As 2017 winds to a close, we at MBO Partners like to take time to reflect on what has changed in preparation for the year ahead. As is common in any fast-growing industry, we marvel at how much has changed in the past 12 months, and how much will likely change again as we head into and through 2018.
We’ve identified and recapped some of this year’s top trends, and have given insight into how we see these items developing as we begin the New Year.
Automation and Artificial Intelligence
Automation was a 2017 buzzword with cautionary headlines about the rise of machines and artificial intelligence taking U.S. jobs. We approached this topic from a slightly different angle, proposing that automation may actually increase the demand for flexible workers who have skills and agility that machines are unable to provide.
- According to 67% of staffing professionals, automation will help promote—rather than eliminate—top talent.
- Automation eliminates the need for many low-paying offshore jobs, allowing organizations to bring labor and production back to the U.S. This increases the need for high-skilled roles, which independent professionals can fill.
- Research from McKinsey Global Institute suggested that by 2030 globally, up to 375 million workers may need to switch occupational categories and learn new skills because of job displacement due to automation.
Automation and artificial intelligence will certainly have an impact on independent professionals in the future. By leaning into these new developments, highly-skilled independents can benefit from task automation. On the other end of the spectrum, less-skilled gig workers may experience job displacement due to a more prevalent use of technology such as self-driving cars or drone-based delivery machines. While we don’t see these jobs going away in 2018, gig opportunities may decline in the coming years.
Independent Workforce Growth
The independent workforce continues to grow both in size and importance to leading enterprises worldwide. At MBO, we released our annual State of Independence study, which found that independents now comprise about 31% of the private U.S. workforce—a 40.9-million strong cohort. The gig economy, workers who pick up occasional or part-time work through companies such as Uber, Task Rabbit, or Thumbtack, saw strong growth as well.
- Intuit estimated that the gig economy makes up 34% of the workforce. That percentage is expected to rise to 43% by 2020.
- According to MBO’s study, 16.9 million Americans are full-time independents, working 15 or more hours per week.
- High earners are another fast-growing segment of the independent workforce. Today, 3.2 million full-time independents make more than $100,000 annually.
Over the next 10 years, we predict that the number of people who are independent or who have experienced independence will grow to roughly 60% of the workforce. Gen Z—a generation which is incredibly comfortable with technology, entrepreneurial, and inclined towards independence—is also poised to make waves in the independent sector. By 2027, Gen Z will be moving into the workforce and is expected to have a big impact on independent work.
The Muddy Waters of Misclassification
As the independent workforce continues to grow, so does the problem of worker misclassification. Recent high-profile lawsuits have thrown this issue into the spotlight. Because existing worker classification guidelines, laws, and regulations conflict with one another and are open to interpretation, it is difficult to define a specific method for proper classification of independent contractors.
- Zenefits paid $3.4 million to misclassified employees after an investigation by the Labor Department’s Wage and Hour Division.
- FedEx settled an ongoing misclassification case by creating a $228 million fund to resolve claims by more than 2,000 delivery drivers.
- As part of North Carolina’s recently enacted Employee Fair Classification Act (EFCA), all employers will be required to display a poster with specific information about misclassification starting December 31 of this year.
- Citigroup paid $350,000 to 18 inappropriately classified information technology workers.
- Uber was under scrutiny for misclassification both in the U.S. as well as in the UK, where they lost their appeal in an employment rights case.
- A California court ruled that misclassification alone does not establish liability for overtime violations, a decision that will affect the type of evidence needed in future misclassification cases.
Moving forward, public policy will need to evolve to match the changing nature of work. MBO will continue to advocate for independent contractor rights through initiatives like our Certified Self-Employed work, which would establish a safe harbor with protections and guidelines for the proper engagement of independent professionals.
The latter half of 2017 proved that tax reform will be an issue of note for the independent workforce both through the end of the year and into 2018. While the final provisions of the tax reform bill are still somewhat in flux, we do know of a few changes that will impact both individuals and businesses in 2018 and beyond.
- Changes to individual tax rates mean that there will still be seven tax brackets, but rates will change to 10%, 12%, 24%, 32%, 35% and 37% from 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
- The standard deduction has nearly doubled, to $12,000 from $6,350 for individuals and to $24,000 from $12,700 for married filing jointly.
- Personal exceptions have been eliminated, local and state deductions have been capped at $10,000, and the child tax credit has been expanded.
Perhaps the most important changes, however, are those that impact pass-through entities, which can include sole proprietorships, partnerships, LLCs, and S Corporations. According to the latest language released, these entities would continue to pay tax through the individual income system, but they would be allowed a deduction of 20% for their domestic qualified business income.
This dedication will be limited to 50% of the “W-2” wages paid, or 25% of W-2 wages plus 2.5% of the cost of tangible, depreciable property, which is designed to benefit real estate companies. The wage limit wouldn’t apply to taxpayers with incomes of $157,500 or less for individuals or $315,000 or less for joint filers indexed for inflation. The limit would phase in for taxpayers with incomes greater than those thresholds.
For partnerships and S Corporations, the deduction would apply at the partner or shareholder level, based on their allocable share of W-2 wages. The deduction would be limited for certain professional services businesses, including those in health, law, and accounting. It would only be fully available for service businesses with incomes of $157,000 or less for individuals or $315,000 or less for joint filers (indexed to inflation) and would phase out for incomes greater than those thresholds.
Engineering, architecture, and investment management businesses wouldn’t be considered service businesses. The thresholds in the conference agreement are lower than those of $250,000 for individuals and $500,000 for joint filers in the Senate-passed measure; these details are expected to be ironed out this week. The joint explanatory statement said the reduction would “deter high-income taxpayers from attempting to convert wages or other compensation for personal services to income eligible for the 20% deduction.” The House-passed measure would have established a new 25% tax rate for pass-through entities instead of a deduction.
Furthermore, losses that exceed a pass-through’s gross income or investment gains plus $250,000 for individual filers and $500,000 for joint filers could be carried forward as a net operating loss. For partnerships and S corporations, the provision would apply at the partner or shareholder level based on their share of income gain, deduction, or loss. The provision would apply during tax years 2018 through 2025. We will continue to update this document throughout the week.
Increased Competition for Top Talent
The war for talent and workforce skills gap have generated much hype in HR departments over the past year. As workers increasingly push for independent careers, companies are finding that not only are they competing for traditional employees, but for independent professionals as well.
- During the second half of this year, 46% of employers planned to hire temporary or contract workers—up from 32% in July of 2016. The majority, 53%, also plan on offering higher salaries due to the increasingly competitive labor market.
- Nearly all Americans, about 80%, said there is a skills shortage in our country and 35% felt personally affected by it.
As companies continue to aggressively compete to attract top talent, they will need to adapt current policies to fit the needs of independents. These changes may include flexible payment and contract terms, the use of preferred talent networks, and streamlined engagement methods. Focusing on becoming a Client of Choice for the independent workforce will be an essential component of business offerings moving forward.
Re-Skilling and Skill Shifting
Many businesses and company leaders acknowledge a growing skills gap in the U.S.—while there are jobs available, employers are struggling to find the right talent. Workers are realizing they will need to re-skill in order to advance their careers. Independent professionals, on the other hand, realize an advantage as the services they provide are directly dependent on their skillsets, which must be up-to-date.
- In the first quarter of 2017, 45% of small businesses reported that they were unable to find qualified applicants to fill job openings.
- 77% of CEOs said the availability of key skills is the biggest threat to their business.
The way we view a typical “career” is changing. In the future of work, education and reskilling will be a common and continual process. Independent professionals will likely continue to provide access to in-demand skills faster than traditional, full-time employees, who must rely on themselves or their employer to re-skill.
Online freelance marketplaces became increasingly prevalent in 2017 as a popular way to find temporary work. These platforms match job opportunities with freelancers, who typically fill out a profile and apply to positions that fit their skillset. Company-specific marketplaces, such as MBO’s marketplace, are geared more towards longer-term engagements and help independent professionals grow their project pipeline by matching their skills, availability, and rate with contract opportunities.
- 20% of full-time independents said they used an online marketplace to find work in the past year and 25% said they intended to do so in the next 12 months.
- Accenture’s 2017 technology trends report predicted that in the next five years, on-demand labor platforms will emerge as a primary driver of economic growth across the world.
As organizations further the trend of flexible employment by using independent professionals to staff projects, online talent marketplaces will continue to grow and evolve. The use of blockchain technology is a growing trend to watch as well, as it may eliminate the need for third-party marketplaces altogether.
Have additional thoughts? Send us a note, or reach out on social media—we’d love to hear from you about what you’re seeing as industry trends and how you’ll be adjusting your business for 2018.