Magazine | February 23, 2015, Issue

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Technology can reduce wage theft while making work more flexible

At Mystique Boutique, a chain of fashion stores in New York, workers were forced to accept long shifts, sometimes ten to eleven hours a day for six days a week, while receiving no overtime pay and less than the minimum wage required by law. After an investigation, the company had to pay $950,000 in restitution to the workers under an agreement with the New York attorney general.

At Fooptube, a video-game developer in Utah, employees regularly had their paychecks bounce when they attempted to deposit them. The company’s CEO also never deposited $1 million of required retirement funds and was in arrears on the company’s health-insurance bills. Utah’s attorney general prosecuted the case, and the CEO received a one-year jail sentence and had to pay more than $1 million in restitution.

While these sorts of violations are hardly without precedent, they have come under greater scrutiny as the salience of “wage theft” has increased. The concept is simple. Employers are failing to pay legally owed wages to their employees, most of whom are working-class and without job security. The issue thus has political gravitas, casting the plight of workers in stark relief.

There is certainly evidence that such activities are widespread. In the study “Broken Laws, Unprotected Workers” a group of labor researchers found that wage-law violations were common in Los Angeles, Chicago, and New York City, with nearly one in four workers not being paid the minimum wage and three in four not receiving required overtime.

Press attention to wage theft has increased from a trickle of articles in 2005 to a flood of hundreds last year. The issue’s growing prominence led both California and New York to pass wage-theft-prevention laws, and other states are now considering them.

For the Obama administration, the solution to this epidemic has been simple: increased regulation and greater enforcement of existing wage laws. That’s the angle proposed by David Weil, the recently confirmed head of the Division of Hours and Wages at the Department of Labor, which investigates pay violations. In his book The Fissured Workplace (2014), Weil argues that the division’s vision and budget have simply not kept pace with the complexity of American workplaces.

The administration’s approach has been deeply polarizing in Washington. Weil’s confirmation hearing was contentious, with a representative of the International Franchise Association arguing that his views were “downright frightening” given the economic damage that increased regulation could cause.

But the issue is not one that the Right should ignore. Wage theft is a symptom of a labor regulatory system that is needlessly complicated, and thoughtful reforms could both limit the problem and increase wages. In addition, the growing popularity of online labor marketplaces such as Uber and better information technology are making it easier for employees and employers to verify hours, obviating much of the need for greater regulation.

While labor unions argue for increased regulations and enforcement, that may be precisely what got us here in the first place. Regulations to prevent wage theft are over-complicated because in practice so is the very definition of wage theft. The Department of Labor says that it can include the outright failure to pay wages, failure to pay overtime, employee misclassification, minimum-wage violations, requirements that employees work off the clock, and illegal deductions from pay. Every one of these categories is built on a morass of laws and regulations, across the federal, state, and even local levels.

#page#As a result, our existing labor laws are immensely complex and increasingly divorced from the realities of the modern work force. Many of the laws, including the Fair Labor Standards Act (FLSA), were passed in the 1930s as part of the New Deal, with the goal of increasing overall employment.

Consider overtime pay. By making it more expensive to employ workers for longer than 40 hours, the FLSA encourages companies to hire greater numbers of workers for less time each, thereby decreasing the unemployment rate. That policy may have made sense in the depths of the Great Depression, but it has serious deleterious consequences for workers today.

Today, unlike in the 1930s, the vast majority of Americans work in the services sector, where labor flexibility is critical for businesses to compete. Yesterday’s labor laws have accelerated the transition of American workers from being employees to being independent contractors, who are almost entirely exempt from wage laws. Increased enforcement of these laws will not change this trend and may even advance it in workplaces that so far have held on to traditional forms of employment.

A better way of reducing wage theft would involve reforming our current wage laws in light of these new patterns of work. One possible approach would be to couple the simplification of labor laws with the expansion of their application to all workers in the economy, eliminating the artificial distinction between employees and independent contractors. That could improve the working conditions of millions of Americans while also reducing the regulatory burden on business.

We are already starting to see these sorts of improvements in online labor marketplaces. Take Uber, for instance. Working with the economist Alan Krueger, the company analyzed its driver data and found that it offered flexible employment to about 160,000 workers last year. Uber allows drivers to work whenever they want — all they have to do is click a button on the company’s mobile app to start working. Significantly, the company’s analysis found that pay received was proportional to hours worked.

Compared with typical service jobs, Uber’s model is a godsend. Its flexibility allows drivers to work around other jobs or family commitments without negotiating with a manager or dealing with a shift schedule. Its drivers can work as few or as many hours as they want without concern that their employer has some sort of legal motivation to prevent them from doing so. Uber also ensures that workers are treated fairly and safely — abusive passengers are pushed off its system. Most important, Uber always pays, since both Uber and its drivers can easily verify work completed through well-designed software.

This sort of algorithmic marketplace, which matches buyers to sellers through an online service, is becoming popular precisely because it is such an improvement over existing service employment. It allows entrepreneurial workers an entrée into the labor force and provides everyone, from students looking for a part-time job to parents who need to schedule their work around their children’s obligations, flexible options to earn wages.

Critics on the left argue that these sorts of flexible jobs are not secure, since they fail to provide benefits and workers are not protected from ups and downs in the market. That’s true, but such criticism also applies to the jobs — retail, food preparation, janitorial work — that many of these workers currently hold in the services sector. Algorithmic marketplaces are improving the conditions for workers, making it easier for them to find work and be paid, which we should be cheering. Motivated workers shouldn’t have to fight complicated labor laws.

Simplification and better use of information technology won’t solve every instance of wage theft. As with Fooptube, some employers may simply be unwilling to pay the wages they are required to, and criminal enforcement may be necessary. However, in the vast majority of cases these tools will provide greater transparency, so that worker and employer will have access to the same records of hours worked, labor accomplished, and wages paid and received.

Labor unions have used wage theft as a cudgel to demand greater regulation for almost a decade now, to great effect. And the issue is now receiving significantly more attention from policymakers. But, seen through a different lens, the problem of wage theft may present an opportunity not only to make the market freer but also to help Americans navigate an increasingly complex work environment.

– Mr. Crichton is a doctoral student at Harvard’s John F. Kennedy School of Government, where he researches labor economics.

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