costs for sellingtheir skills.

The classical corporation exists becauseof its advantage in the transaction costscalculation. It depends in large partupon the control inherent in theemployment contract, as Coaseacknowledged:

We can best approach the questionof what constitutes a firm inpractice by considering thelegal relationship normally calledthat of master and servant oremployer and employee. Themaster must have the right tocontrol the servants work. Wecan thus see that it is the fact ofdirection which is the essence ofthe legal concept of employerand employee just as it was in theeconomic concept (of the firm).15

In this Coaseian framework, the firmwould lose its advantage in transactioncosts without control and direction ofits employees. For example, a largebakery that supplies supermarkets withfresh bread every morning would notbe able to compete with independentbakers if it could not guarantee, via theemployment contract, that its bakerswould turn up for work very early inthe day.

Yet it is in this very concept of controlthat the problems for the corporationbegin to form. The first is what is knownas the principal-agent problem. Theentrepreneur (the principal) hastheoretical control of his or heremployees (the agents), but cannothope to direct every single one oftheir actions. There will come timeswhen the agent is acting out ofdifferent motives from the principal,with results that go against theprincipals intent.

If I spend anhour washingdishes, I give upan hour I couldhave spentexercising.



For example, the production departmentmight be so concerned with cuttingcosts that it produces a product notup to the quality expectations of theentrepreneur, resulting in lost sales.Or the marketing department mightdemand product diversity while theproduction department prefers productuniformity, resulting in internal conflictthe entrepreneur must resolve. FredSmith draws attention to a newer formof the problem, where governmentaffairs professionals benefit in careerterms from expanded regulation thatotherwise burdens the business.16

This problem is magnified when theentrepreneur is joined by other ownersin the form of shareholders, who areeven more removed from the conduct ofthe business, and delegate managementresponsibility to managers orsupervisors. The problem then becomesthe principal-supervisor-agent problem,with three different sets of motivesinvolved, and the possibility forcollusion by two parties against theinterests of the other.

The initial reaction to this problemwas Taylorism, a philosophy ofscientific management propoundedby the engineer Frederick WinslowTaylor in the early 20th century.Taylorism held that the activities ofagents could be controlled throughscientific principles, directing workerslike cogs in a machine, reducingeach task to a set of efficiency-basedprinciples. While often denounced as

dehumanizing, Taylor actuallypropounded such ideas as givingworkers rest breaks to improve outputand even performance-related pay.Nevertheless, the concept relied on theidea that processes could be perfectedand imposed by rule. It allows noroom for independent thinking.Taylorism ultimately failed becauseit did not appreciate the nature ofknowledge in an organization.

In his seminal article, The Use ofKnowledge in Society, Nobeleconomics laureate Friedrich Hayekintroduced us to the knowledgeproblem, which states that knowledgeabout any process or question isdispersed around societyor a firmand any attempt to compile all of it isdoomed to failure.17 For instance,different individuals place differentvalues on various goods and services,which results in different prices. Hayeksclassic example is the price of tin. Whenmore people need it, the price rises,which sends a signal to everyone thatthey should seek ways to economizein their use of tin. No one needs toplan the allocation of tin, centrally seta price for it, or promote laws on howit may be used.

In this world of dispersed knowledge,prices are the mechanism by which wesignal information to each other. Aseconomist Steve Horwitz puts it: Pricesserve as knowledge surrogates toenable peoples individual knowledgeand fields of vision to sufficiently

Taylorismultimately failedbecause it didnot appreciatethe nature ofknowledge inan organization.



overlap so that our plans getcoordinated.18 Yet, this poses achallenge to the way the firmis organized.

The firm relies on employmentcontracts, which suppress knowledgesignals that commercial contractstransmit through prices. It relies onthe assumption that the firms managers,and its workers, can interpret limitedinformation well enough for itsorganizational cost advantage to bebrought to bear. Nobel laureateeconomist Oliver Williamson calledthis the bounded rationality of thefirm.19 Or as Coase himself put it,It can, I think, be assumed that thedistinguishing mark of the firm is thesuppression of the price mechanism.20

Another issue firms often face isopportunism, a more perniciousmanifestation of the principal-agentproblem, in which the agent not onlyacts out of self-interest, but does soagainst the interests of the principal.This can be compounded in a principal-supervisor-agent situation, where thesupervisors and agents collude to theirown benefit. That can lead to thecreation of stifling bureaucracy, lossof competitive market discipline, lossof accountability, and even outrightcorruption.21

A final problem is that a firm has toinvest in assets that can become veryspecific to one task and cannot berepurposed. This goes as much for ahighly skilled employee as for machines

that can only make buggy whips.Williamson called this problemasset specificity.22

Together, these problems can causeseemingly dominant corporations tocome tumbling down in the processthat economist Joseph Schumpetercalled creative destruction, wherebyan old firm is replaced by a newer firmwith more innovative capabilities.23

Kodak could not see the change inmarket preferences away from film,owing to its bounded rationality andasset specificity. Barings Bankcollapsed overnight because of theopportunism of one trader.

Despite the existence of theseconstraints, the employment contractprovided a significant commercialadvantage in the first half of the20th century.

The Heyday of the Corporationand Regulatory ResponsesThe emergence of the corporation inthe early 20th century brought with itseveral problems. The most obvious wasdomestic strife between managementand organized groups of employees,with government often taking the sideof management.24 The cause of strifewas a belief that individual workerslacked bargaining power over theemployment contract, and thatemployers would refuse to meetwith workers organized under unionrepresentation, calling on the power



of the state to enforce that refusal.25

This was a legitimate concern. Asclassical liberal philosopher JacobLevy noted:

The fact that workers have sooften and in so many placessought to organize, and the factthat firms have so often and in somany places resorted to illiberalrestrictions on freedom ofassociation if not outright violenceto prevent them from doing so,itself looks like prima facieevidence from the world inunions favor. Whatever onescomplaints against the regimeof employment relations createdby legislation such as theWagner Act, unionization comesfirst, before the state action andinitially in spite of state action.26

Collective action by workers can beseen as a reaction to these problems. AsLevy notes, many union demands canbe seen as reactions to the principal-supervisor-agent problem, helping todiscipline managers who are actingopportunistically. Yet, unionizationrepresents an imperfect solution to agenuine problem. Collective bargainingoften imposes rigid work rules thatcan make a firm uncompetitive andmay not be suitable to individualworkers particular circumstances.

This was exacerbated during the NewDeal era, with the passage of the

National Labor Relations Act (NLRA)and Fair Labor Standards Act (FLSA).27

These two laws have come to dominatemuch of the employment relationshipin the eight decades since theirenactment.

The National Labor Relations Actcurtailed the power of managementwithin the firm. It guaranteed therights of workers to form unions andbargain collectively, granted exclusivebargaining power to a union that wonan organizing election in a bargainingunit, defined unfair labor practices bymanagement, permitted the negotiationof contracts requiring compulsorydues, and set up an enforcement body,the National Labor Relations Board(NLRB).28

The purpose of the NLRA is set out inits first section:

[T]o promote the full flow ofcommerce, to prescribe thelegitimate rights of both employeesand employers in their relationsaffecting commerce, to provideorderly and peaceful proceduresfor preventing the interference byeither with the legitimate rights ofthe other, to protect the rights ofindividual employees in theirrelations with labor organizationswhose activities affect commerce,to define and proscribe practices onthe part of labor and managementwhich affect commerce and areinimical to the general welfare,

Collectivebargaining oftenimposes rigidwork rules thatcan make a firmuncompetitiveand may notbe suitableto individualworkersparticularcircumstances.



and to protect the rights of thepublic in connection with labordisputes affecting commerce.29

Set up as an adjudicatory as well asa regulatory agency, the NLRB hasbecome highly politicized because ofits structure. It is made up of fivemembers: two Republicans and twoDemocrats, with a chair from thePresidents party. As a result, NLRBpolicy making shifts wildly withchanges in administration, asRepublican administrations tend tofavor the management side, whileDemocrats lean heavily towardorganized labor. This makes for aless stable legal climate compared todisputes settled in Article III Courts.

The Fair Labor Standards Actplaces significant constraints on theemployment contract. It establisheda standard 40-hour workweek,time-and-a-half overtime pay foremployees earning below a certainamount, a federal minimum wage,requirements for record-keeping, andrestrictions on the employment ofchildren. Other restrictions includea ban on volunteers working forcommercial companies.

Moreover, the FLSA very broadlydefines employment as to suffer orpermit to work. This is why volunteersare categorized as employees underthe Act. At the same time, courts haveexempted independent contractorsfrom coverage under the Act on the

basis of tests derived from the commonlaw tradition described above. The Actprovides for exemptions from wageand overtime requirements for workersemployed in a bona fide executive,administrative, or professionalcapacity.30

As is the case with all regulation,however, interpretation and enforcementof the law have varied considerablydepending on the leanings of theadministration in power at the time.

After a period of little industrial actionduring World War II, the pendulumhad swung so far in the unions favorthat activities such as union shops,secondary picketing, and wildcatstrikes were severely hampering thelegitimate rights of employers. Thisled Congress in 1947 to pass theTaft-Hartley Labor ManagementRelations Act, which bans suchpractices and allows states to adoptright-to-work laws that bar unionsfrom requiring workers to pay duesas a condition of employment.31

Nevertheless, collective bargainingremained an important form ofemployment negotiation in most states.That put the corporations control ofthe employee under severe constraint.Yet, with no more than one third of theworkforce ever members of laborunions, the corporation retained itsdominance in the market.32

To understand why, we can turnagain to Coase, who pointed out that:

NLRB policymaking shiftswildly withchanges inadministration.



Inventions like the telephone and thetelegraph which tend to reduce thecost of organising spatially will tendto increase the size of the firm.33

Advances in telecommunications thatwere happening at the same time as thelabor regulations were enacted did notjust offset the rise in organizing costs,they enabled firms to grow in size.Coase points out other factors thatpushed the firm to becoming ever larger:

Other things being equal, a firm willtend to be larger:

(a) the less the costs of organisingand the slower these costsrise with an increase in thetransactions organised.

(b) the less likely the entrepreneuris to make mistakes and thesmaller the increase inmistakes with an increase inthe transactions organised.

(c) the greater the lowering (orthe less the rise) in the supplyprice of factors of productionto firms of larger size.34

All these factors came into play duringthe 1940s and 1950s. Taft-Hartleysettled the regulatory landscape,preventing any further rise in regulatoryorganizing costs. Telecommunicationsand increased understanding of businessadministration reduced the incidenceof mistakes by entrepreneurs and theirsurrogates. Together, these forcesled to a settled structure for work.Large firms, with a highly regulated

employment contract, strong unioninfluence, and internal hierarchiesdominated the market for the nextthree decades.

Corporate and Worker Responsesto the Regulated FirmDespite this settled environment,corporations seeking competitiveadvantage looked for new ways oforganizing that in many cases improvedefficiency by accessing the extrainformation contained in markettransactions and their prices. Othersrealized that using market transactionscould reduce the problem of assetspecificity by hiring contactors withspecialized expertise or equipmentwhen needed to perform non-corebusiness activities. In turn, workerswith specific skill sets looked for waysto sell those skills or knowledge toseveral businesses rather than havingto adapt to the needs of one employer.

One example is contracting out supportservices to staffing companies. Staffingcompanies offer the services ofreceptionists, bookkeepers, or officecleaners, who previously wouldhave been direct employees of thecorporation. Some staffing companyemployees are seeking temporary work,while others use it as a stopgap whilethey look for permanent employment.Corporations that utilize staffingcompanies are freed from the costs oftraining several types of employees, as



well as from some long-term costs,such as pensions, that may come withpermanent employees.

These costs distort the true worth ofthe position, which is more accuratelyreflected by the price negotiated in acommercial contract with the staffingcompany. For example, the value ofhaving an office cleaned once a daymay be worth less to a company thanthe cost of hiring, training, providingequipment for, and accommodating afull- or even part-time employee to dothe work, never mind the extra cost ofcomplying with employment regulationsand providing benefits.

Various laws such as the NLRA, FLSA,and the Family and Medical Leave Actanticipated such arrangements underthe concept of joint employment, inwhich two or more employers areequally responsible for the legalrequirements associated with theemployment contract. In 1984, theNational Labor Relations Board ledthe way in interpreting the definitionof joint employer status by establishinga bright line standard that requireddirect and immediate control over anemployee for an employer to qualifyas a joint employer.35 The lack of directcontrol removed the threat of jointemployer liability from the firm thatcontracted or outsourced the serviceand enabled businesses to makegreater use of contract services.

Another form of business organizationdeveloped to exploit the price system

in a commercial contract beginning in the 1950sfranchising. In a franchise business, an independent entrepreneur buys most of the components necessary for a successful business from the franchisor. This can include production methods, marketing, branding, reputation, a supply chain, and much more. The cost of these elements is set by the commercial contract. However, the franchisee entrepreneur runs the business as the sole employer of workers in the restaurant, store, or other establishment. The franchise can experiment as much as it desires within the constraints of the contract, up to and including innovations that the franchisor may adopt for all its franchises. A famous example is the Big Mac, which was invented in a McDonalds franchise restaurant.36

Ray Kroc, the man who made McDonalds famous, started out as the McDonald brothers franchising agent, opening its first franchised store in Des Plaines, Illinois, in 1955.37

As Ken Phillips, Executive Director of Independent Contractors of Australia, put it in his 2005 book, Independence and the Death of Employment, regarding Australian franchise bread businesses:

To a casual observer, hot breadfranchises look like largeconglomerates. But they arevery different. They are, in truth,a new model of the firm in whichthe conglomerate is deconstructedinto integrated small firms, but

Ray Kroc, theman who madeMcDonaldsfamous, startedout as theMcDonaldbrothersfranchisingagent.



which, as a whole, still haverecognizable features of a largefirm. Rather than being controlledby employment contracts, thefranchise operation functionsinternally through commercialcontracts. Each hot bread franchiseowner has commercial contractswith his or her customers and thefranchise. In one instance, a hotbread franchiser went broke andthe franchisees pooled theirresources and purchased thefranchisers business. In thisinstance, the franchisees havecommercial contracts with afranchiser in which they are allshareholders.38

The creation of such a businessmodel would have been difficult in anenvironment where the franchisor isregarded as a joint employer of thefranchises employees. The value andinformation created by the commercialcontract arrangement likely would bedrowned out by the exercise of controlthrough the employment contract.However, the NLRB took no stepsto impose joint employer status onfranchise businesses, which meant thatfranchise transaction costs could belowered to a point where they werelower than the organizing costs of alarge conglomerate.

Other businesses less suited to thefranchise model sought ways tointroduce market arrangements intothe firm.39 Some, like the German

engineering giant Siemens, havecontracted out even essential serviceslike research, while retaining researchdivisions that were effectively incompetition with outside contractors.40

It has also dedicated over 100 million($113 million at this writing) to allowemployees to pursue their own researchprojects.41 Others, like the robotics firmABB Group, split into many semi-independent units in order to promoteentrepreneurship.42 Taiwanese computergiant Acer split into a network ofbusinesses that charged each othermarket prices, and were not restrictedto buying from other firms in thenetwork.43 Even large state-runenterprises like the British NationalHealth Service introduced internalmarket structures during the 1980sand 1990s. In each case, the aim was toreduce the problems of the commandstructure imposed by the employmentcontract via the introduction ofinformation contained in a commercialcontract into the structure of the firm.

A good example is Hewlett Packard,which introduced a form of internalventure capitalism for projects calledVC Caf.44 Anyone could propose anidea to a board of senior managers,who would fund the projects it foundthe most promising. The projects wereposted online and project managerscould find staff to work on them fromthose who expressed an interest,matching projects to those with thenecessary skills and passion to makethe project a success, without need for

Even largestate-runenterprises likethe BritishNationalHealth Serviceintroducedinternal marketstructuresduring the1980s and 1990s.


reorganization. Moreover, in anexcellent example of the marketproviding information that managementlacks, on occasion the board found noemployee interest in a project it hadapproved, leading to cancelationof the project.

Another innovative HP experimentinvolved compiling sales projectionsfrom an internal predictions tradingmarket, where employees were givenan allocation of shares and allowed totrade them based on their sense ofhow printer sales would turn out.In 15 out of 16 experiments, theconsensus of the traded projectionswas significantly closer to actual salesthan the companys official estimates.As Thomas W. Malone and Patrick J.McGovern of MITs Sloan School ofManagement note:

[I]n the market, salespeople aremotivated to trade based on whatthey actually think will happennot what they want to happen orwhat they want others to think willhappen. Even more important, thetraders can see the currentconsensus of all their colleaguesreflected in the prices. Then theycan use whatever other data theyhave (even if its just theirinstincts) to judge whether agiven prediction at a given priceis a good buy or not.45

To be sure, internal markets can sufferfrom principal-agent problems, where

heads of competing divisions treattheir competitors as enemies ratherthan colleagues, but in general theprinciple of internal markets increasinginformation flows has been provenover time.46

At the same time as corporations weredeveloping these new business models,workers were making new demands ofemployers. A combination of socialand cultural changes led to a rejectionof the idea that the state and otherinstitutions could determine or controlpeoples thoughts, actions, or aspirationsin the way they had in the past.47 Thisrise of individualism was reflected inhow people reacted to the employmentcontract.

Union membership declined steadily,particularly in the private sector.48 Yetmanagements reaction to this changedid not reflect a decrease of workersbargaining power. Rather, employeeswent from being viewed as cogs inthe machine to important assetswhose creativity and potential couldbe sources of competitive advantage.49

As a result, workers were able toleverage their increased value to thefirm to demand greater flexibility inemployment contracts.

This was reflected in the transitionfrom employees being regarded aspersonnel to being viewed as humanresources. Human resource theoryregarded an employee not just as oneset of skills plugged into one job, but a


Employeeswent from beingviewed as cogsin the machineto importantassets whosecreativity andpotential couldbe sources ofcompetitiveadvantage.



bundle of skills and other assets thatcould be just as much a resource to thecompany as any expensive capitalasset. Leadership, talent, and creativitywere all assets that could be developedand utilized by a company that regardedits employees in that way.

The idea can even be traced back toAdam Smith, who noted that therewere four forms of fixed capital, thefourth of which was:

[T]he acquired and useful abilitiesof all the inhabitants or membersof the society. The acquisition ofsuch talents, by the maintenance ofthe acquirer during his education,study, or apprenticeship, alwayscosts a real expense, which is acapital fixed and realized, as itwere, in his person. Those talents,as they make a part of his fortune,so do they likewise that of thesociety to which he belongs. Theimproved dexterity of a workmanmay be considered in the samelight as a machine or instrumentof trade which facilitates andabridges labor, and which, thoughit costs a certain expense, repaysthat expense with a profit.50

It was work by Columbias JacobMincer and Chicagos Gary Becker thatled to the widespread recognition of thepotential of a firms human capital inthe 1960s. With human resourcemanagement focusing more on the

relationship between the firm and theindividual employees, the relationshipbetween the firm and the collectiverepresentatives of employees beganto take a back seat. The individualworker began to have more controlover his or her employment contract.

One example of this is the growth ofsalaried junior management within thefirm. Firms were able to select hourlyemployees with potential, promotethem to junior management positions,and allow them to work longer hoursin order to use their talents and abilitiesto the firms advantage in exchangefor accelerated promotion. They wereable to do this as the Department ofLabor did not raise the wage thresholdfor exempting workers from the FLSAsovertime pay requirements for severalyears. This meant that workers whopreviously might otherwise be neededto be hours-limited for overtime payby means such as clock-punchingwere now able to be regarded as juniormanagers, with extended hours andresponsibilities.51

Other examples of increased workercontrol over the employment contractcame in the form of flexible workinghours, telecommuting, performance-related pay and bonus schemes,employee stock options, and othermanagement innovations, beginning inthe 1980s. Of course, not all workersbenefited from such developments,notably those with fewer or less



marketable skillsthose in possessionof less human capitalbut firms withsignificant investment in human capitalexperienced a significant shift in theworker-management power balancetoward the worker. This was despite,or perhaps because of, the decline inunion representation.

Yet, unionization has persisted tovarying extents around the U.S.,and there is evidence that collectivebargaining held back this power shift.In a 2014 study conducted for theCompetitive Enterprise Institute,Ohio University economist Lowell E.Gallaway and Jonathan Robe found thatstates with higher union membershipshowed lower growth in householdincome between 1965 and 2011.52

Collective bargaining may have beenrestricting the use of more worker-friendly, higher compensatedemployment contracts. Indeed,they concluded that, the decisionto officially encourage collectivebargaining through public policy,which was the primary thrust of theNational Labor Relations Act of 1935(the Wagner Act), was rife withunintended negative consequences.53

Labor regulations have yet to catch upwith these developments, in particularthe rise of what Ken Phillips calls theindependent employee:

They want to do and think forthemselves. They are decision-makers. They are self-managers.

They seek to control their owndestinies and careers and not tohave the firm decide either theircurrent or future place in theworld. And the more educatedthey are, the more they want toexercise self-control. Thesepeople, working in firms, are thegreatest challenge so far to theidea, structure and operationsof firms.54

We can see just such a desire forindependence in the popularity of thenew workplace culture entrepreneurTim Ferriss outlines in his 2007bestseller, The 4-Hour Workweek.Ferriss advises a four-step frameworkfor rethinking your work life, whichgoes by the acronym DEAL, forDefine, Eliminate, Automate, Liberate.The steps are as follows:

Work out what you really wantfrom life (What excites you?)and what it will take to get youthere.

Eliminate tasks that take uptime for little result; beeffective rather than efficient.

Automate not just tasks butincome streams as well.

Work when and where youwant to by liberating yourselffrom the 9-to-5 routine and thephysical office location throughremote working arrangementsand flexible scheduling.55



Workers who pursue these goals are almost by definition independent employees. They look for multiple income streams and freedom from the most restricting constraint of the employment contractcontrolby others.

There are other workers to whom independence may not necessarily be terribly important, but for whom flexibility is key, such as single mothers. They may not care whether they are employees or contractors, but desire flexible work arrangements to ensure they can take care of non-work responsibilities. Such demandsoften lead firms to offer things like telecommuting or flexible work hour options. Yet not all firms can do so, which means that independent contracting is often the best way to achieve flexibility in work, even if the worker does not value independence that highly.

By the start of this decade, the work landscape had changed considerably from the settled environment of the past 40 years. New business models took advantage of changes in transaction costs and sought to introduce the benefits of the price system into the firm. Meanwhile, a new breed of employee was forcing changes to the employment contract without using regulation. The system of natural liberty was beginning to reassert itself.

The Return of Regulation andAdvent of Platform TechnologyAround 2010, two new forces beganto assert themselves in the area ofemployment. The first was an effortby the Obama administration aimedat reasserting government regulatoryauthority over the employment contract.The second was the development ofplatform technology that promises tofundamentally restructure much of theworld of work.

In a 2007 law review article, DavidWeil, then a Professor at BostonUniversity School of Management,now the head of the Department ofLabors Wage and Hour Division,challenged the idea that the commercialcontract could secure benefits forworkers. Weil wrote:

A regulatory strategy isbased on the idea that privateactorsindividuals, employers,institutionsleft to their owndevices will not necessarily selectpolicies that are consonant withthe public aims related to the fiveprinciples. Regulatory systemsprovide the government withtools to change private behavior,and those tools are usually relatedto enforcement activities:conducting of inspections, findingand citing violations with laws(procedural or substantive),assessing penalties, and ensuringcompliance. [Emphasis added]

By the start ofthis decade, thework landscapehad changedconsiderablyfrom the settledenvironment ofthe past 40 years.



Weil defined five principles to achievehis policy goals:

Assuring basic labor standards:hours of work, overtimecompensation, child laborrestrictions.

Ensuring a safe and healthywork environment.

Protecting against workplacediscrimination in hiring,promotion, and dismissal andequal treatment of employeesregardless of race, sex, age,or disability.

Providing mechanisms forworker representation and voiceat the workplace

Protecting against majordownside risks associated withemployment: loss of pensionsor health care benefits, loss ofjob from plant closure, or majorfamily emergencies.56

Weils aim was to reverse the movetoward greater commodification ofworkthat is, suppress the system ofnatural libertyin favor of a single setof planned principles set by governmentand enforced by the employmentcontract. His strategy was to leveragethe power of the regulatory system toforce changes in private behavior,under threat of punishment, in orderto achieve public aims.

Of particular concern to Weil was whathe termed (and named a later bookafter) the fissured workplacethe

growth of more and smaller businessunits. Weil regarded the introductionof markets and commercial contractswithin a formerly monolithiccorporation as a threat to workersand the public aims of employmentregulation. His agenda pays no regardto the need for more information thatthe growth of new business models wasintended to fulfill, or to the increasingdemand for flexibility and independenceexpressed by modern workers.

Such a strategy has been adopted byU.S. labor regulatorsof which Weilis now onesince the election ofPresident Obama in 2008. Both theDepartment of Labor and the NationalLabor Relations Board have embarkedon a steady stream of regulatoryinterpretations, rulemakings, andenforcement actions with the intentionof restricting business and workeroptions. These include the following:

The Department of Laborfollowed up with its owneconomic realities test forjoint employer classificationunder the Fair Labor StandardsAct (January 2016).

The Department of Labornearly doubled the wage levelat which employers are requiredto pay overtime (rule proposedMay 2016).

The National Labor RelationsBoard dropped its bright linestandard for joint employerclassification in favor of an



economic realities test thatallows for much more discretionon the part of the NLRB andmuch less clarity for businesses.It has already enforced this newstandard on staffing companiesand its General Counsel hasstarted action to extend jointemployment status to franchisebusinesses by launchinglitigation against McDonalds(August 2015).

The Department of Labor hassignificantly revised its tests forindependent contractor statusunder the FLSA, making itmuch more difficult to classifyas one. As with the jointemployer classifications, themost significant move was tolessen the importance of directcontrol over the employee,allowing other tests to signifyemployment even in theabsence of control (July 2015).

The Department of Labor andstate labor departments crackeddown on volunteers working forsuch industries as consignmentsales and wineries (2014-2015).

The NLRB introduced new rulesto make it easier for unions tocall quick elections in companies,which gives management lesstime to make its case, leading toan increased likelihood ofcollective bargaining beingimposed on the company(December 2014).

The Occupational Safety andHealth Administration reversedpolicy and allowed unionrepresentatives to accompanyfederal safety inspectors oninspections of nonunionworksites, giving unions a roleto play in making argumentsover workplace safety evenwhere the union has not beenelected by the workforce(February 2013).57

Taken together, these actions representa direct attack on modern businessmodels. Redefining joint employmentcould be fatal for some companiesthat rely on outsourcing and smallerfranchise businesses.

It is worth looking at the NLRBs jointemployer ruling on staffing companiesin more detail.58 The majority, in itslengthy opinion, is explicit in its aimsto rein in the developments of the pastthree decades in American employmentpractices. Time and again, the majorityrefers to Board decisions and SupremeCourt opinions from the 1970s orearlier, ignoring subsequent rulings.

This decision makes contracting muchless attractive to companies, as it raisesthe transaction costs associated withhiring. More functions will be broughtin-house, and as a result of the raisedcosts, people will lose their jobs. Peoplewill lose the flexibility working forstaffing companies rather than one

Redefiningjoint employmentcould be fatalfor somecompaniesthat rely onoutsourcingand smallerfranchisebusinesses.



particular employera flexibilitysome workers value.59

Worse, the majoritys stretching of thedefinition of joint employment showsa disregard for Congressional intent,by essentially reviving a definition ofjoint employment that Congress firmlyrejected in the 1947 Taft-Hartley Act.

As Board Members Philip Miscimarraand Harry I. Johnson III note in theirdissent, the majoritys opinion seemsto rely on the overly broad definitionrejected by Congress.

In this case, our colleagues abandonthe attempt to strain extant joint-employer law, which had alreadybeen strained beyond its rationalbreaking point in CNN. Instead,similar to what was done in FedExfor the definition of a statutoryemployee, they have announced anew test of joint-employer statusthat, notwithstanding their adamantdisclaimers, effectively resurrectsand relies, at least in substantialpart, on intertwined theories ofeconomic realities andstatutory purpose endorsed bythe Supreme Court in NLRB v.Hearst Publications, 322 U.S. 111(1944), which Congress expresslyrejected in the Taft-HartleyAmendments of 1947.60

The majority is also explicit in why itwants to do thisto make it easier forlabor unions to organize new members.

The NLRB aims to use the jointemployer decision to reverse the trendtoward independent employees, bymaking it easier for unions to play thetwo sides of a potential joint employeragainst one another.

Joint employer status is the gift thatkeeps on giving to employmentregulators. For example, Microsoft andother large companies have imposedcodes of conduct on their contractorsspecifying that the contractors shouldadhere to certain employment standards.It is ironic to note that the presence ofthese codes, many of them once cheeredon by the Obama administration,may be viewed as evidence of jointemployment status.61

Similar motives are in play in the otherregulatory initiatives. The overtimerule could cause companies to restrictthe hours of employees who mightwant to work more for personal careeradvancement, reducing the role ofaspirational junior managers incompanies.

In effect, the government has usedregulation to convey differentinformation from that conveyed viathe price system. The price systemconveys information about peoplesneeds and desiresin other words,what people really need and want.Regulation used in this fashion conveysinformation about what the governmentthinks people should want (as Weiltakes pains to point out).62



The price system would indicate noperceived need for the regulation. Byseeking to fulfill utopian goals ratherthan allow people to pursue theirindividual preferences, it is likely to beviewed as unwanted or in many casesactively opposed by those on thereceiving end of it. By raisingtransaction costs, it frustrates peoplesability to fulfill their needs and wantsas revealed through the price system.63

However, at the same time as thisregulatory agenda was being developedand implemented, technologicalinnovation led to significant reductionsin transaction costs for some industries.This development has variously beentermed the on-demand, platform,gig, or sharing economy. Its mostcommon application has been thecreation of new markets through onlineplatform applications, which act asanother source of information.

These markets are what economists calltwo-sided markets, where a supplierof a good or service is linked up witha customer through the platform, muchas a farmers market helps buyers andsellers connect, reducing transactioncosts, which in turn reduces the needfor an employment contract.

A platform is not necessarily an activemarket maker. It could be a passivetechnology like the DVD, which makesit easier for the supply side to providehigh quality video products and for the

demand side to get those products inan affordable, standard format.

Platform apps, on the other hand, aregenerally market makers. The two mostprominent examples are ridesharingapps like Uber and Lyft and roomsharing apps like AirBnB. In bothcases, they link someone who is willingto provide a service with someone whowants that service. A person seekingan affordable ride has new optionsavailable in addition to taxis. Similarly,someone seeking lodging has accessto new, more affordable alternativesto hotels.

Ridesharing provides a good exampleof lowered transaction costs. Theexisting taxicab market was alreadylargely made up of independentcontractors. What ridesharing did wasattract more people into a contractingmarket by reducing transaction costsvia an innovation to which old price-raising regulation did not apply.

Taxicab operators have traditionallybeen highly regulated, with therationale of ensuring public safety. Thejustification was that entrusting onestravel to a stranger involved beingable to trust that stranger to carry outthe service without harm to thepassenger. Regulation provided thattrust. The genius of the ridesharingrevolution was that the platform appscontain their own system of trust inthe form of feedback mechanisms,

The genius ofthe ridesharingrevolution wasthat the platformapps contain theirown system oftrust in the formof feedbackmechanisms,such as ratings.



such as ratings. For instance, Uber passengers rate their drivers on a basis of one to five stars, and any driver who drops below a certain threshold faces a review which could result in them losing access to the platform. Passengers see their drivers rating in advance, and can choose not to accept a ride offer from someone with a lower rating.

These feedback mechanisms also lower risks for drivers. Taxi drivers have no way of knowing whether a passenger is going to treat them well. They might stiff them, either by not having the cash to pay for the ride or presenting a fraudulent credit card. They might be drunk and throw up in the car. Using ridesharing feedback mechanisms, drivers rate their passengers. Passengers with low ratings will not be offered rides.

Platform apps attract new workers to independent contracting, which allows them to become their own boss. Surveys of ridesharing drivers show many drivers do it as a second job, many work fewer than 10 hours a week.64

Similarly, room-sharing hosts almost by definition are setting up their own businesses.

If independent employees are turning more to gig economy work, we would expect that to show up in the Bureau of Labor Statistics measures of self-employment or the number of people holding more than one job.

That is not the case. As Eli Douradoand Christopher Koopman of theMercatus Center show, the first measureis at a 70-year low and the second hasdeclined for two decades. However,as Dourado and Koopman suggest,the Current Population Survey relieson responses from workers whomight think of gig economy workas being somehow different fromself-employment.65

To obtain a more objective measure,Dourado and Koopman examinedInternal Revenue Service (IRS) dataon the issuance of Form 1099-MISCMiscellaneous Income comparedwith issuances of Form W-2 thatrepresent employment income. Theyfound that, there has been a significantincrease in the total number of 1099-MISC forms issued by the IRS in thelast 15 years, around a 22 percentincrease since 2000. During the sameperiod, W-2 forms have stagnated,falling by around 3.5 percent. Moreover,they note that this process wasunderway long before the arrival ofthe first sharing economy firms. Thissuggests that people were lookingfor sources of income other thanemployment even before theexpansion of employment regulationand the parallel opening up of newopportunities. Absent further regulation,we should expect more people to lookfor more flexible forms of work. Butregulation is not absent. It is the tensionbetween these two forces that forms

Absent furtherregulation, weshould expectmore people tolook for moreflexible formsof work. Butregulation isnot absent.



the real policy challenge of comingyears.66

The Sharing Economy andits Regulatory ChallengesIn many ways, the sharing economyis a good example of the rebirth ofnatural liberty. All sharing economyenterprises display one or more of thefollowing characteristics. They:

Serve unmet demand bytapping into underused capitalvia price signals;

Provide a significant reductionin transaction costs;

Use crowdsourced certificationto build trust;

Integrate payment systems tofurther reduce transaction costsand provide both enhancedcustomer experience andlowered risk for the supplier;

Create or expand two-sidedmarkets, thanks to appsmarket-making capability.

As such, they pose a challenge forregulators. In the case of trust, theymake regulators redundant. They alsocreate new markets that regulators hadnever considered in the first place.Some highly regulated industries mayfind themselves wiped out by thecreation of these new markets. Forinstance, the taxicab industry findsitself on the ropes in many cities in theface of competition from ridesharingservices. As the value of taxi medallions

has plummeted, we have begun tosee regulators attempt to convey theinformation that taxis are valuableby imposing a tax on ridesharingcompanies to subsidize taxi services,as happened recently in Boston andVictoria, Australia.67

The most pressing problem that needsto be addressed is that of employmentregulation, as new business modelsthreaten to make the employmentcontract obsolete. As Duke Universityeconomist Michael Munger has noted:

[A] long-term contract of the sortwe associate with firms may wellbecome quite rare. Firms mayrent capital equipment and labourfor very short periods, increasingthe productivity of the workers forthe period that they are employedand dramatically reducing thefixed costs of the firm. In thelimit, firms themselves mightsimply become individuals orsmall teams that hire out forspecific projects. Workers inthis system would be privatecontractors, not employeesin the traditional sense.Unsurprisingly, the counter-revolutionary fervour of thosewho wish to protect existingpower structures of both firmsand unions will call for attemptsto control the sale of transactioncost reductions.68

The sharingeconomy is agood exampleof the rebirth ofnatural liberty.



Mungers concerns are on point. Thereaction of regulators so far has beento double down on the employmentcontract through the proliferationof ever more intrusive workerclassification determinations. Therehave been dozens of court casesalleging that Uber and Lyft driversshould be considered employees of thecompany providing the platform ratherthan independent contractors.69 Unionshave sought to apply the terms of theNational Labor Relations Act to newtypes of companies as well.

So far, these actions have not causedany change in the status of independentworkers in the sharing economy, atleast at the federal level, as most courtcases have been settled on the basisthat workers remain independent con-tractors (although California-basedcleaning app Homejoy closed as aresult of state lawsuits).70 However, theagenda described above, coupled withthe broad definition of employment inthe FLSA, means that threats to newforms of work will continue. Forexample, a California judge recentlydenied a proposed settlement of alawsuit between Uber and certaindrivers on the grounds that a juryshould decide the question of whetherUber is an employer under state law.71

As platforms seek to make themselvesmore attractive to workers, they havesteadily been offering incentives thatmay make them seem more likeemployers to regulators and courts.

Much of the advantage of reducedtransaction costs will vanish ifregulators impose unneeded organizingcosts on the platforms, by trying toforce them into a New Deal-eraregulatory scheme.

To circumvent this problem, therehave been proposals for a new, thirdclassification for workers as dependentcontractors. Such a category alreadyexists in some developed countries,including Canada and Germany.Cutoff points for what proportion oftheir incomes workers must receivefrom one source to count as dependentvariesit is 80 percent in Canada, just51 percent in Germany.72 As HebrewUniversity of Jerusalem law professorGuy Davidov notes:

The important point is that themore you rely on a singleemployer for your livelihoodthe more the relationship ischaracterized by dependency, andthis vulnerability, in turn, justifiessome protection. The crucialaspect appears to be the abilityof the worker to spread risks.73

This points to a central problem withU.S. labor law. The various employmentregulators, in pursuing their agenda byredefining such categories as jointemployer and worker classification onthe basis of economic reality havealready created this category andsubsumed it under employment. A

Much of theadvantageof reducedtransactioncosts will vanishif regulatorsimpose unneededorganizing costson the platforms,by trying toforce them intoa New Deal-era regulatoryscheme.



contractor who would qualify as a dependent contractor in Canada or Germany could easily qualify as a full employee under the current regulatory interpretations of employment in the U.S., although this is less likely in industries where independent contracting is the accepted method of doing business, such as construction contractors that do a majority of business with one client. It is in new industries such as sharing economy platforms where the dependent contractor is likely to be recognized as an employee according to current regulatory thinking.

The idea of dependent contractors also creates problems for the putative employer in that their incomes are subject to significant variability. These problems are obvious when we look at the issue of withholding taxes. As Jared Meyer of the Manhattan Institute says, This would create a burden on employers because participants in the sharing economy often have highly variable incomes, so their estimated tax obligations are unclear.74 For a business where large numbers of employees are working variable hours every day, the burden would become even greater.

There is also the question of marginal cases, where the worker has several sources of income and it is not clear whether one of her clients reaches the threshold for being designated as the

source of dependence. It is almostimpossible for firms to predict forsuch a circumstance, which meansthe burden of proof resides with theworker. Firms would have to budgetfor disputes, raising the transactioncosts of working with potentialdependent contractors.

Moreover, the creation of such acategory ignores the realities ofindependent employees and what theyare looking for. In many cases, theyare looking for multiple incomestreams in order to reduce dependenceand the constraints of the employmentcontract. Bringing them back towardsthe constraints of employment wouldundermine that goal.

This debate at least shows that othercountries have attempted to reconsiderthe early 20th century employmentmodel, but have not yet been successfulin catering to workers without overlyburdening their potential employersand cutting off opportunities.

What about Benefits?A major source of trepidation forindividuals considering working asindependent contractors is what theysee as the loss of fringe benefits,especially health insurance. Yet,technology can offer solutions there aswell. One proposal is the creation of aportable benefits vehicle to allowworkers of whatever stripe to share in



the sort of policy goals normallyattached to the employment contract.A consortium of CEOs, union leaders,and think tank researchers describedthe idea in a statement, Commongrounds for independent workers inNovember 2015.75 The signers agreedthat: Everyone, regardless ofemployment classification, shouldhave access to the option of anaffordable safety net that supportsthem when theyre injured, sick, inneed of professional growth, or whenits time to retire.

The vehicle the consortium proposedwould have the following characteristics(the following is taken verbatim fromthe proposal):

Independent. Any worker should be able to access a certain basic set of protections as an individual regardless of where they source income opportunities.

Flexible and prorated. People are pulling together income from a variety of sources, so any vehicle should support contributions that can be prorated by units of money earned, jobs done, or time worked, covering new ways of micro-working across different employers or platforms.

Portable. A person should be able to take benefits and protections with them in and out of various work scenarios.

Universal. All workers shouldhave access to a basic setof benefits regardless ofemployment status.

Supportive of innovation:Businesses should beempowered to explore andpilot safety net optionsregardless of the workerclassification they utilize.76

While the platform looks promising,pitfalls could arise in its developmentand implementation. The standardizedbenefit package and other featuresalready guarantees that it would be aregulatory burden. If government wereto administer the program, it wouldlikely increase in size, scope, andnumber of rules, and become anotherbureaucratic burden as well. Relevantlegislation would be needed to divestthe various employment regulators ofsome of their current authority, inorder to avoid them expanding theirpower to the detriment of the sharingeconomy as a whole.

Ideally, however, a program like thiscould be privately administered andadopted voluntarily by both workersand platforms. Competing programscould exist. The model for suchprograms already exists, in the form of19th century fraternal organizations,which provided pooled insurance forworkers in the form of sick pay andother protections before the emergenceof the socialized versions in the20th century.



As University of Alabama historianDavid Beito points out, it was the verylegislative tying of benefits to theemployment contract that doomedfraternal societies in the first place:

[A] reinvigoration of mutual aid(though not necessarily throughfraternal societies) is not out ofthe question in the 21st century.One reform that would encouragesuch a trend is to repeal or reviselaws that subsidize third-partyinsurance. Perhaps the leadingexample is legislation enactedduring World War II, whichexempts employer-providedfringe benefits, such as healthinsurance, from income tax.According to John C. Goodman,the annual value of this exemptionadds up to an enormous $130billion. For a typical autoworker,for example, it is over $1,200 peryear. Federal tax policy has notonly tied workers to their jobs buthas undermined their incentivesto purchase health insurancethrough non-governmentalorganizations such as fraternalsocieties. It has also created aperverse system where workerslose all their benefits whenthey change jobs or becomeunemployed. By contrast, ifindividuals had the same taxincentives to purchase insurancefrom associations, such as lodges,as they do now from their

employer they could still retainfull coverage even if theychanged jobs.77

With the change Beito recommends, it is plausible to see platforms rather than associations springing up to provide such benefits. Whether the government would be prepared to countenance such a change is another matter. The Affordable Care Act retained the tie of health insurance to the employment contract while threatening to fineor tax, as the Supreme Court interpreted itindependent workers who did not purchase health insurance through the governments portal.

Another suggestion by Princeton University economist Alan Krueger and Cornell University economist Seth Harris for a category of independent worker contains just such a proposal. Their suggestion would guarantee workers many of the benefits attached to the employment contract but not hours-based benefits such as those under the FLSA or unemployment insurance. Being more extensive than the CEO consortiums proposal, it suffers from many of the same problems.78

For instance, the independent workers benefit package includes the right to bargain collectively. As noted, collective bargaining is a poor answer to the shift toward more flexible and entrepreneurial work arrangements that has been taking place for half a century, and to which

Collectivebargaining is apoor answer tothe shift towardmore flexible andentrepreneurialwork arrangementsthat has beentaking place forhalf a century.



the sharing economy is a market-discovered answer. As Jared Meyersays, Of course these workers shouldbe allowed to join a union, but itmakes little sense to force them toadhere to collectively bargainedagreements when they often work withmore than one company and/or haveanother full-time job. Additionally,independent workers have diversepriorities and work arrangements,even when they work with the sameintermediary.79

Instead, addressing the challengesfacing traditional corporations, sharingeconomy platforms, independentworkers, and regulators requiresinstitutional reforms designed tostrengthen contractors rather thanburdening them and others withcomplex regulation. Australias solutionwas to pass an Unfair Contract Law in2015 that significantly restricts whatdemands a company can make of asmall business contractor. The lawforbids unilateral changing of termsand conditions, and other terms thatapply to one side but not the other tothe smaller firms detriment.80 Whilesuch a suggestion may seem attractiveat first, it represents favoritism tosmall businesses and undue restrictionson the commercial contract. Microsoftshould be able to demand that itscontractors commit to its code ofethics. What should not happen is forthis code to be enforced by any otherlaw than the law of contract, or that

Microsoft be adjudged to have joint employer status with its contractor as a result of the code.

The true solution to these problems is to return to the principles of common law as a means of deciding what makes the difference between an employee and a contractor, and to let the market experiment with different forms of mutual aid packages that can present the contractor who wants to pay for them with equivalent benefits to those guaranteed by law to employees. With transaction costs falling, the market should be able to find acceptable solutions as long as government does not burden those solutions with utopian information.

Finally, to achieve a successful transition to a work environment more attuned to natural liberty, business leaders, whether they be corporate CEOs or individual independent contractors, need to explain to regulators, and to the public at large, the changes in the nature of work and why they have proved beneficial. They must do so in terms of the economy as a whole rather than their particular industry. In short, they must be prepared to stand up and advocate for the system of natural liberty.

ConclusionIn order to enable the system of natural liberty to reemerge on terms set by individuals acting in markets rather than be strangled at birth by regulation

Addressingthe challengesfacing traditionalcorporations,sharing economyplatforms,independentworkers, andregulatorsrequiresinstitutionalreforms designedto strengthencontractorsrather thanburdening themand otherswith complexregulation.



designed for a bygone era, legislatorsand regulators will need to makecertain policy changes.

First, lawmakers should reconsider alllaws that tie non-economic socialgoals to the employment contract. Inparticular, Congress should reform theFair Labor Standards Act to narrowthe definition of employment in orderto exempt volunteers and contract stafffrom it. No other employment law hassuch a broad standard. Therefore,harmonizing the FLSAs standard withthose of other lawssuch as the NLRA,which uses the common law master/servant definition of employmentwould be welcome. In order to addresslegitimate concerns about potentialloss of benefits, legislators shouldconsider policies such as neutral taxtreatment to facilitate the developmentof private alternatives.

Legislators should also consider reformsto the National Labor Relations Act, inkeeping with the stated purpose of theAct, to reduce conflict betweenemployers and workers. Furthermore,removing the adjudicative functionfrom the National Labor Relations

Board could lead to a depoliticizationof the Boards regulatory functionand a reduction in regulation byenforcement. Adjudication of NLRAactions should be transferred toArticle III Courts, which are moreinsulated from politics than the NLRB.

Employment regulators should returnto the common law tests of employmentversus contracting, based primarily oncontrol rather than the economicrealities tests rejected by Congress inthe 1940s. This would reduce the risksof legitimate contracting being unfairlydesignated as employment. In addition,regulators and courts should considerwhether a platform creates a two-sidedmarket, using the criteria outlined inthis essay, before stepping in to regulatebusiness platforms as employers.

Legislators should also resist demandsto create a new category of dependentcontractors or independent workers.Rather than creating a government-mandated portable benefits vehicle,legislators should reform laws thatcreate penalties on associations andbusinesses that attempt to providesuch services.

Documents

Punching the Clock on a Smartphone App? Murray - Punching the... · Punching the Clock on a Smartphone App? The Changing Nature of Work in America and Regulatory Barriers to Success