“Fissuring” is a threat to American workers, according to the government, but it has nothing to do with making work sites earthquake-proof.

Instead, the U.S. Department of Labor describes fissuring as the increasingly common practice of outsourcing certain work though business models that “obscure, or eliminate entirely, the link between the worker and the employee.” The government agency this month issued guidelines to clarify what it means to be an employee under the Fair Labor Standards Act.

The stakes are high for employers, workers and the government. While companies can legitimately outsource work for business reasons, misclassifying workers as independent contractors has also enabled some employers to avoid paying unemployment insurance and workers’ compensation as well as evade compliance with regulations protecting worker rights, health and safety, according to the Labor Department. In addition, a worker’s status as employee or contract worker can affect access to benefits such as health insurance, retirement savings plans and sick leave.

The department’s enforcement efforts have focused on industries with a high incidence of fissuring, including construction, hospitality and janitorial services. The new guidelines examine the “economic realities” in the relationship between worker and company, testing whether the work is integral to the business, if the relationship is permanent or indefinite and the degree of control the company exerts over workers, for example.

The issue has gained increased visibility in recent years as virtual companies offering services as diverse as on-demand drivers, health aides, copy editors and personal shoppers connect paying clients to an army of freelancers. Drivers for Uber, the smartphone-enabled ride hailing service, became archetypical workers in the new “gig economy” while the company has become the poster child for a technology-enabled disruptive business models.

Now Uber is under assault from its drivers in San Francisco who are pursuing a class-action lawsuit, claiming they deserve employee status and benefits while the company argues that its hundreds of thousands of drivers are independent contractors. As the case plays out in the California courts, it puts front and center the issue of what “employment” means and how the job market has changed since the Great Recession.

In Minnesota, a legislative audit study in 2007 estimated that 1 in 7 workers across the state were misclassified as independent contractors, based on an examination of unemployment insurance payments. The Department of Labor and Industry now investigates the validity of “independent contractor” status in the construction trades across the state. It can levy fines for failing to register and revoke contractor licenses.

Charlie Durenberge, assistant director for construction codes and licensing at the department said he’s seen since “a greater level of professionalism” among the construction trades since stepped up enforcement began in 2012. Written contracts, invoicing and subcontractor registration have all increased. Previously, business was done on a verbal handshake with no paper trail to show how workers were being paid, Durenberger said.

The government has struggled just to measure the changing nature of the workforce nationwide. Though it tracks employment and unemployment monthly, the last time the Bureau of Labor Statistics (BLS) directly measured what it calls “contingent workers” was in 2005. It has not updated the data in a decade due to budget constraints.

A recent evaluation by the Government Accountability Office (GAO) tried to get around the data gap using a variety of historical data from the BLS, the Census Bureau and a University of Chicago study. The GAO estimated that contingent workers made up as much as 40.4 percent of the total working population in 2010 or more than 52 million U.S. workers, up from 35.3 percent in 2006, before the start of the recession. This represents an increase of more than 4 million active workers without a formal and stable connection to employment at a time when the total number of active workers fell by more than 6 million, according to BLS data.

Estimates on the size of the contingent workforce vary depending on who is included. The GAO uses the broadest definition of contingent workers, including self-employed contractors and regular part-time workers who may have long-term relationships and relative economic stability as well as what it describes as “core contingent” workers who are the most economically vulnerable. This group includes on-call workers, day laborers, contract company workers and temp agency employees, all of whom totaled more than 10 million people, or 7.9 percent of the working population in 2010, according the GAO.

The lack of permanent job status can have real economic consequences for this group in particular. “Core contingent” workers are three times more likely to have experienced layoffs in the previous year. Compared with “standard workers,” they tend to be younger, more often Hispanic, less likely to have graduated from high school, and more likely to be in poverty and therefore rely on some form of public assistance, the GAO study found.


Brad Allen is a freelance journalist and former investor relations executive for companies including Imation Corp. and Cray Research. His e-mail is brad@bdallen.com.