From Harvard Business Review:
by David Weil
Every day, many of us eat at restaurants, stay at hotels, receive packages, and use our digital devices with the assumption that the company we pay for these services — Hilton, Amazon, Apple, etc. — also employs the people who deliver them. This assumption is increasingly incorrect: Our deliveries are often made by contractors and our hotel rooms are cleaned by temporary employees from staffing agencies.
This phenomenon is what I call the fissured workplace, the cracks upon which today’s economy largely rest, and it leaves so many without fair wages, a career path, or a safe work environment. And while it’s true that low wage workers — an estimated 29 million people in just 10 industries, according to the U.S. Department of Labor’s Office of the Chief Economist — have been hard hit by the consequences of fissuring for some time, those with college and graduate educations, even in professions once regarded as protected from the ups and downs of churning labor markets, are being affected as well.
My exposure to this seismic shift in our economy is not just via my research as an academic. I saw its negative consequences first-hand as President Obama’s head of the Department of Labor’s Wage and Hour Division, the agency responsible for enforcing our nation’s most basic labor standards (minimum wage, overtime, child labor, etc.). What I’ve learned can help both policymakers and business leaders understand why and how this is happening — and what steps we must all take to make work a fair deal for all.
First, a quick look at how we got here. Over the past few decades, major companies throughout the economy have faced intense pressure to improve financial performance for private and public investors. They responded by focusing their businesses on core competencies — that is, activities that provide the greatest value to their consumers and investors— and by shedding less essentially activities.
Firms typically started outsourcing activities like payroll, publications, accounting, and human resources. But over time, this spread to activities like janitorial work, facilities maintenance, and security. In many cases it went even deeper, spreading into employment activities that could be regarded as core to the company: housekeeping in hotels; cooking in restaurants; loading and unloading in retail distribution centers; even basic legal research in law firms.
Like a fissure in a once-solid rock that deepens and spreads, once an activity like janitorial services or housekeeping is shed, the secondary businesses doing that work are affected, often shifting those activities to still other businesses. A common practice in janitorial work, for instance, is for companies in the hotel or grocery industries to outsource that work to cleaning companies. Those companies, in turn, often hire smaller businesses to provide workers for specific facilities or shifts.
Because each level of a fissured workplace structure requires a financial return for their work, the further down one goes, the slimmer are the remaining profit margins. At the same time, as you move downward, labor typically represents a larger share of overall costs — and one of the only costs in direct control for satellite players further from the mothership, so to speak. That means the incentives to cut corners rise — leading to violations of our fundamental labor standards. At my former agency, we saw violations related to fissuring in the form of failure to pay janitors, cable installers, carpenters, housekeepers, home care workers, or distribution workers the wages and overtime they had rightly earned — losses typically equivalent to losing three to four weeks of earnings. For a family struggling to get by, that translates to more than five weeks of groceries, a month of rent, or five weeks of child care.
Being split off from the main firm doesn’t only affect labor standards compliance, however. It can lower wages and access to benefits. When you work as an employee for a major business, decades of research shows your wages and benefits tend to increase over time, regardless of whether that large employer is a union shop or not. But earnings fall significantly when a job is contracted out —even for identical kinds of work and workers. Opportunities for “climbing the ladder” fade because the person in the mail room (or, more likely, at the IT service desk) is now a subcontractor without a pathway. That not only means lower wage growth and reduced access to benefits, but also diminished opportunities for on-the-job training, protections from social safety nets like unemployment insurance and workers’ compensation, access to valuable social networks, and other pathways to upward advancement. Taken together, the fissured workplace contributes to growing earnings inequality.
However, there remains a critical paradox for the companies that shed so many activities to other organizations. If the mothership provides the satellite businesses upon which they depend exquisite detail in the timing, specifications, quality, and of course price for their contracted services — and my research and experience say they do — shouldn’t the company have some responsibility for compliance with laws? Shouldn’t they provide opportunities for advancement for “temporary workers” who may work within their company on a full-time basis, often for years? At the Wage and Hour Division, our view was yes, they should. You can’t shirk your responsibility for employees within your establishment if you also dictate how that work is undertaken at the same time. As a result, we focused our efforts — drawing on the laws we enforced and subsequent court rulings on them — to address the impacts of fissuring using multiple approaches.
We sought to make sure that independent contractors were truly that and not simply misclassified employees. We conducted investigations of businesses that sought competitive advantage through misclassification, often taking them to court and negotiating major settlements insuring that they would correctly classify employees in the future. We worked with state agencies (in both red and blue states) in charge of workers’ compensation, unemployment insurance, and tax revenue to fight misclassification by sharing information on problematic employers and industries, and coordinating enforcement on companies that misclassified workers.
We also aimed to make sure that all parties affected by the fissured workplace understood their roles in assuring compliance. In many circumstances, for example, we used the law and well-established court opinion to assert joint employment, ensuring that both motherships and satellites had responsibilities for their workers. We did so with staffing agencies and the companies that hired them, and in rapidly growing industries like fracking where — in keeping with its name — fissuring practices quickly spread. In these and many other industries we sought to get the businesses that determined much of the working relationship (e.g. shipbuilders hiring staffing agencies, retailers using logistics companies to run their distribution centers) to play their role in compliance.
We also observed that many highly successful businesses were embracing their responsibilities. They chose partners in their supply chains, contracting networks, and franchise systems that complied with the law, and often exceed legal requirements. These firms may benefit from the flexibility afforded by fissured relationships, but they also understand their responsibilities as the center of gravity within those relationships. The Wage and Hour Division had numerous partnerships with major companies who stood up and accepted their important roles in setting the table for all that happens around them, providing compliance assistance, providing training opportunities, and setting business relationships that allow all parties to do well — and do right by workers.
Take the case of Subway. In an industry characterized by low-wage work and widespread non-compliance, Subway entered into a voluntary agreement with the Wage and Hour Division to raise compliance among its system of 27,000 franchisees. The agreement involves a combination of training, outreach, information sharing, and joint problem solving to let new franchisees understand their responsibilities — and workers their rights under the law. It also provides both parties with information to identify and address continuing compliance issues, particularly among franchisees with significant and persistent problems. We also worked with companies in the agricultural sector, sometimes arising out of enforcement actions and litigation, to find and keep supply chain business partners who obeyed the law.
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