What is the problem with contractors?
Problem identification is the first step toward good public policy development. Is there a concern that needs solving?
If policymakers do not get this first step right, they risk unnecessary regulation. Or, worse still, they risk adverse unintended consequences. Regulatory intervention is rarely costless.
The Ministry of Business’ Better protections for contractors discussion paper suffers from this problem. Released late last year (and with submissions due next week) the discussion paper responds to a promise in the Labour Party’s 2017 election manifesto to strengthen the protections available to so-called “dependent” contractors.
The paper is full of solutions but light on problems. Indeed, the paper seeks feedback on no fewer than 11 ‘options’ to provide contractors with better protection. The solutions extend from improved enforcement powers for the Labour Inspectorate through to reclassifying some categories of contractors as employees – or as a new intermediate category of ‘worker’ (with some but not all of the rights of employees).
But what exactly are the problems the options are intended to solve? In the discussion paper’s opening “Message from the Minister,” Workplace Relations and Safety Minister Iain Lees-Galloway claims the deregulation of New Zealand’s labour markets in the 1990s has resulted in “structural problems” and “increased inequality.”
Neither claim is sound. In our 2019 report, Work in progress: Why Fair Pay Agreements would be bad for labour, we found that New Zealand’s labour markets have been working very well since the early 1990s.
Wage growth has been tracking productivity growth. New Zealand has enjoyed high levels of employment, high levels of labour market participation and one of the highest rates of job creation in the OECD. And the best available evidence shows that market income inequality has trended downward since the early 1990s.
The discussion paper does identify a problem: that some employers are treating workers as independent contractors when the law requires them to be treated as employees. As a result, these workers are not receiving their rights and entitlements. This is a genuine problem that should be rectified. However, the issue is one of enforcement. It is not a problem classification.
In relation to the various reclassification options, the discussion paper acknowledges that the contractors who are dependent on a single firm for all – or the majority of – their income, is comparatively small. At the same time, MBIE presents no evidence that a material proportion of these contractors are suffering from exploitation or some other harm requiring a change to the classification of their status.
Instead, the discussion paper presents a series of anecdotes about contractors who may be in disadvantaged positions. However, as the OECD has warned in its 2019 report on The Future of Work, policymakers should be careful to base any decisions they make on “evidence rather than anecdotes.”
The OECD does, nevertheless, advise that greater protections for dependent contractors may be required in labour markets characterised by monopsony power. But monopsony power typically arises where a significant fraction of employment is in highly concentrated labour markets – markets with a small number of employers. Given New Zealand is a nation of small businesses, it is hardly surprising that MBIE is unable to point to any evidence that monopsony power is a characteristic or concern in labour markets in New Zealand.
Policymakers should also be mindful that non-standard forms of work such as contracting, or so-called ‘platform’ work (for example, Uber driving), often emerge in response to the real needs of both employers and workers. Business may need sufficient flexibility to adjust workforces and working hours in response to fluctuating and unpredictable demand. Workers may be seeking greater flexibility to fit work around other responsibilities (eg. caring) and/or leisure to achieve a better work-life balance. Many workers want more independence in the way they organise their work and hours.
In the words of the OECD, “diversity (and continuous innovation) in employment contracts allows both employers and workers to escape the constraints of a one-size-fits-all approach and find arrangements that are in the best interests of both.”
To be fair to MBIE, the discussion document identifies a range of risks and costs from the various “solutions” put forward in the discussion paper. But the range of risks is wider than even MBIE acknowledges. The risks include reducing flexibility, impracticality, cost and confusion, adverse effects on freedom of choice for workers and firms, job losses, cost to consumers, and risks to productivity growth and overall prosperity and wellbeing.
This is a long list, and it is one to which the government would do well to pay heed. In the absence of compelling evidence of a problem that needs fixing, making significant changes to regulatory settings that appear to be working well could end up harming workers and the wider economy.
Aside from the enforcement issue affecting employees who are being mistreated, the only other problem may be the pressure the minister feels to meet one of Labour’s pre-election promises. But New Zealand should not allow the solution to that promise to become a problem for workers, firms and wellbeing.