A Blueprint for Progressive Federalism: Washington State’s Portable Benefits Bill

Maia Usui

Maia Usui is a student at Harvard Law School.

The gig economy has been coming under a lot of fire lately.  Last month, The New Yorker skewered Lyft and other businesses for their grueling work culture, running the headline: “The Gig Economy Celebrates Working Yourself to Death.”  It pointed to the cautionary tale of Mary, a Lyft driver who — nine months into her pregnancy — started experiencing contractions behind the wheel and still decided to pick up passengers on her way to the hospital, right before she gave birth.  Lyft thought Mary’s story was “exciting.”  Others found it disturbing — especially because Lyft provides neither maternity leave nor health insurance.

This kind of story is not unique to Lyft.  Most employers in the gig economy classify their workers as independent contractors, not employees, thus excluding them from basic protections such as minimum wages and overtime pay.  And as the gig economy grows, this means that as much as 40% of the American workforce could lack an adequate social safety net.  In response, some local governments are taking action, experimenting with new benefit schemes for gig workers.  Many of these experiments are promising.  But cities and states should be careful, when creating new protections, not to displace the existing protections that workers are already entitled to.  To avoid this risk of “regressive federalism,” local governments should legislate against the background of employment law, building on it rather than bargaining it away.

This month, legislators in Washington state proposed a bill that establishes a portable benefits system for gig workers.  The bill offers a useful blueprint for progressive federalism, showing how local governments can help update the social safety net for the gig economy.

An Unraveling Safety Net

In the United States, the social safety net is inextricably woven into the employment relationship.  For generations, most Americans have depended on their employers for a wide range of benefits, including health insurance, workers’ compensation, and pensions.

But today, that safety net is unraveling.  In the wake of the recent recession, and with the rapid rise of the gig economy, more Americans now find themselves in nontraditional work arrangements.  Economists estimate that about 16% of workers fit this description, working for temporary help agencies, in on-call or contract positions, or as independent contractors and freelancers.  The government has concluded that the number is closer to 40%.  And while advocates for the gig economy claim that it is “good for workers,” the data suggests otherwise.  According to a recent Pew survey, gig workers tend to be poorer than the rest of the workforce, with lower levels of household income as well as educational attainment.  These are workers in particular need of economic and social security.

However, because most gig workers aren’t classified as employees, they lack the security that traditionally comes with work.  Businesses are not required to provide benefits to independent contractors, and they are strongly incentivized not to do so: in addition to the substantial cost “savings”, businesses are also reluctant to provide benefits for fear that it will be used against them as evidence of an employment relationship.  Unsurprisingly, studies have shown that nontraditional workers are likelier to face “fewer benefits[] and a greater reliance on public assistance” than others.

A Role for Local Government

In today’s gig economy, the social safety net is in dire need of an update.  And with the federal government slow to act (if anything, the Trump administration is more likely to dismantle existing benefits), many are counting on local governments to take action.  Policy experts have called on cities and states to “embrace their role as the laboratories of democracy” and experiment toward a “high-quality modern social safety net.”

The issue of portable benefits has attracted particular attention.  Earlier this year, the New York state legislature was reportedly considering a new bill that would establish portable benefits for gig workers.  Pushed by Tech:NYC (a tech industry lobby group that includes Uber, Etsy, and Airbnb), the bill — which has been reviewed by Bloomberg and The Village Voice — would establish a voluntary, industry-wide benefits fund.  Participating businesses would contribute at least 2.5% of the fee for every service performed (every Uber ride, every Instacart delivery, etc.), which workers could later use to purchase health insurance and other benefits.  The catch?  As long as they can choose their schedule and work for other companies, anyone who works for a participating business would be classified as an independent contractor under state law.

The New York bill is now on hold (Governor Cuomo has established a task force to consider the issue first), but it illustrates the risk that is inherent in local experimentation: sometimes, those experiments can go awry.  Ben Sachs, in his discussion of the bill, calls it an example of “regressive federalism.”  He points out that, by locking workers into independent contractor status, the bill would bar them from the existing protections of employment law in exchange for “a cheap substitute” (for an Uber driver who works about sixty hours a week, the 2.5% contribution adds up to a measly $3.21 a day).  And others agree.  David Weil, former administrator of the DOL’s Wage and Hour Division, is skeptical of the proposal, stating in an interview that it would be “perilous” for local governments to “bargain away baseline protections” for limited benefits.  Former NLRB chairman Wilma Liebman has also weighed in, noting that “it’s a lot to be giving up in terms of rights [and] protections,” without “something more” in return.

An Alternative: The Washington Bill

Now, Washington state is considering a new bill that offers a different — and better — scheme for modernizing the social safety net.  Like the New York bill, the proposed legislation would establish a portable benefits fund for gig workers, but with several differences.  First, the Washington proposal is not a voluntary system; it would require all businesses that act as brokers for more than 50 individual workers to contribute to a portable benefits fund.  This would include most “platforms” in the gig economy.  Second, the required contributions are not insubstantial.  Whereas the New York bill would require businesses to contribute only 2.5% of the fee earned, the Washington bill would require ten times that (25% of the fee) or $6/hour, whichever is lower.  Given that benefits represent, on average, about 26% of total compensation for service workers in the United States, this rate is far more likely to secure meaningful benefits.  The bill contemplates mandatory workers’ compensation, as well as a wide menu of optional benefits to choose from, including health insurance, paid time off, and retirement benefits.

Third, and perhaps most importantly, the Washington bill would not require gig workers to forfeit employee status.  On the classification issue, the bill makes concessions to both sides: it does not foreclose the possibility of employee status for gig workers, but it also carves out a safe harbor for businesses, ensuring that any benefits provided under the bill will not be used as evidence of an employment relationship in future disputes.

The Washington bill offers a useful blueprint for local governments seeking to engage in progressive federalism.  Unlike the New York bill, this proposal seeks to build on — rather than rebuild — existing employment law, preserving the protections that gig workers might already be entitled to.  What separates the two bills is a difference in baseline assumptions.  The New York legislators assumed, as many commentators have, that gig workers occupy some kind of “gray area” between existing employment categories, not quite employee and not quite independent contractor.  Diane Savino, one of the Democratic senators behind the New York bill, justified the proposal on these very grounds, stating: “We can . . . leave [those workers] in some gray limbo, or we can try and be creative.”  One problem with the “gray area” view of gig workers is that, as has been argued on the blog, it’s probably wrong.  But another problem with this view is that it invites unbridled discretion in policymaking.  If gig workers don’t “fit” into existing employment categories, there’s no baseline to work off of: lawmakers are free to strike a completely new balance between workers’ interests and business interests.  And this creates an opening for industry lobbyists to undo the existing balance, tipping it in their favor.  What the New York legislators fail to realize is that existing law already represents a careful bargain, negotiated over time, between employers and employees.  That’s not a bargain they’re free to renegotiate.

In contrast, the Washington bill leaves in tact the fundamental baseline of employment law.  Some might argue that it doesn’t go far enough — Ben has argued that states should unequivocally declare employee status for gig workers — but the problem of the gig economy is a complex one, involving a diverse range of work arrangements, and the state legislature has at least reserved for itself the possibility of expanding protections in the future.

Going forward, local governments will continue to have an important role as “laboratories” for regulating the gig economy.  Senate Democrats intend to introduce a bill in Congress that would provide federal funding for “cities, regions, and states to experiment with portable benefits.”  Meanwhile, industry lobbyists have indicated that they will be pushing for local legislation as a “national model,” no doubt to insulate the gig economy even further from the reach of employment law.  Against this encroachment, local governments could be our strongest line of defense.  Cities and states should remember, when crafting new benefits, not to bargain away the baseline protections provided by employment law.  Most gig workers are already legally entitled to an adequate safety net.  To accept anything less would be a bad deal.

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