Photo: Olivier Koning
Photo: Olivier Koning

All Work and No Job

Welcome to Hawaii’s Gig Economy, where companies increasingly use independent contractors for temporary projects, or “gigs,” rather than hire employees. Many are white-collar or highly skilled workers who love the freedom of freelancing, while others long for the good old days of a secure job.

February, 2016

There are a million stories in the white-collar gig economy. Let me introduce you to one.

Alison Chock has two jobs: One is in retail, where she works nights at a boutique. Her other job is more unpredictable. The work is seasonal – there’s more in fall than in spring – with each stint lasting no more than a few months. But this work is not in farming or tourism, traditionally seasonal occupations. Chock, who has a master’s degree, has been teaching introductory courses in the English Department at UH Manoa and other undergraduate programs for almost a decade, one semester’s gig at a time.

She’s not alone. The ivory tower might be the last place you would expect to find the gig economy thriving, but, over the last two decades, faced with budget pressures and an increasingly corporate model of administration, humanities departments nationwide have turned more and more to independent contractors for undergraduate teaching.

Justin Hedani says he left his regular job because “I couldn’t really control the work I wanted to do, or the direction I wanted to take it.” Now, as an independent web developer working for different clients, he can choose projects in the areas that interest him, including agriculture, education and humanitarian work. Photo: Olivier Koning

Justin Hedani says he left his regular job because “I couldn’t really control the work I wanted to do, or the direction I wanted to take it.” Now, as an independent web developer working for different clients, he can choose projects in the areas that interest him, including agriculture, education and humanitarian work. Photo: Olivier Koning

“The English Department used to have 40 to 45 assistant professors,” says department member Craig Howes, speaking of the university’s full-time teachers who are in the pipeline for eventual tenure. “Now there are four.” The courses still need to be taught, and the teaching load is taken up by graduate students and independent lecturers like Chock. Many have doctorates.

Chock is doing what many would argue is the core of a professor’s job, but she doesn’t take home a professor’s pay. Howes guesstimates that Chock and other lecturers like her take “an 80 percent pay cut” from what a tenured professor would make, teaching the same number of course hours. It’s not enough money to rent her own place or buy her own health care. Most adjunct professors, says Chock, have supportive spouses or second jobs, or both. “A lot of people wait tables,” she says, without irony. “It pays more.”

Howes has tenure, so he can use his real name and say that it’s a “fundamentally exploitative situation.” Chock can’t use her real name, so we are using a pseudonym; she, like many independent workers, wants to get hired back.

Gig Economy: Fact or Fiction?

Chock is just one of Hawaii’s 98,490 “nonemployer businesses” – a business consisting of one, self-employed person. She’s part of the core of what’s being called the “gig economy,” also called the 1099 economy (after the tax form filed for independent contractors) or on-demand employment. Each term emphasizes a different aspect of the gradual but steady growth, both in numbers and in visibility, of people who are working outside of a traditional one-job, 9-5 framework.

“A lot of people wait tables. It pays more.”

 

— Alison Chock, Part-time university lecturer
(not her real name)

 

2015 has been declared a “breakout year” for independent workers, who loomed large in campaign speeches and public wrestling matches between government regulators and sharing-economy giants, like Uber, that are powered by independent contractors. Presidential candidate Hillary Clinton has called the gig economy an issue to watch. President Obama has made addressing it a priority of his administration. Last summer, the Department of Labor issued detailed guidance on how to distinguish independent contractors from employees, citing deep concerns about new business practices.

Lately, discussion has shifted to putting numbers to the feeling in the air, but it has proven difficult to do; Congress de-funded the Bureau of Labor Statistics’ regular count of the self-employed in 2005, and some, like the Wall Street Journal, have asked whether the gig economy is actually a figment of the imagination.

John “JR” Robinson Co-founder, Nest Egg Guru. Photo: Olivier Koning

John “JR” Robinson
Co-founder, Nest Egg Guru. Photo: Olivier Koning

Recently, new numbers have surfaced indicating that although the picture is complicated, the gig economy is large, and growing. In the absence of BLS numbers, The Freelancers Union commissioned a 2015 study by independent research firm Edelman Berland that shows almost 54 million Americans – roughly one in three of the total workforce – is a contingent worker in some way: a temp, a part-timer, a freelancer or an independent contractor.

In 2015, the U.S. Government Accountability Office used a similar definition of contingent work and came up with an even more startling estimate: that 40.4 percent of employed U.S. workers in 2010 were contingent, a rise of 5.1 percentage points over 2006.

“In the past, a company’s data, financial, operational, etc., was normally at its place of business. … But as that data became more readily available in the cloud, now you can get some very talented people who can come in and do a better analysis remotely.”

 

— Reg Baker, Independent CFO

 

Other metrics also support a rise in independent contractors. In 2015, Patrick Kallerman of the Bay Area Research Economic Institute looked at previously unanalyzed data: IRS-reported totals of 1099-MISC forms, the tax form clients file for each independent contractor they use, measured against totals of W-2 forms, the tax form of traditional employment. Kallerman found that W-2s took a nosedive during the recession of 2001, and despite up and down growth, have never recovered to 2001 levels – while 1099-MISC form numbers began to rise sharply in 2000 and, with a brief dip just after the recession of 2008, have increased by more than ten percentage points since 2010. (While 1099-MISC forms count independent contractors used, they do not directly count independent contractors, because a contractor can be hired, and a 1099-MISC form filed, by more than one company. They do, however, reflect a steadily rising use of independent contractors.)

Kallerman also looked at another nontraditional metric, the number of nonemployer firms – businesses that have no employees, i.e. the individual self-employed. They found that in the U.S., nonemployer firms have “increased by nearly 18 percent since 2004, compared to a 3.5 percent increase in payroll employment.” The same count of nonemployer firms shows an even larger increase in Hawaii, 28 percent, since 2002. Nationwide, urban counties where the knowledge and digital economies are prominent show similar gains over the same period. King County, Washington, which includes Seattle, experienced a 29 percent increase in nonemployer firms, while San Francisco County had a 33 percent gain.

Most of the national focus so far has been on unskilled or blue-collar labor, but many factors make the gig economy also a white-collar phenomenon: tech developments that allow knowledge workers to be untethered from a physical location, a global marketplace that offers a host of lower-cost, skilled-labor choices against which U.S. workers must compete, and a long-term trend in business toward outsourcing and “fissuring” (more on that later). All of these developments are being felt in Hawaii’s white-collar gig economy. But it’s not all bad.

A C-Suite Gig

If Alison Chock lives on the dark side of the highly skilled gig economy, Reg Baker lives on the bright side. His decades in the C-Suite (he recently served as CEO, CFO and COO of the Hawaii Medical Assurance Association) have led to an appointment to the U.S. Small Business Administration’s Regulatory Fairness Board of Directors. Baker no longer has a full-time CFO appointment, but he belongs to more C-suites than ever – as an independent contractor.

A 1099 CFO? Sure, says Baker, who says Hawaii’s growing small- and medium-size businesses often need the services of a CFO, but don’t need and can’t afford a full-time one: “They need to find a CFO who has the skills they need, but make it scalable so they can be engaged as necessary.” Some of his smallest clients need CFO services for just a handful of hours a month.

Bernice Parsons, founder of Vertaccount, a financial outsourcing firm that Baker works with frequently, says she has seen how it works for the CFOs who go independent, too. “It becomes a quality-of-life question. ‘Instead of working for this one company, I want to see my kids grow up.’ They’re like, ‘If I quit, I can take on four independent clients and probably make the same or more, but I also have my quality of life and I can work from home.’ More people are doing it. And they’re like, ‘Hey, this is a lot better.’ ”

Baker says he’s shifting his focus from big-company turnarounds in which he was often the bad guy, to small businesses that can achieve growth goals with his guidance. “I find it very rewarding to be able to work with a company and going through various stages of development … It’s almost like mentoring or coaching a student or child into the growth phase and watching them develop and be more successful.” Baker announced he was taking on new clients a few weeks ago, and already his pipeline is almost at capacity.

Baker credits the growth of remote or part-time C-suite workers in part to the digital revolution. “In the past, a company’s data, financial, operational, etc., was normally at its place of business. And having somebody there watching it, tracking it, monitoring it, analyzing it, was pretty labor-intensive. But as that data became more readily available in the cloud, now you can get some very talented people who can come in and do a better analysis remotely, and provide some very valuable feedback or input.”

1099s as Survival Tools

Hiring contract workers has also become an integral part of Silicon Valley’s “lean startup philosophy,” where agility is prized and the goal is to survive the vulnerable first phases of business growth. Startup folks call them by their tax-form shorthand: “1099s” and “W-2s.” Hiring a W-2 is a big risk, says John “JR” Robinson, owner of Financial Planning Hawaii and a co-founder of Nest Egg Guru, one of Blue Startups’ current cohort of companies. Says Robinson: “The best way to increase your chances of success (in a business startup) is to keep your own expenses, fixed and variable, as low as possible. Any time you take on a (W-2) employee, you’ve got a larger cost plus benefits.”

“Why would I want to pay someone constantly if I don’t need them constantly?”

 

— John “JR” Robinson, Co-founder, Nest Egg Guru

 

Although, on paper, a 1099 worker can cost more per hour than an employee, once employee rights and benefits like paid vacation and sick time, unemployment insurance, support staff, FICA taxes, work space, family medical leave and health care are factored in, an employee usually costs at least 30 percent more than a 1099 performing the same core function. Sometimes, where there is a large supply of skilled talent, as with university teachers or freelance writers, the 1099 vs. W-2 cost spread can be many times greater.

Another advantage of using 1099s: If W-2 employees aren’t working out, it’s hard to drop them; a couple of bad W-2 hires can kill a young company. Robinson outsourced NestEgg Guru’s social-media marketing and its software development, but he didn’t find the right fit on the first try with either of them. “I’ve gone through two development teams. I’ve gone through four social-media platform providers, and now I’ve got one that’s really good. He’ll be my first (W-2) hire. It helps you build your team, and gives you the flexibility to pivot or to change as you need to.”

The speed and complexity of business are also increasing, and many sectors are becoming more project-based, with needed skill sets hard to predict from project to project. “Contracts are not guaranteed,” says entrepreneur Donavan Kealoha, a Honolulu-based senior associate with Startup Capital Ventures. “Sometimes they’re short term, and you need to spin somebody up pretty quickly who has experience. They can come in, and hit the ground running.” And then, when their work is done, they ride off into the sunset until you have another project.

Robinson emphasizes that the right employees – those who share your vision and will go the extra mile to see your business succeed – are worth their weight in gold. But that’s not always what you, or your project, need. Echoing a widely shared sentiment among startup founders, he says, “Why would I want to pay someone constantly if I don’t need them constantly?”

Today’s successful young companies will become tomorrow’s established companies, and hiring a W-2 only when absolutely necessary will be coded into their DNA. In a time when labor is increasingly being offshored and automated, it’s one more way to keep costs low enough to stay competitive.

The 1099 Blues

Here’s the catch: When a business sheds risk, cost and complexity, those things don’t disappear. They move down the chain.

Let’s start with the cost of doing business. 1099 workers are responsible for their own paperwork, bookkeeping, invoicing and taxes; they provide their own tools and workspace; they pay their own utility bills and shoulder their own professional liability. The paperwork alone can eat significantly into billable hours, says Justin Hedani, an independent full-stack web developer whose clients include The Gates Foundation. “You have to go online and submit all these monthly reports, and take out your taxes, and do it manually. Documentation is horrendous online. You’re just adding to the plate of an independent contractor, who already has a limited amount of time.”

Reg Baker, Independent CFO. Photo: Olivier Koning

Reg Baker, Independent CFO. Photo: Olivier Koning

Taxes for 1099 workers are significantly higher, too: In addition to the 7.65 percent total of Social Security and Medicare taxes that both W-2s and 1099s pay, the 1099s also have to pay the matching employment tax of 7.65 percent that is normally paid by employers.

And what happens when something goes wrong? Because they aren’t technically employees, independent workers fall outside the employee “safety net” constructed by U.S. law and custom in the 20th century to provide unemployment insurance, worker’s compensation, paid vacation, sick days and family leave, among many other things. In Hawaii, you can add health care to that list, thanks to the Prepaid Health Care Act of 1974. For an independent worker in Hawaii not covered by a family member’s health plan, health insurance can cost $12,000 to $25,000 a year for a family of four.

When you’re a 1099 worker, if you stop pedaling, the bicycle falls over, adds Ilima Loomis, formerly the managing editor of a national health magazine who has been a freelance writer since late 2014. (Disclosure: she is a contributing writer to Hawaii Business.) When the summer of 2015 rolled around, and her young daughter was at home, says Loomis, “I noticed my income decrease significantly. My lack of boundaries in protecting my work time was making a difference in my bottom line.”

Independent workers are also relatively invisible, falling outside the legal circle of protection. A Department of Labor and Industrial Relations official says federal regulation “is not like wall-to-wall carpet. We don’t cover everyone.” The Bureau of Labor Statistics hasn’t even counted contingent workers since 2005.

The Department of Labor is keenly aware, though, that the gray area between 1099 and W-2 is getting larger and more problematic. They recently tapped researcher David Weil, author of “The Fissured Workplace: Why Work Became So Bad for So Many and What Can Be Done to Improve It” (Harvard University Press, 2014) to be the administrator of the department’s Wage and Hour Division, and concern over fissuring has loomed large in explanations of recent DOL actions.

What is it? Fissuring, says Weil’s website, is the recent and accelerating phenomenon of large corporations shedding “their role as direct employers of the people responsible for their products, in favor of outsourcing work to small companies that compete fiercely with one another.” The smallest company of all is the nonemployer business – the independent worker.

The result, concludes Weil, has saved businesses a bundle of money and passed savings onto customers, and profits onto shareholders, but has also led to “declining wages,” “eroding benefits” and “ever-widening income inequality” as successful companies no longer share the benefits of prosperity with people who are no longer their employees.

Here to Stay

Despite these concerns, says the 2015 Freelancers Union’s report, the proportion of independent contractors who are freelancing by choice is 60 percent, up 7 percentage points from the year before.

Ilima Loomis, Freelance Writer. Photo: Ryan Siphers

Ilima Loomis, Freelance Writer. Photo: Ryan Siphers

The gig economy is not going anywhere, says Kealoha, the entrepreneur, because businesses want it and Millennials and many others do, too: “The previous way we worked doesn’t work anymore.” Jeff Mohr, a founder of the social-mapping startup Kumu, agrees that there has been a “generational shift” in the way Millennials want to work. “They don’t want to be in a big hierarchy,” Mohr says. “It’s a dirty term. If someone says about a company, ‘Oh, they’re really hierarchical,’ you don’t want to be there. You want a meritocracy, where you can just kill it, and do good work.”

Loomis, although not a Millennial, concurs. “I love seeing my work, and valuing it in dollars and cents,” she says of the independent contractor’s more project-based approach. “There’s a much greater sense of value and worth than logging hours at a desk – even if you do the same kind of work.”

Another benefit is how much more straightforward a professional relationship can be when either party feels free to walk away, says Loomis. For example, a boss she had worked under as a W-2 became a client once she went freelance. “She did all the same things that used to drive me crazy, but I didn’t care,” Loomis says. “She was my client and not my boss. Before, it would have been a major argument; I had a personal stake in the outcome, because it was my magazine, too. But your relationship with a client is so different from your relationship with a boss. You know you can walk away.”

Independent contractors are also more agile in terms of career direction, she adds. “I really enjoyed science writing, so (when she went freelance) I decided to be a science writer. If I decided I wanted to write about health, I could pivot and become a health writer. If I decided I wanted to go for the money and pitch a lot of corporate projects, I can do that. Compared to a staff job, where you’re really limited to just that job, I am the master of my career. I choose the direction I want to go.”

Hedani, the web developer, also values the freedom to craft his client list. He says he left his W-2 job because “I couldn’t really control the work I wanted to do, or the direction I wanted to take it, if I was working for someone.” He sees Web development as a way to help the not-always-tech-savvy sectors he’s interested in, from agriculture to education to humanitarian work, to embrace and use the technology available: “Each of those niches has so many problems to solve in it that once you break into that industry, there’s a lot you can do there. I’ll be that piece of the puzzle, so you can finish what you set out to do.”

Feeling More Secure

Dependence is the key word” when it comes to distinguishing an independent worker from an employee, says Eileen Zorc, a partner with Honolulu employment law firm Marr, Jones & Wang; traditionally, an employer provides not only work and income, but a series of legal protections and benefits that together provide a sense of security.

“There’s a much greater sense of value and worth than hours logged at a desk – even if you’re doing the same kind of work.”

 

— Ilima Loomis, Freelance writer

 

But more than one 1099 worker I spoke to said they felt more stable as an independent contractor than as an employee, entirely dependent on a single employer – particularly in industries that were rapidly changing. “I have almost more security as a freelancer than I would as a staff person,” says Loomis. “In publishing, I always felt a real insecurity that my job could evaporate at any moment. Now I may not know where my next piece is coming from, but any one of the magazines I write for could go out of business tomorrow, and I would be OK. In business terms, I’m diversified.”

By and large, white-collar 1099 workers relish their independence, and want to make it work if they can. The 2015 Freelancers Union survey reported that 50 percent of freelancers said “no amount of money” would make them return to a traditional job. None of the independent workers I interviewed were eager to become W-2s again, either. Even Chock, the university lecturer, wishes the pay and benefits were better, but appreciates the flexibility. “I need time to deal with the other things in my life,” she says, citing elder care and other issues.

Even more frank was Loomis, who (like 60 percent of workers surveyed by the Freelancers Union) is now earning more than she was at her full-time position. Although she entered the gig economy involuntarily when her magazine job evaporated, she told me without hesitation: “I never want another job.”


How to Make It as an Independent Worker

Thinking about becoming a lone wolf?

Here are tips from the people we spoke to:

Tag, you’re it. Employees exist partly under the umbrellas of their companies’ reputation. Instead, 1099 workers build and tend to their personal brands. It doesn’t have to be on social media or online, either. Reg Baker says his online TV show, “Business in Hawaii with Reg Baker,” helps bring in work. And, in Hawaii, word-of-mouth is still king. Hedani, the web developer, doesn’t have a website; he gets jobs through former clients’ recommendations.

Not all of your work will be paid. Save (unpaid) time for marketing, pitching, invoicing and other paperwork. “It’s easy to get absorbed in deadlines and not carve out time to do marketing and pitching,” says Loomis.

Have a plan for health care. This can be a make-or-break issue. Many 1099 workers are covered by W-2 spouses. An alternative is to build the cost of your health care into your fees, says Hedani, whose skills as a full-stack web developer are in high demand. “It’s not too difficult, if you include it in your cost of operation. It’s an expense. Being able to say, ‘I need to be alive to do this work,’ it’s the same as asking someone to pay for your car ride or other expenses.”

Don’t be a commodity. These days, work that can be commodified – easily duplicated elsewhere – tends to get offshored to places where wages are a lot lower. The more unique your skills are, the more indispensable you are.

Find, or build, a professional community. Kailua-based software developer McKay Davis says that when he had a single employer, his comfortable work-home groove meant he could go “six months without going townside.” Now that he’s independent, he’s thrown himself into Hawaii’s burgeoning entrepreneur and developer community. Yes, it takes a lot of time, but “When I do land a big contract, it’s like, ‘Yes, I wouldn’t have been able to do that without this connection, or being in that place at the right time.’ ”

Stay focused. Did you disappear down an Internet rabbit hole for 30 minutes? If you were supposed to be working, that just cost your employer: you.

Look like a pro. There’s a fine line between approachable and inappropriate, and there may be no wiggle room for your client to figure out what a good guy you really are. Those off-color remarks your cubicle mates used to love? Your wacky socks? Leave them at your last staff job, unless they are part of your brand.

You’re free to look elsewhere. Some skill sets “allow people to market themselves to a global network of businesses, not just Hawaii,” says Kealoha. Loomis, who lives on Maui, now writes for national magazines. “I felt that my opportunities as a journalist would be limited on Maui,” says Loomis. “I like covering local stories, but I also wanted to write stories from beyond Hawaii. My family is here, and I knew I couldn’t leave, but I knew my career would always be limited if I limited myself to local jobs.”