As the number of part-time workers continues, more workers are now becoming freelancers to make an income. But this large shift comes at even larger price: freelancers do not get benefits, including the all-important 401(k) plan and its critical employer match.
According to a CNBC report, over 53 million Americans are now freelancers, comprising up 34% of the U.S. workforce, according to a 2014 survey by the research firm of Edelman Berland that was commissioned by the Freelancers Union. “Those numbers are only expected to grow,” the report said.
Bad Journalism from CNBC
While this CNBC report touted the emergence of a new real estate market for freelancers using flexible office space arrangements, the reports makes no mention of the benefits freelancers lose by working as 1099 employees. This is bad journalism since CNBC editors failed to look at the larger issue bout the societal issue of more freelancers and how it changes the workplace and the benefits landscape.
Instead, CNBC took the lazy approach and just published the results of a single new study without the benefit of adding anything aside from the press release. Maybe it was because the editors who follow benefits were off for the day. But whatever the reason, this is bad journalism for the public and free publicity for the people who conducted the study.
Aside from that journalism critique, which is becoming all too common, especially in financial journalism, the benefits lost to freelancers is exactly a major reason why they have become freelancers in the first place. The rise of 1099 employees, those who just get a paycheck as non-employees, is on the rise according to a 2012 report in Forbes found that the number of people who primarily work on their own has swelled by 1.3 million since 2001 to 10.6 million, a 14% increase.
The last time there was a large rise in temporary workers it was before the euphoric Y2K (2000) tech bubble imploded on March 2000 accompanied by a major decline in tech stocks and a subsequent recession that lasted from 1999 to 2001.
This economic disruption also saw a major change in the workforce, especially in the number of workers were abused by such employers as Microsoft and Arthur Anderson, who were kept on as 1099 temp workers for up to five years as companies sought to avoid paying stock options on appreciating stock, as well as 401(k) and other medical benefits.
The Perma-Temp Scandal
So if the public wants to think the rise in freelancers is a good sign for the long-term economy, think again. This example from 2000 shows the problems perma-temp workers faced and how employers had to pay the price for abusing their workers.
The U.S. Supreme Court ruled in January 2000 that Microsoft must compensate as many as 10,000 former temporary workers who were not allowed to participate in the company’s stock purchase program. And to add to the problem, Microsoft is also being sued for failing to provide health insurance, retirement and other benefits.
At the time, Microsoft was mirroring national trends in the high-tech industry by using a huge workforce of 6,000 temporary or independent contractors compared with the company’s 19,000 full-time employees. In the Seattle area alone, about 10,000 workers were employed as temporary or independent contract workers. Working next to permanent company employees, these perma-temps received few benefits enjoyed by full-time workers, such as health, insurance, pension, vacations, stock options.
Things got uglier when Microsoft inserted new language into its standard contracts that required perma-temps to waive any payments or compensation a court might order as a result of the litigation. The judge cut-off a Microsoft lawyer during his presentation by asking that the company “do the right thing” by eliminating the language from its contracts.
While there were a number of factors contributing to the rise in Microsoft’s use of perma-temps, a major one was because under Microsoft’s stock purchase program at the time, full-time employees could buy shares at a 15% discount. That was not offered to the tem workers.
Although regulations at the time stipulated that contract workers cannot work more than 12 consecutive months without some time off, many Microsoft temps worked for as long as five or six years as “temporary” employees. Some temp worker even found themselves in the odd position of managing product teams staffed by full-time Microsoft employees.
To complicate matters, Microsoft blundered in 1999-2000 when it set strict limits on the size of pay raises for perma-temps. As the courts later ruled, this meant Microsoft was acting as a direct employer. The problem was that because the perma-temps actually worked for the temp agencies, Microsoft was then dictating what these “employers” (the temp agency) could pay them. Lawyers charged that Microsoft was practicing restraint of trade in violation of antitrust laws.
A similar situation happened to the National Collegiate Athletic Association (NCAA) when in a lawsuit, the courts ruled against the NCAA on exactly those grounds by saying the athletic organization could not tell colleges what to pay their assistant coaches because those coaches were not employed and paid by the NCAA.
In the Microsoft case, a lawyer found some major similarities. “Microsoft wants to have all the control of an employer,” plaintiff’s attorney Stephen Strong said at the time, “but none of the responsibility.”
The perma-temp case study puts more perspective on what it means to be a freelancer today. Companies don’t want to add to their permanent workforce, especially when it is easier to outsource than ever before, while escaping benefits costs. And despite what presidential candidate Donald Trump insists, he cannot bring back jobs from overseas unless he fundamentally reforms the tax code, which makes it easier for corporations to move outside of the U.S. and not pay their taxes.
“As a whole, the 15 companies paid no federal income tax on $23 billion in profits in 2014, and they paid almost no federal income tax on $107 billion in profits during the past five years. All but two received federal tax rebates in 2014, and almost all paid exceedingly low rates over five years.” — Newsmax
As a result, the growth of freelancers and other 1099 workers, sans any retirement or medical benefits, should continue to grow. This will fundamentally change the nature of work (since a quality retirement is directly connected to as quality job that pays benefits), as well as the retirement and housing market landscape.
The reason? Lower wages (after payments for health insurance and retirement contributions are included) mean lower retirement savings. Or, it could mean an increase in people who take advantage of the Affordable Care Act, but miss out on their Social Security contributions and any matching employer money to their 401(k)s. Also, if freelancers cannot save enough to buy a house, they lose out on the all important wealth-building engine of home equity, which accounts for a large percentage of overall retirement wealth, along with 401(k) savings and Social Security. If these three wealth-building engines are not accessible to freelancers, they face a low-quality retirement.
But under any scenario, this increase in freelance workers is a bad sign for the American way of life.