Human Cloud Developments Outpacing the Legal & Regulatory Landscape

Just as companies such as eBay have transformed buying and selling of goods, companies such as Upwork, Work Market and others – the human cloud segment – are transforming the market for services. While the concept is not really new – think of old nurses registries and similar kinds of businesses that connected companies that needed labor with those interested in providing it – the breadth of these new marketplaces presents challenges to traditional notions of worker status, and as a result, also challenges the ability of governments to impose their laws upon these relationships.

Take, for example, the fact that technology makes it possible for IT staffing to occur without the buyer and seller of such services ever meeting. With online platforms, a company in California can engage an IT professional as an independent contractor who performs the work in Romania and transfers it electronically back to California. Many factors, such as expertise and a limited engagement, may support an independent contractor determination. Other factors, however, such as the employer providing detailed instructions on what to do, setting schedules and rates of pay, could point to an employment relationship. Regardless, the relationship is beyond the reach of California, which loses tax revenue under this arrangement. The current regulatory structure, at least in the United States, will need to be modernized to account for these kinds of transactions and recognize that having only independent contractors or employees as the only two options fails to recognize relationships that blend factors from both together. And as technology has made it easier to outsource this work to locations beyond the reach of various jurisdictions, businesses are likely to continue to do so in response to more burdensome regulations on the employment relationship and the uncertainty of a worker’s status.

Ultimately, the tailwinds driving this are threefold:

1. Technology is making it possible to perform services remotely from anywhere in the world at any time, eliminating many of the more traditional factors used to determine whether a worker is an employee or independent contractor.
2. As businesses look for greater productivity and efficiency, and seek more and more highly specialized knowledge and skill sets for specific purposes, marketplaces that connect those businesses with individuals that possess such skills will continue to accelerate the reliance upon these kinds of freelance arrangements, particularly in IT staffing.
3. As working anywhere at any time has been made possible by technology, the traditional notion of working during specific hours at a set time has given way to letting workers organize their lives around their own parameters, rather than the businesses’ needs. In other words, as more people desire greater control and flexibility in their lives, technology allows them to do so. This will make employees and contractors look almost identical under any reasonable analysis of the factors used to determine status, and thus make decisions arbitrary and outcome dependent upon who is making the determination.

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The headwinds, however, are very strong.

1. We have a 20^th-century legal framework for worker status and employment law in general that is designed for large employers of stable workforces.
2. This structure is necessary to support the pay-as-you-go public welfare system that was designed in the 1930s and remains largely the same today.
3. Because of this legal framework and benefit structure, government in under immense pressure to keep both revenue and benefits increasing, at the risk of insolvency of these programs. For example, the Social Security Disability Fund was slated to become insolvent in 2016. Congress bailed out the Fund by transferring money from the Social Security Fund, which while a a short-term solution leaves in place long-term structural issues will at some point become insolvable without real change in how the government operates.

Perhaps one of the biggest problems in the United States is there is no respect for the contracting relationship. A worker who decides he does not like being an independent contractor — often after the contract ends — can seek unemployment benefits claiming to have been misclassified, or otherwise owed overtime. The government can disregard the contract between the parties and assert misclassification as a way to seek additional tax revenue or other benefits. This disregard for the contracting relationship, coupled with the inherent uncertainty and inability to rely upon decisions that are made, will accelerate the use of outsourced IT staffing to locations beyond the reach of the government in which service recipient operates. Moreover, as much as government dislikes the use of independent contractors, because of the lack of both tax revenue and the protections such status affords the workers, this trend is not going away. Government would be better served if it embraced this trend and learned how to deal with it, rather than merely vilify employers and seek to prevent the use of more independent contractors in the future.

In my next post, I offer some possible solutions to these issues.

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