The 1099 Economy: Benefits and Risks Ahead

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Although the 1099 economy has been growing over the last few years, it has yet to transform the workforce landscape — though we may be in the early stages of a "gig economy" transformation. According to Bloomberg, the percentage of workers receiving 1099s "is up from 12 percent of the workforce in the late 1990s to 16 percent in 2013 ... So this rise of the 1099-MISC does seem to be indicative of a real-if-not-yet-exactly-transformative shift in American labor markets."

Benefits for Workers and Organizations: Flexibility and Cost

The 1099 economy, also called the "gig economy," the "on-demand economy" or the "freelance economy," represents the growth of organizations using independent contractors to do work. When organizations pays $600 or more per year to a non-employee, they are required to send that worker an IRS form 1099-MISC. 1099 workers can have the flexibility of choosing the organizations they work for, and usually work whenever and wherever they want. Uber drivers, for example, can choose their own schedule, using the Uber platform to find customers and get paid.

For organizations engaged in the gig economy, the benefits of flexibility and cost control are clear. As the amount of work increases, firms can look to independent contractors to close the gap. Since the 1099 worker is not considered an employee under the Fair Labor Standards Act, the organization isn't required to track hours or pay overtime, nor must they pay for health insurance, unemployment insurance, social security and Medicare taxes, vacation pay or other benefits. By contracting 1099 workers, organizations can flexibly expand to meet their workloads.

A Trend to Restrict or Regulate the Gig Economy

As 1099 economy firms such as Uber, Airbnb and Upwork have expanded, there's been some growing pains in the form of efforts by governments and communities to regulate the gig economy. For example, voters in Austin recently passed a referendum forcing Uber and Lyft drivers to undergo fingerprinting and background checks. The ride-sharing services responded by pulling out of the Texas city. Whether the situation in Austin is an aberration or the beginning of real pushback from communities is open to debate, and only time will tell.

In addition to a growing demand for regulation, there's also been a movement toward establishing benefits packages for gig workers, with a special emphasis on health care. The health care subsidies offered under the Affordable Care Act have helped many gig workers get coverage. In fact, according to Wired, 82 percent of gig workers had health insurance coverage in 2015. The Freelancer's Union is also working hard to help independent contractors gain access to an array of benefits that full-time employees have access to.

Compliance Risks and the Gig Economy: Misclassification

Like all trends, the gig economy has its benefits and its risks. Perhaps the biggest risk involves the potential for employee misclassification. The Department of Labor and the IRS have been cracking down on organizations that misclassify a worker as a 1099 independent contractor but actually treat that worker as a W-2 employee. The organization's mere classification of the worker is not determinative of a worker's status, but the DOL and the IRS may look at the facts and circumstances of each case to determine "the degree of control" the employer has over the worker and her work.

What factors are relevant to determine an employer's "degree of control" of an independent contractor? According to DOL Fact Sheet #13, some factors include the following:

  1. To what extent does the employer control the employee's behavior and schedule, such as when, where and how the employee works? What's the level of control in terms of supervision?
  2. Are expenses reimbursed, and is the worker paid hourly or by the job?
  3. Is there a contractual relationship, and if so, what are the terms and the reality of that relationship?
  4. Does the employer provide benefits and/or training to the worker?

As the gig economy grows, so will related compliance risk for organizations engaging 1099 workers. Having a clear delineation of the legal rights and status between W-2 employees and 1099 workers will be more and more important as the fast-evolving gig economy continues to grow.