As the director of two masters programs that prepare students to become sustainability managers, I spend a great deal of time helping my students and alumni connect with each other and with employers during job searches. Over the past decade, I've noticed that while placement in traditional large, hierarchical organizations continues, many of my former students are working for start-ups and small businesses and nonprofits. Many are also piecing together short term consultancies with part time jobs. In some cases these graduates are unhappy with these jobs and their lack of job security but in many cases, they seem to prefer the flexibility and are actively seeking to avoid large organizations. I believe that due to the growth of private pensions and low priced health coverage under Obamacare, we are going to see an acceleration of these trends.
While the crash of 2008-2009 reduced the number of opportunities in large organizations and can be seen as the cause of this trend, I also think that technological change and the global economy has also fueled this transformation. The Internet, laptop computers, tablets, cell phones and cloud communication make it possible for work to take place anywhere in the world. More and more production is taking place in small, networked organizations. While I see this tendency picking up momentum, I also find that government and some labor unions have not figured out how to operate in this new environment.
A recent research project that my colleague Bill Eimicke and I led provides clear evidence of the inability of government regulation to deal with the changing nature of work. The research was funded by the FedEx Corporation, and resulted in a report entitled: "Independent Contracting Policy and Management Analysis", FedEx is a company that operates a number of business lines with differing employment models. FedEx Ground has established a delivery service that relies on independent contractors. In 1998, FedEx acquired RPS, a small-package ground service, which was later renamed FedEx Ground. FedEx Ground immediately distinguished itself from its major competitor, United Parcel Service (UPS), by adopting the successful RPS business model of contracting its work out to small independent trucking companies. FedEx Ground's truck drivers purchase and operate their own vehicles, and while they are bound to certain FedEx Ground rules and regulations, these contractors have the ability to set their own hours, to buy and sell routes, and to develop their own business. UPS, in contrast, owns its own fleet of trucks and employs a heavily unionized workforce. In cases like this, workers are free to determine which model works for them (and that may change over time) by actively pursuing work at FedEx Ground, UPS or other delivery companies.
However, FedEx Ground is currently battling class action suits from a small number of their drivers claiming that they are employees under federal and state employee benefit and labor laws. Despite the fact that drivers entered into these arrangements willingly, plaintiffs in these cases argue that they are actually employees of FedEx and should be provided with the full benefits of employment, such as unionization rights and inclusion in health and pension plans. One of the negative impacts of these legal actions is that it makes it difficult and risky for small companies to act as contractors for large firms. The big companies worry about law suits and the small firms worry about being redefined as employees of the large firms. In the case of FedEx, many owners of small trucking companies went into business because their owners did not want to work for a large organization.
This pattern of networked organizations involved in production has in many instances replaced the more hierarchical vertically integrated organizations of the 20th century. One of the reasons for increased contracting and production networks is the increased specialization required in production. As technology advances and customer demands increase, organizational expertise becomes more narrow and focused. A key management decision in many organizations is what we call the "make or buy decision": When making that decision management poses a simple, but profound question: Is this work central to who we are as an organization and therefore we must "make" this part of our product, or should we buy it from an outside vendor? For example, at Columbia University Barnes and Nobel runs the bookstore. Columbia does many things well, but running a bookstore isn't one of those things and so the university contracts it out to a bookstore company. Apple computer designs its products in California, but for the most part manufactures its products in Asia. For Apple, design, not manufacturing, is their core competence.
The laws that govern the U.S. worker-employer relationship, like the Fair Labor Standards Act, were established during the New Deal era to protect workers against unfair and abusive labor practices. These laws are not easily applicable or appropriate for the new independent worker model. In addition, laws that could actively support contractors have not been established. Our research demonstrated that navigating the rules on contracting in the U.S. is unbelievably complicated. The rules on permissible independent contracting vary across states, courts, and regulatory agencies. A multitude of employee labor, benefit and tax laws and separate agencies' interpretations govern employee and independent contractor classifications - no single test applies to all relevant federal and state laws.
For example, the Internal Revenue Service and the Department of Labor sometimes disagree with each other on the definition of "contractor" and "employee". The diversity of classification criteria and rules makes it difficult for employers to accurately assess which category a given worker falls into. And, if an employer is found to have misclassified their workers - intentionally or not - it can face steep fines and damages.
Our study found that the biggest challenge to nontraditional work, particularly work done by independent contractors, comes from inconsistent application of definitions and tests by tax and labor departments at the state and federal level. Confusion about rules and regulations make it difficult for independent contractors and businesses to even know how to operate within the law.
I believe that a strong union movement and an effective regulatory structure are needed to protect workers from unscrupulous and powerful corporations. However, unions and regulators must adapt to a changing global economy, new technologies and a changing society. The world has been transformed since the middle of the 20th century. While the need to protect workers is as great as ever, attempting to protect them by discouraging small businesses and network management is a strategy doomed to failure.
There is a great deal of ideology and symbolic politics involved in discussions of contracting and the changing nature of work. But, the "make or buy" decision is a management decision. Outsourcing and privatization should not be seen as an attack on labor, but as a way of organizing work. We need to develop rules governing labor and contracting that protect those who do not have the means to protect themselves. In my view,unpaid internships are a far greater abuse of labor than contracting out, but young people have no way to insist that minimum wage laws be applied to this increasingly abusive practice.
Labor and contracting rules must be updated and need to be based on the economy and technologies of this century, not the last one. We need to understand contracting, globalization and organizational networks and ensure that the rules governing these practices protect both workers and owners. Both are needed and if either fails, the economy suffers.