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Independent Contractor vs. Employee: It Pays To Not Be An Employee In The Sharing Economy

A huge point of controversy in the sharing/gig economy world has been how to classify those of us who work in it. Most people reading this have probably seen or read about lawsuits challenging Uber’s classification of its drivers as independent contractors, rather than as employees.  The same lawsuits have been raging on with basically every app out there in this space, including delivery apps like Postmates, DoorDash, and Caviar.

I’ve sometimes wondered if the folks fighting to be classified as employees understand the huge benefits they could be giving up by going that route.  Don’t get me wrong, I totally understand the problem with misclassifying workers. Most people need the benefits and protections that come with traditional employment.

But, I suspect that many people fighting to be classified as employees under these apps don’t really understand what they stand to lose. For a side hustler like me, any reclassification to employee status would be devastating.  And to be honest, I doubt that any workers on these apps would stand to gain any benefits as an employee other than a (low) guaranteed hourly wage.  I highly doubt a company like Uber would allow any newly classified employees to work enough hours to qualify for any benefits.

Instead of blindly jumping in with the masses, let’s stop and think for a second about why you want to be an independent contractor when working in the sharing/gig economy space.

Why You Want To Be An Independent Contractor In The Sharing/Gig Economy

In the debate over being an independent contractor vs. employee, I think many people forget the huge benefits that come with being an independent contractor.  These are benefits that you simply cannot get in a traditional employer-employee relationship.  Let’s take a look at what I mean:

1. Opens Up Side Hustling To More People

The amazing thing about these sharing/gig economy apps is how much they’ve opened up side hustling to the general population.  Being classified as an independent contractor is the only reason that someone like me has been able to step into this space.  It’s the reason why we live in the golden age of side hustling.  Anyone, if they want, can literally go out and start making extra money today.

Before the rise of these sharing/gig economy apps, side hustling wasn’t really side hustling for most people – it was just picking up a second job.  You can get a feel for this just by listening to some of the older personal finance gurus out there.  Look at Dave Ramsey, for example, who regularly tells people hustling to pay off debt to consider delivering pizzas at night.  Or look at Homer Simpson, when he picked up a second job at the Kwik-E-Mart in order to help pay for a pony for his daughter.  These aren’t side hustles.  They’re just classic examples of second jobs.

independent contractor vs. employee
Homer didn’t have a side hustle. He had a second job.

If you’ve got a short-term goal, then picking up a second job is totally fine.  But, it’s not sustainable over the long term.  Professionals, like myself, don’t have time to commit to weekly schedules at a second job.  And there aren’t a ton of jobs out there that will let me work just a few hours a week whenever I feel like it.

In contrast, I think I could do these sharing/gig economy apps into perpetuity.

Fine, you might say, don’t pick up a second job.  Instead, start your own side hustle.  As much as we like to think it, though, not everyone is cut out to create a side business out of nothing.  And not everyone wants to do that anyway. Some of us just want to make a little bit of money on the side without having to deal with a ton of commitment.

2. Gain Access To Extra Tax-Advantaged Space

The little-known benefit of being an independent contractor in the sharing/gig economy space is that you gain access to additional tax-advantaged accounts that most people don’t have access to.  When you earn income as an independent contractor, you’re in essence, running your own little business.  This makes you eligible to contribute to self-employed retirement accounts like the Solo 401k.

Even a lowly Uber driver or Postmates courier is eligible to put some (or in some cases all) of their earnings into a self-employed retirement account.  Your highest level employee can’t even do this.  When it comes to independent contractor vs. employee, the independent contractor wins hands down in this arena.

Remember this important fact.  Every dollar you earn in a side hustle is a dollar you don’t need to spend.  You can literally save 100% of it.

3.  Work Whenever You Feel Like It

The ability to work on my own schedule, anytime I want, is the only reason I’m able to do any of these gigs.  My day job can be demanding and there’s simply no way I could commit to working any set schedule as an employee in a second job.  Even if I could, I wouldn’t want to.  I value the flexibility of knowing that I can side hustle whenever I want.

As an example, there’s one prominent delivery service in my city that regularly advertises for delivery couriers.  I’ve always wanted to sign up.  The problem is that the company classifies its workers as employees.  This requires people to work set schedules and make a set hourly wage.  It’s probably good for people who are looking for a job, but it’s not good for someone like me who’s just looking for a side hustle.  I can guarantee that there are zero lawyers doing deliveries on that platform.  The only people working on there are people who really don’t have the skills to do anything else.

For someone working in the sharing/gig economy full time, being able to work whenever you feel like it has another added benefit – you can work as much as you want.  Most employers aren’t going to allow employees to work any number of hours.  I suspect that if Uber were forced to classify its drivers as employees, it would respond simply by capping the number of hours anyone could work.

4.  You Can “Care” Less

Maybe not the best thing to say – you should probably try your hardest at everything you do – but the nice thing about being an independent contractor is that you don’t have to “care” as much.  There’s something about picking up a job that makes me feel obligated to work really hard.  It’s just a different feeling when you’re an independent contractor using these apps.

Problems With Being An Independent Contractor In The Sharing/Gig Economy

I’m firmly of the belief that most people fighting for employee status stand to lose more than they gain.  But, I will admit that I see the reasons why people on these platforms might advocate to be classified as employees.  Here are just a few of those reasons:

1.  No Safety Net

One issue with being an independent contractor is that the rug can be pulled out from underneath you pretty much without warning.  It’s pretty common to hear stories of people who’ve had their accounts deactivated for no particular reason. And unlike with a traditional employer-employee relationship, you’re not eligible for unemployment or other similar benefits.

This isn’t a problem for someone like me who doesn’t rely on this income to make ends meet.  But I know that there are many people who need this money in order to live.

2. Most People Doing These Type of Gigs Aren’t Sophisticated Enough To Be Independent Contractors

When you’re an independent contractor, by definition, you’re running your own little business.  In the past, people working as independent contractors usually did more complicated tasks.  You didn’t really have independent contractors doing menial tasks like driving people around or delivering food.  The level of sophistication with an independent contractor was probably higher.

You can get a sense of the level of sophistication in most sharing/gig economy works if you interact with the community.  I’m in a ton of these sharing/gig economy Facebook groups and most of the people in there have no idea what they’re doing.  Many don’t realize that they can deduct their vehicle expenses.  The vast majority have no idea how taxes work.  I’d say most people on Postmates or Uber would probably benefit from the hand holding that comes with a traditional employment relationship.

3.  More Competition

A workforce of independent contractors usually means more workers.  Since the barriers to entry are low, it’s easy for anyone to step into this space.  All I have to do is sign up on the app.  In many cases, I don’t even need to go in for an interview.

These companies also have little incentive to reduce the supply of workers.  Their goal is to get as many workers signed up as possible in order to improve the customer experience.  Since these companies aren’t hiring employees, they really don’t have to worry about making sure there’s enough work to go around.

Independent Contractor vs. Employee: You Want To Be An Independent Contractor In The Sharing/Gig Economy

I understand why many sharing/gig economy workers are fighting for employee status.  If you’re making a living doing these type of gigs, employee status matters.  There’s something to be said about knowing that you’re in a traditional employer-employee relationship and that you have some sort of backup if something happens to you.

But for someone like me, and for most of you reading this, any court ruling or decision to turn sharing/gig economy workers into employees would basically be an end to these gigs as a side hustle.  I don’t have the time to take on a second job.  I definitely don’t have the time to work scheduled nights and weekends as a delivery person.  What I do have time for is to do deliveries on my own time, whenever I feel like it.

I’m all for worker’s rights and I do believe that people should get paid enough so that they can live comfortably.  But in the sharing/gig economy space, I’m not sure that reclassification to employee status would be the right move.  Instead, look at the positives that come with independent contractor status and capitalize on it.  That’s what I’m doing anyway.

18 Comments

  1. These are good points. I think it comes down to people thinking traditionally about work and “feeling safe” (even when they’re not). This is one of Robert Kiyosaki main talking points in his Rich Dad, Poor Dad book. Even though people think of being an independent contractor as being more risky, whether you’re able to work or not depends largely on the work you decide to put into it and your determination. Whereas when you’re an employee, it’s your boss that decides whether you get to work or not. Good article. -Aaron

    • Thanks Aaron! There’s an idea that being an employee is good, and obviously, it is. But at the same time, there are a ton of advantages with independent contractor status, especially with the sharing economy. I think that a turn to employee status would be harmful to a lot of people who use these apps.

  2. Great write up, FP.

    I am quite conservative and I like the stability my “day” job provides.

    However, I’m trying to bootstrap my way into two or three side hustles that could replace my current income. I have a LONG way to go to turn my side hustles – blogging, internet of things (IOT) consulting and teaching – into revenue streams. I need to stop with the “I don’t have time” and really start to focus more on these side hustles.

    Finally, one significant concern I have for side hustling or starting my own business is healthcare costs. They are EXTREMELY high when you venture out on your own.

    • Yep, healthcare costs is an issue. Probably the best thing is if you do your own thing and have a spouse with a regular day job. Seems like you could then get the best of both worlds!

  3. I hear you on the “benefit from handholding.” The side hustlers I run into most are the Uber/Lyft-ers. Excited and thrilled to be earning the extra $, they forget YOU STILL NEED TO FOLLOW THE RULES OF THE ROAD. Its important to prevent you from colliding with others!

    The incomprehension on driver’s faces as they receive a notice of traffic violation is hard to quantify. It’s like we are not speaking the same language.

    “Here’s a ticket for running the stop sign.” “But I’m an Uber driver.”
    “But you ran the stop sign…right in front of me.” “But I’m an Uber driver.”

    The pernicious hidden costs of participating in the gig economy are there…lurking. Like a photo credit lawsuit for a blogger. *shudder*

    • That’s one concern I have that I think I mentioned. The level of sophistication with a lot of these new wave of 1099ers is really low. I’m in a ton of these gig workers facebook groups and you can just see it – people have no idea they’re not an employee, wondering how to do taxes, confused they have to pay taxes or that taxes weren’t taken out for them, and having no idea how to deduct expenses. In the traditional 1099 context, you really didn’t have these type of workers doing 1099 work – it was usually more sophisticated workers, like consultants and things like that. It’s only recently that a taxi driver or delivery person could conceivably be considered an independent contractor.

  4. You know the real difference to me, besides the benefits you mentioned, is motivation. To side hustle or be a contractor you have to be self motivated. Being an employee often means punching a clock. Someone else is dictating your hours and driving you. It’s all about the type of person you are imho. I personally like mixing and matching.

    • Good point and I didn’t think about that. But you’re right, if no one’s setting a schedule for you, it’s a real eat what you kill situation.

  5. For people with a full-time day job that pick up shifts in the gig economy, they definitely want to keep the independent contractor status.

    It would be good to know what percentage of workers are working the gig economy full-time vs as a side hustle before concluding what’s better for society overall.

    One of the negatives of being an independent contractor is the self-employment tax (i.e. the IC having to pay both sides of FICA taxes). Arguably these costs are factored into your salary anyway but I’m not so sure in practice it works that way and suspect that the vast majority of ICs just end up eating the extra taxes.

    Of course the flip side to the last point is the ability to deduct all kinds of expenses incurred in operating your business, so perhaps if everything is handled perfectly it’s still overall better for the IC.

    • I suspect that most people probably aren’t doing Uber or other gig economy apps full time and I think that’s the position that these apps take as well. My thinking when it comes to these sharing economy apps is that, few people will really benefit from getting classified as employees anyway. Most likely, Uber and other companies would just put a hard limit on how many hours you can work in order to avoid having people be eligible for benefits. I know Instacart made that move a few years ago and they limited their workers to 30 hours or less per week. In essence, people doing this full time would probably just be forced to pick up two jobs with fixed schedules.

      The SE taxes are problematic and one that most people in the sharing economy don’t understand. As a counterpoint though, the nice thing about paying SE taxes is that it means you can throw it all into tax-advantaged accounts like a Solo 401k. One issue I’ve discovered is that I really have no way to tax-shelter my Airbnb income, and since my income is firmly in the 25% tax bracket right now, I’m basically stuck paying 25% + state taxes on that money even though I don’t really need it.

      I guess ultimately, my thought is that, with these gig economy apps, classification as an employee seems detrimental. You won’t see people like me or Financial Samurai or Rideshare Guy doing these type of gigs if it requires you to work as an employee.

  6. It would definitely be interesting if companies allowed you to check a box if you wanted to be considered an employee or independent contractor. That way those that wanted employee status could get the benefits associated with it and those that wanted to be independent contractors could go that way. I’d love to see how people will pick given the option.

    • That would be pretty interesting if that were possible. In a way, companies like Instacart are sort of doing that. When you sign up, they give you the option of signing up as an independent contractor or as an employee.

  7. I think the flexibility is the most important aspect of an independent contractor but I definitely agree that most people aren’t cut out for this. Sure, it sounds great and looks amazing when you have all that power and freedom to decide what you want to do. But it’s really just tons of hard hard work to be able to reach the level where you’ll be able to receive a substantial amount of compensation for your work.

    • Very true. It’s why its interesting now that you have Uber drivers and delivery people working as independent contractors. These aren’t the typical jobs that are full of sophisticated people who understand how to run a business or do taxes and all that other stuff.

  8. I remember a few years ago, when Uber first started they used to brag that “our independent contractors make more money than full time tax drivers”. That was a load of BS once you factored in the lease costs, fuel costs, etc.
    The sharing economy is great for businesses but not so much for the employees who now no longer have a guaranteed income.

    • It’s a good point. From the standpoint of a traditional employee, being an IC for Uber, Lyft, Postmates, etc is much worse than being a traditional employee. A lot of these companies are obviously doing this in order to take advantage of cheaper labor.

      As the same time, its really opened up doors for people like me or early retiree folks or people who are just doing this stuff as a side gig. If these gigs were all employee gigs, it’d be much harder to do on the side.

      • It’s great for students as well. I think it’s better to work as an Uber driver during one’s spare time than to work in some retail store. Part time work in retail doesn’t have many employee benefits either, but at least you can set your own hours.

        • I totally wish I had these type of options back when I was in college. I graduated college in 2009 and the only things we really could do was to get a part time job either affiliated through the school or with some restaurant or store near campus. I ended up grabbing a gig as a janitor and I had buddies who worked as lab assistants or at the cafeteria. Honestly, with all these gig economy apps out there now, I don’t know why any college kid would do a regular part time job.

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