What Freelancers & Micro Business Owners Need To Know About The PRO Act

Mar 30, 2021 | Culture, Money & Life, Operations

Photo by Wonderlane on Unsplash

If you’re a freelancer, contractor, or micro business owner, you’re about to hear a lot about the PRO Act—which recently passed the U.S. House of Representatives.

The PRO Act is designed to revitalize the labor movement by reasserting the rights of workers to organize for better employment terms.

Now, as a freelancer, contractor, or micro business owner, you might be wondering what the heck this has to do with you. You’ve never considered labor organizing. You’re not looking for an employment contract.

Here’s where you come in.

The PRO Act is also designed to protect workers in another way—and that is making the distinction between an independent contractor and an employee much, much clearer.

In the U.S., employment classification determines what parts of the social safety net a worker is eligible for. And that determines the relative security or precarity of a worker.

Employees are eligible for worker’s compensation and unemployment insurance. Independent contractors aren’t. Independent contractors are also required to pay both their share of Medicare & Social Security taxes, as well as the portion that would be paid by their employer (if they had one)—otherwise known as the self-employment tax.

Employment classification, as such, has very real, very consequential repercussions.

How employment has changed & why it matters to you

Over the last 20 years, the state of employment in the U.S. has changed dramatically. Today, 1 in 4 of the largest employers in the world rent out labor to other companies.

These are workers who are employees of one company but do work for another company. There’s nothing inherently wrong or unethical about this arrangement—and in fact, it can make a lot of sense, especially for workers with specialized training or skills. However, this type of arrangement has been the slippery slope that’s allowed more and more companies to misclassify workers or avoid the responsibilities of being the employer of record.

Companies like Uber, Doordash, and Lyft claim to provide flexibility and financial opportunity to workers who do, in essence—if not in legal filings, the work of the company without the classification of employee.

Increasingly, the average worker in the U.S. is working full-time hours with no protection of minimum wage, employer-sponsored health insurance, paid time off, retirement savings, worker’s compensation, or unemployment benefits.

Today, having a “job” is no guarantee of stability or even peace of mind.

This is an incredibly complex problem to solve. It’s easy to demonize Uber or Doordash for using legalese to escape their responsibilities as employers. But it’s at least equally the government’s fault for not adapting labor laws to fit the 21st-century workforce. Relying on employer-sponsored benefits to provide the most basic comforts of modern life (healthcare, retirement, and a little time off) adds to the government’s failure.

Add systemic racism, sexism, and other forms of injustice into the mix and the problem gets becomes even more complex.

Again, as a proud freelancer, independent contractor, or micro business owner, you might be wondering what this has to do with you. Unlike the Uber driver or the Airbnb host, you’ve elected the employment arrangement you have. You’ve traded benefits and some semblance of security for flexibility—and maybe even outsized financial opportunity.

The problem is that so few “gigs” for freelancers and independent contractors actually fit the definition of freelance or contract work.

And, micro business owners can be just as culpable for relying on fuzzy employment classification as Fortune 100 companies.

Introducing the ABC test

The PRO Act is designed to address one small aspect of the very complex problem of the deterioration of the American job by codifying the ABC test into federal law. The ABC test is where the rubber starts to meet the road for those electing the freelance or micro business lifestyle.

So what is the ABC test?

The ABC test is a 3-part test for determining the proper classification of a job. A job must satisfy all 3 parts of the test to be appropriately classified as independent. If any part of the test cannot be satisfied, the job must be classified as traditional employment with the rights and benefits thereof.

  • A: The employer cannot assert control or direction over the worker both by contract and by in the day-to-day function of the job
  • B: The work being done is outside the normal scope of the business’s hiring
  • C: The worker is engaged in this work (via trade or business) outside the confines of this particular role

For more, a recent episode of the podcast The Uncertain Hour did a deep dive into the ABC test and how it applies to work that is often designated “independent” in order to avoid protecting workers or even paying minimum wage.

It’s not surprising that businesses which have benefitted from misclassifying work would be speaking out against the PRO Act. Uber, DoorDash, Lyft, Postmates, and Instacart spent $203 million dollars to defeat a similar measure in California that would have forced them to reclassify their workers.

But what about the workers who have been speaking out against the PRO Act?

Some have argued that “legitimate independent contractors” would have a difficult time passing this test. Others have asserted that if a writer produces just 1 article for a publication that they’d have to be classified as an employee. I’ll use this exact example below to explain my reasoning—something that the linked article’s author fails to do before repeating the fear-mongering that’s spreading among employers.

I would argue that it’s only difficult to meet if you’re accustomed to misclassifying your workers—or you’re accustomed to your work being misclassified.

Exploitation runs deep. And we’re all so used to being exploited that it can seem normal to accept unfair terms or to impose unfair terms on others.

There is nothing difficult to overcome about the ABC test if we’re being honest about the kind of work we’re doing or hiring for.

Many of us—freelancers, contractors, micro business owners, and traditional employees alike—are part of what’s becoming commonly know as the “precariat.” A socioeconomic class not determined by the industry you work in, the training or education you’ve received, or even the income you make but by the precariousness of your situation.

Anne Helen Petersen writes in her book, Can’t Even: How Millennials Became The Burnout Generation:

[Workers] are angry at and are anxious about the broken promises of the American Dream, but they keep grinding to try to position themselves closer to it. Depending on whether or not you’re a part of the precariat, this might all sound dire. It is—but one of the greatest cruelties of the American class system is that no one, not even those whose lives are now defined by precariousness, wants to admit as much.

We don’t want to admit that the search for flexibility, a little extra time, and the potential for a better outcome to life and work has left us more precarious—not less. So the first step here is admitting there’s a serious problem—not with us, but with the system. The second step is figuring out what to do about it.

Freelancing vs. permalancing

Freelance writers and journalists have been among the first to raise concerns about the ABC test provision in the PRO Act. And they make a great example for understanding the real-world application of misclassification.

Freelance writing work falls loosely into two categories:

  1. Pitching and writing pieces for a variety of publications or clients
  2. Permalancing

Permalancing is the practice of employing a “freelance worker” for full-time or near full-time work on an ongoing basis. Permalancing often comes with control of the work done, the schedule of the worker, and the environment the work is done in.

Permalancing resembles traditional employment in nearly every way—except pay, benefits, and protections.

On the other hand, truly freelance writers are  (A) in control of the pieces they pitch and the outlets they pitch them to. They’re given (B) deadlines as opposed to schedules. They adhere to style guides instead of listening to managers. And, most importantly, (C) freelance writers are engaged in their trade and managing their own careers.

Conditions aren’t always ideal for freelancers, of course. But they have much more control over outcomes and working conditions than permalancers do.

Permalancing does not pass the ABC test. True freelance writing does.

I’m not an employment lawyer—but one of the other benefits of the ABC test is that it’s written in plain english. When you actually look at a role and how it functions in practice, it’s pretty easy to determine whether or not it passes the test.

It is entirely possible for a publication to both hire staff writers and purchase the work of freelance writers while staying above board. What a publication couldn’t get away with under the PRO Act, however, is replacing staff writers with permalancers who (primarily) work for only that publication.

All of this brings us to two fundamental questions:

  • How do you know if your work is being misclassified?
  • And how do you know if you’re misclassifying work that you’re hiring for?

How to know if your work is being misclassified

Flexibility has been touted as the main benefit of independent work. And rightly so! Flexibility is key when you’re trying to navigate all of the failings of the modern world.

However, one thing almost all misclassified work has in common is a lack of flexibility. Isn’t that ironic?

If you’re wondering if the work you do should legitimately be labeled as independent, consider just how flexible your work really is.

  • Are you given a schedule or expectations for when you should be working?
  • Is your pay dependent on your time as opposed to the product of your work?
  • Are you able to work for the clients you choose or does your employer insist on your responsibility to them?

Maybe you’re thinking that while your working conditions might not be as flexible as you’d like, the job is safely “independent” because you signed an independent contractor agreement. That agreement likely specified terms that satisfy the ABC test, as well as looser tests for flexibility and self-determination. But that agreement is moot if your employer doesn’t actually treat you or the job you do that way.

Perhaps another way of looking at the question of flexibility is simply: has flexibility in your work actually made your life better?

Or has the promise of flexibility been used as an excuse to treat you poorly and lock you out of the (very flawed) system of worker benefits & protections we have in the U.S.?

How to know if you’re misclassifying work

With the rise of micro business has also come the rise of micro employers.

Businesses-of-one often hire virtual assistants, community managers, and all manner of subcontractors as independent contractors to expand their capacity.

Many of these roles are perfect for legitimately independent contractors.

Many are not.

Here are some questions you can consider to see if you’ve misclassified work:

  • Is the person you’ve hired performing similar work for other clients?
  • Have you given expectations for when the worker is working?
  • Are you exerting control over how the work is done as opposed to setting expectations for the product of the work?
  • If you felt more secure about the strength and resilience of your business, would this role be performed by an employee?
  • Is this work best compensated on an hourly, ongoing basis or based on the product of the work?

If the worker you’re considering is doing this work especially for your business or you’ve set their schedule or you exert control of how the work is done or you’d hire this person as an employee if you felt more secure yourself or if the work is best compensated on an hourly, ongoing basis…

…you’ve probably misclassified their employment.

I know that might be shocking. But it’s truly important.

Until we find a “third way” to classify workers so that employers, workers, and the government can provide a balance of flexibility, security, and basic benefits, we must start properly classifying the people we work with.

To ignore this responsibility is to knowingly exploit the people who work with us and help us build whatever relative wealth we’re building.

How to move forward (with or without the PRO Act)

Unfortunately, the deadlocked Senate is unlikely to be able to pass the PRO Act. However, just because the ABC test isn’t federal law doesn’t we shouldn’t start using it to properly classify work.

The ABC test simply makes the guidelines for classification clearer—it doesn’t actually change the manner by which work is classified.

If you truly don’t want to hire employees, no problem! Just structure your business so that you don’t have to rely on misclassified work.

If you truly want the flexibility and self-determination that comes from working as an independent contractor, structure the way you offer your work to meet these tests and accept nothing less.

Quoting Anne Helen Petersen again:

This is how precarity becomes the status quo: We convince workers that poor conditions are normal; that rebelling against them is a symptom of generational entitlement; that free-market capitalism is what makes America great and this is free-market capitalism in action.

Either way, in addition to the way we operate as business owners, freelancers, or contractors, it’s time for us to advocate for the reality of work today and how the modern workforce deserves a safety net too.

I’m acutely aware that not everyone has the privilege to insist on not being exploited—whether in dealing with Fortune 100 companies or micro business owners. And that’s why this will take legislation like the PRO Act, grassroots organizing, and awareness-building among workers and employers alike to solve the complexity of this problem.

Host of What Works

Tara is a podcaster, small business community leader, strategist, and speaker. She’s been helping small business owners build stronger businesses for over a decade.  

Tara McMullin, What Works Weekly Newsletter

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