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100 Tex. L. Rev. 353 (2021-2022)
The Economic Basis of the Independent Contractor/Employee Distinction

handle is hein.journals/tlr100 and id is 375 raw text is: The Economic Basis of the Independent
Contractor/Employee Distinction
Eric A. Posner*
In recent years, a controversy has erupted over the distinction between
employees and independent contractors. Commentators have argued that in the
modern gig economy, many people traditionally classified as independent
contractors are as vulnerable as employees and should be granted the legal
protections that employees alone normally enjoy. However, the distinction
between the two categories remains inescapable, and the theoretical basis for it
has not been identified. I argue that the distinction is derived from market
structure. Employees are workers who, because they must make relationship-
specific investments in a single firm, are subject to labor monopsony.
Independent contractors do not make such relationship-specific investments, and
hence normally operate in a competitive labor market. Employment and labor
law may be explained as a methodfor protecting workers from labor monopsony;
because independent contracts are not subject to labor monopsony, they do not
require such protection, and in fact may impose costs on others if granted it.
The law's distinction between employees and independent contractors
(or, merely contractors) has sparked intense debate over the last few years.
As a result of advances in technology, some workers who have traditionally
been classified as employees are now being treated as contractors: they make
a living by undertaking a series of gigs for different labor buyers (as I
will call the firms or households that purchase the services of workers) rather
than working for a single employer.1 Many commentators worry that these
* Kirkland & Ellis Distinguished Service Professor, The University of Chicago Law School.
Thanks to Oren Bar-Gill, Oliver Hart, Daniel Hemel, Max Huffman, William Hubbard, Aneil
Kovvali, Genevieve Lakier, Mark Lemley, Jonathan Masur, Sarath Sanga, Steve Shavell, and
participants at workshops at the University of Chicago Law School and Harvard Law School, for
helpful comments, and to Michael Christ and Justin Taleisnik for research assistance. Thanks also
to the Russell Baker Scholars Fund for financial support.
1. Some commentators claimed that these alternative work arrangements (outside the
employment relationship) have transformed labor markets throughout the United States, a claim that
received a boost from a 2016 study, which found that alternative work arrangements increased from
10.7% in 2005 to 15.8% in 2015. See Lawrence F. Katz & Alan B. Krueger, The Rise and Nature
of Alternative Work Arrangements in the United States, 1995-2015, at 1 (Nat'l Bureau of Econ.
Rsch., Working Paper No. 22667, 2016) (discussing the findings of a survey on alternative work
arrangements). However, the authors later revised their estimate down to a 1% increase. See
Lawrence F. Katz & Alan B. Krueger, Understanding Trends in Alternative Work Arrangements in
the United States 2 (Nat'l Bureau of Econ. Rsch., Working Paper No. 25425, 2019) (explaining
analysis that indicates a modest upward trend in the incidence of alternative work arrangements of
about 1 percent of the workforce).

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