Small Business Labs

One-Third of U.S. Business Use independent Contractors

The U.S. Government Accountability Office (GAO) recently released Nonstandard and Contracted Work Arrangements, a study looking at nonstandard work arrangements by U.S. companies.

As the study chart below shows, 33% of firms responding to the 2020 Annual Business Survey reported they used contractors, subcontractors, independent contractors, or outside consultants.

These results are not surprising.

IRS data shows that there's been a long-term shift to contract labor by small businesses. And many studies show that a majority of big companies use contingent labor.

Echoing those studies, the GAO also sampled annual financial reports submitted by S&P 500 companies in 2021.

They found that 89% of the companies in their sample mentioned using contractors in their annual reports.

The shift to nonemployee labor by firms large and small has been going on for years. It's a trend we are forecasting to continue.

What the Department of Labor's Worker Classification Guidance Means for Independent Work

Last month the  Department of Labor (DOL) announced it's releasing new guidance to help determine whether a worker is an employee or an independent contractor under the Fair Labor Standards Act.

The announcement got a lot of press coverage, most of it saying the new guidelines will make it much harder for companies to classify workers as independent contractors. Examples include:

• Wall Street Journal's Biden Rule Would Add More Gig Workers to Company Payrolls
• New York Times's Biden Proposal Could Lead to Employee Status for Gig Workers
• NPR's Labor Department proposal could change gig worker and company rules

But - and this is a big but - the new guidance basically returns the guidance to where it was under the Obama administration. Key quote from the Wall Street Journal article on the proposed guidance:

"It would replace a Trump-era rule—completed just days before the Biden administration took office—and return to an approach favored by the Obama administration."

In other words, the guidance is reverting back to what it was between 2008-2019. 

In case you weren't following independent work and the gig economy between 2008 - 2019, it grew dramatically. So going back to an approach favored by the Obama administration is unlikely to have a major impact on independent workers. 

Bloomberg's Uber, Lyft Shares Fall on Possible Changes to How Gig Workers Are Classified also points out:

"Companies had anticipated the Biden administration would reinstate the Obama-era guidance on the classification, and the proposal didn't come as a surprise, according to Tom White, an analyst at DA Davidson & Co. "It has no immediate changes to anything related to how companies operate their business," White said. "It's a proposal that in some ways can be viewed more like a conversation starter."

So don't expect significant near term changes in the gig economy based on the new guidance.

But having said that, all the press saying it will have an negative impact on the gig economy, will have an impact.  And that impact will likely be companies - and their lawyers - choosing to be more conservative about the use of nonemployee labor.

But this will be a relatively minor impact.    

The legal issues around worker classification, the DOL's role, and why the new rules aren't going to have a major impact are too long and complicated for this blog post. So we're not going to cover them here.

For those interested in more depth on this topic, we recommend the Independent Contractor, Misclassification, and Compliance blog. 

Their article THE LABOR DEPARTMENT'S INDEPENDENT CONTRACTOR RULE HAS LITTLE IF NO LEGAL IMPACT BUT IS LIKELY TO CAUSE ANXIETY FOR MANY STAKEHOLDERS covers this topic in-depth.

The article's title, in our opinion, also nicely sums up the impact of the new guidance.

Mercer's Global Talent Trends - Disruption and Greater Use of Non-Employee Labor Ahead

The global human capital consulting and services firm Mercer recently released their annual Global Talent Trends study.

For the 2019 edition of this study, they surveyed over 7,300 business executives, HR leaders, and employees from around the world on a variety of talent and HR issues.

The major finding is 73% of the executives surveyed expect their industry will experience significant disruption over the next 3 years. 

The study chart below (click to enlarge) summarizes the main sources of disruption by industry. 

Despite this view that disruption is coming, most of the executives surveyed are optimistic about their firm's prospects - 4 out of 5 believe their company can lead their industry's disruption.   

The rest of the study findings reflect this thinking about industry disruption.

They show firms and executives are working to increase their business and talent agility and flexibility so they can quickly respond to change.

Not surprisingly, this includes the increased use of contingent labor.

What is a bit surprising is the extent to which the executives expect to increase their use contingent labor.

Key quote:

"... 79% of executives expect that contingent and freelance worker will substantially replace full-time employees in the coming years ..." 

Substantially replacing full-time employees seems unlikely to us, at least over the next decade.

But we certainly agree the use of contingent labor by corporations will increase, which means more opportunity for independent workers.

The Rise of the "Elite Expert Segment of the Gig Economy"

How To Be A Rock Star In The Elite Expert Segment Of The Gig Economy is an interesting white paper from The Luxury Institute, which claims to be "the world's most trusted luxury and premium goods and services consulting firm ...".

The Luxury Institute is an expert network firm. These firms provide clients access to industry experts, most of which are independent consultants. 

The Luxury Institute calls their expert network GLEN (Global Luxury Expert Network) and say they have hundreds of independent luxury goods and services experts who are part of it.

The white paper points out highly skilled expert talent is in demand. Key quote:

Whether an individual chooses to be a full-time employee, or an independent expert, it has never been easier to market and sell expert skills across the entire planet. With a tremendous skills brain drain occurring in business as baby boomers have started to retire, leaving in their wake an army of novice millennials to take over in the cockpit, literally, elite experts are in high demand.

And they point out if these people choose to go independent, they can do well. Again from the white paper:

... if someone is a rock star in the gig economy, they will see their market value magnified by going solo rather than being employed. This is simply because they have the ability to sell their expertise to the highest bidders. Similar to fields such as professional sports and entertainment, and now high technology and e-sports, the gig economy will ensure that elite business experts benefit from what economists call a “power law distribution,” where the top achievers earn a highly disproportionate amount of the revenue. 

This echos what we found in our research looking at highly skilled and compensated independent workers. 

As the chart below from the MBO Partners State of Independence study research brief Highly Skilled, High Earning Workers shows, the number of U.S. high earning independent workers (those making $100k or more) has increased by 70% since 2011.

There are many drivers behind the growth of high earning independents - see the research brief for details. 

But the main driver, as is pointed in The Luxury Institute's white paper, is the growing demand for highly skilled workers.

And since firms are increasing their use of highly skilled independent workers, we see no reason why the number of highly skilled independent workers won't continue to grow.

JP Morgan Chase's 2018 Online Platform Study and Rideshare Driver Earnings

The JP Morgan Chase Institute released their 2018 Online Platform Economy in 2018 study this week.

It generated a lot of media attention, most of which focused on the data showing the average rideshare driver's earnings per month declined 53% between 2013 and 2017 (click on the chart to enlarge).

This, of course, led to a rash of headlines proclaiming earnings for gig workers have fallen substantially. These include:

Recode: Uber drivers and other gig economy workers are earning half what they did five years ago

Wall Street Journal: When the Supply of Uber and Lyft Drivers Rises, Their Earnings Fall

MarketWatch: Drivers for Uber, Lyft are earning less than half of what they did four years ago, study finds

The only problem is that's not exactly what the study found.

Yes, the study did find that the monthly earnings for the average gig worker driving people or goods decline by 53% between 2013 and 2017.

But as Uber nicely summarizes in their response to the study, the study does not include any data on how many hours per month the drivers worked. 

So if the average driver worked fewer hours in 2017 than in 2013 - which Uber says is true for their drivers - then their monthly total income from driving would of course go down. This is true even if their hourly wage stayed the same or increased.

Our research shows, like Uber claims, that on average those working via the online gig platforms are working fewer hours per month than in the past. 

A key reason is more people are taking advantage of the low friction, highly flexible work offered by these platforms to work when they have small amounts of spare time or gaps in their schedules. 

This includes students, care givers, those with illnesses, those with full-time jobs looking for supplemental income and others who need high levels of flexibility. 

Our research also shows only a slight decline in gig worker hourly earnings over the study's time frame. This data supports the thesis that the average platform worker is working fewer hours.

The study, BTW, is excellent and has a lot interesting data. It also has a "big data" methodology that knocks your socks off (or at least it knocked our socks off. And yes, we do need to get out more). 

See the report for details on the methodology.

According to LinkedIn, Most SMBs Use Freelancers

A recent survey by LinkedIn found that 70% of U.S. small businesses have hired a freelancer in the past and about 50% currently are using freelancers.

LinkedIn also found most SMBs plan to hire more freelancers in the future. Key quote from their article on the study:

"... more than half (52%) of small business hiring managers say that the number of freelancers and contractors in their company will increase in the next 5 years while 38% say the number will stay the same."

Another interesting finding is solopreneurs and freelancers themselves also use freelancers. As the LinkedIn chart below shows (click to enlarge), half of solopreneurs currently are using one or more freelancers.

    

Most surveys show somewhere between 20% to 30% of independent workers use contract labor.

The likely reason the LinkedIn results are higher is the industries they targeted in their survey. Key quote from LinkedIn's study methodology:

"Specific industries were targeted including Art & Design, Accounting/Finance, Consulting, Consumer Goods, Education, Healthcare, HR, Marketing/Advertising, Retail, Sales and Tech."

Several of these industries - especially art & design, consulting, marketing/advertising and education - are heavy users of freelancers. So LinkedIn finding a higher overall SMB usage rate of freelancers makes sense.

The use of contract labor and freelancers by small businesses of all sizes is clearly increasing. The LinkedIn study results are yet another confirmation of this trend.

The Strong Job Market's Impact on Independent Work

July was another solid jobs month for the U.S. The economy added another 157,000 jobs and the unemployment rate fell slightly to 3.9%.

As the chart below from the Washington Post shows, U.S. employment has grown consistently since 2013. And if this chart went back further, it would show 94 straight months of job gains. 

Economic growth has led to a jobs recovery for even the hardest hit segment of workers, those with less than a high school education.

The chart below, from the New York Times article Workers Hardest Hit by Recession Are Joining in Recovery, shows this group's unemployment rate is down to 5.1%

But wage growth continues to be stagnant after adjusting for inflation.

The chart below, from the Los Angeles Times article Job growth remains solid, but workers are still waiting for a real jump in wages, shows real wage growth (adjusted for inflation) has hovered near zero since 2017. 

Key quote from the article:

... while average hourly earnings are growing at an annual rate of 2.7%, the consumer price index for the 12 months that ended June 30 was up 2.9%. That means the purchasing power of Americans went down during that period.

These trends have several major impacts on independent work:

Independent workers who would prefer a traditional job can get one. Simply put, the strong job market is pulling independent workers who didn't choose or don't like independent work back to traditional jobs.

This is especially true for lower earning, less educated independent workers who, on average, are less satisfied with independent work than higher earning independents. Until recently this segment has not benefited as much from the economic recovery as others. But tight labor markets are leading to more opportunities for workers in this segment to secure traditional employment.

This is excellent news for these workers, but challenging to gig companies and marketplaces who look to less educated workers to provide labor supply. 

Continued wage stagnation means more people are becoming part-time and occasional independent workers. With real wage growth near zero more people are turning to part-time gig work to make ends meet.

The strong economy makes independent work more attractive for those with in-demand skills. Due to worker shortages and the "war for talent", the strong economy means more opportunities for independent workers with in-demand skills. This is leading to more highly skilled workers going independent. 

All of these impacts and changes are covered in more detail in the 2018 MBO Partners State of Independence report, which we work with MBO Partners on.

Independent Workers Feeling More Secure

One of findings that most surprised us when we first started researching independent workers was how many think independent work is more secure than traditional jobs. 

Back in 2011 when we first starting asking about this in surveys, we assumed the vast majority of independent workers would view self-employment as being less secure than having a traditional job. 

But as the chart below shows (the data is from the MBO Partners State of Independence study series), we were wrong.

In 2018 49% of full-time independent workers feel working independently is more secure than having a traditional job. This is up from 41% in 2012.

There are several reasons about half of independents feel independent work is more secure. 

The main reason given by independents is having multiple sources of income and/or customers provides more security than having a single employer.

Independents also point out that being charge of their work lives makes them more able to adjust to changing economic conditions, which makes them more secure.

They also say traditional jobs are no longer as secure as they once were, making independent work relatively more secure.

The data is trending up for several reasons.

First, the improving economy has made it easier for independent workers to find work. This is particularity true for independent workers with sought after skills and experience. 

The strong economy is also allowing reluctant independent workers - those that would prefer a traditional job- to go back to traditional jobs.

Reluctants, on average, report feeling independent work is much less secure than traditional employment. So as they leave independent work, it raises the share of independents who feel more secure working independently. 

The growing infrastructure of products and services that make being an independent easier is also making independent work more secure. 

These include low-cost, Internet-based tools and services for everything from billing and project management to marketing and sales. It also includes things like the ACA (Obamacare), which makes it easier for independents to get health insurance. 

But being independent is still not secure enough, especially for those without in-demand skills.  We'll have more on this topic in the near future. 

We contribute to the MBO Partners State of Independence report series.

Google's Shadow Workforce

Bloomberg's Inside Google's Shadow Workforce covers the use by Google of what they call TVCs, or “temps, vendors and contractors". According to the article about half of Google's workforce is comprised of TVCs. 

The article caused quite a stir on social media with many people expressing surprise at the numbers, especially the fact that Google is using so many TVCs. 

But the growing use of non-employee labor by large corporations (and small ones too) has been an open secret for years. 

We've recently covered a number of studies confirming this. These include:

• A SAP/Fieldglass study showing that 44% of workforce spend at large corporation is on external, non-employee talent (see chart below).
• A Randstad study showing that more than half of global human capital leaders expect to transfer one-third of their permanent positions to contingent roles in the near future.
• A Deloitte study showing that corporations are increasing their use of "off-balance sheet talent", which is their term for non-employee labor

And it's not just big companies. 

A November, 2017 SCORE study found that small business owners reported a 37% increase in hiring gig workers over the prior six months. They also reported more than half of surveyed small business owners plan to increase their use of non-employee talent over the next year.

There are a variety of reasons companies are increasing their use of non-employee labor. These include access to hard to find talent, improving business flexibility and agility and, in some cases, lowering costs. 

We cover these reasons and the corporate use of non-employee labor in more detail in our Contingent Workforce section.

We'll have more on this topic in the near future.

Reviewing the BLS 2017 Contingent and Alternative Employment Arrangements Survey

The U.S. Bureau of Labor Statistics (BLS) caused quite a stir yesterday with the release of their 2017 Contingent and Alternative Employment Arrangement (CWS) survey results. 

Specifically, the report shows that the share of U.S. gig/contract workers in the U.S. workforce was slightly smaller than they reported the last time the survey was done, which was 13 years ago.

They also found that only about 10.1% of Americans engage in alternative (independent) work.

This, of course, is much lower than what pretty much every other survey or study done on the gig economy over the past 5 years has found. For example, a recent Federal Reserve study found 31% of adult Americans engage in alternative (independent) work.

So what’s going on?

As we’ve mentioned before when reviewing gig economy studies, different studies use different gig economy definitions. This leads to very different results. This is true for this study.

The BLS has a narrow definition of contingent and alternative work.

For example:

1. The CWS only includes people whose sole or main job is independent. This excludes the millions of people who do gig work as moonlighters or as a second job.
2. The CWS also excludes, because of their definition of an independent contractor, independent workers who aren’t in the services industry. So, for example, independent workers who have an Etsy or Amazon store, or any kind of product-based business are excluded – even if it’s their primary source of income.

According to the technical note in their release, because of their independent contractor definition only 3 in 5 of those who are self-employed (solopreneurs) are included in their number.

This means they exclude about 4-5 million people who are included in almost all other surveys on independent work.

There are other differences that result in the CWS having lower numbers than most other surveys. But these two reasons explain most of the differences.

We ran the BLS's definitions against the dataset from the 2017 MBO Partners State of Independence (SOI) survey (which was done the month before the CWS survey).  Adjusted for the BLS’s definitions, we came up with roughly similar numbers as the BLS.

So again, this shows the differences are more about differing definitions than anything else.

We've long held that independent work is not going to replace traditional jobs as most people's primary source of income anytime in the foreseeable future. So, in that sense, we agree with the BLS.

But because of their narrow definition, in our view their survey understates the size, scope and growth of independent work. And by only asking about primary jobs, the CWS fails to address a major economic issue, which is why so many Americans are turning to 2^nd jobs and alternative sources of income. 

Our biggest concern is the CWS results will lead many to conclude work, jobs and the workforce are not changing. For example, we've already had people tell us there's no need for new gig work related legislation because the CWS says the sector is small and isn't growing. 

Like others (see this article by Aspen Institute or this article by Samaschool) we urge Congress to provide the BLS the funds to conduct regular and broader research on this topic.

We also recommend those interested in the gig economy/alternative work visit Aspen’s Gig Economy Hub and review the other studies on the gig economy.

Economist Robert Solow once said "you can see the computer age everywhere but in the productivity statistics". Eventually, government statistics showed computers add to productivity. And eventually statistics will catch up to the reality of independent work.

We'll have more on CWS in the near future.