Make employee benefits more portable

Nearly a million North Carolinians work as independent contractors or own their own businesses. They do so for a variety of reasons, but many are parents or caregivers who need control over their own schedules so they can better balance their work and family obligations.

Thanks in part to advancements in computer and communications technology, business structure, and management practices, independent work is an increasingly viable option across a host of professions and occupations. Unfortunately, some barriers remain. Here in North Carolina, one such barrier is an overly rigid distinction between employees and independent contractors.

To be specific, one test is whether a company helps defray the cost of health coverage, retirement accounts, or other non-wage benefits for a worker. Receiving compensation in that fashion ought not require the designation of “employee.” In a growing number of states, it no longer does.

In 2023, Utah enacted a portable-benefits bill that explicitly permits companies to offer such payments and workers to receive them without ending the latter’s status as contractors. Alabama, Tennessee, and Wisconsin have since passed similar laws. Maryland, Pennsylvania, and Georgia allow DoorDash to finance health coverage and paid time off for its drivers and are considering a broader application to other firms and sectors.

Liya Palagashvili, a senior research fellow and director of the Labor Policy Project at George Mason University’s Mercatus Center, predicts that North Carolinians working in professional services, construction and repair, transportation, real estate, and health care would be among the greatest beneficiaries of such a policy.

“North Carolina can join the national movement by allowing workers to create portable benefits accounts and companies to contribute to portable benefits funds without triggering worker reclassification rules,” she wrote in a recent Mercatus report. “In doing so, North Carolina can support a modern, inclusive economy that aligns with how people actually work today — empowering businesses to innovate and enabling workers to thrive.”

The link between employment and non-wage benefits is somewhat of an accident of history. When Congress enacted the current version of a federal income tax in 1913, almost no one received income in any other form but cash. Later, when Congress and the Roosevelt administration enacted wage and price controls during World War II, they didn’t apply to non-wage compensation. “As a result,” wrote economist Melissa Thomasson in Harvard Business Review, “firms began to offer health benefit packages to secure workers.”

In 1954, Congress cemented into law the exemption from income tax of money spent by employers on health premiums. What was tacit became clearly legal. While 47% of households had group health insurance before Congress acted, that leapt to 66% by 1957.

That employers and employees responded rationally to the resulting incentives doesn’t necessarily mean it was rational to tie these emerging products and services to workplaces. Risk-pooling based on membership in other groups — such as churches, neighborhoods, or, civic associations — would have kept workers from having to worry about changing plans or losing coverage if they left one job to take another. When employers large enough to self-insure secured regulatory exemptions unavailable to small employers buying commercial plans, the market became even more complicated and inequitable.

All that having been said, to enact sweeping legislation today to disrupt an employer-based system built over many decades would be unwise. State and federal policymakers simply need to make portability a viable legal option.

Why? One compelling reason is that removing artificial barriers to entrepreneurship and independent contracting may help address one of America’s toughest challenges: a long-term decline in our fertility rate. As the average number of children per woman goes down, the ratio of future workers to retirees drops, too. Whether funded through government transfers or private savings, the goods and services consumed by retirees must be produced in real time.

Offering more flexible work arrangements and schedules makes it easier for couples to have and care for more children, and for adult children to care for elderly parents. It’s time to get creative.

John Hood is a John Locke Foundation board member. His books Mountain Folk, Forest Folk, and Water Folk combine epic fantasy and American history.