The Downward Pull of Contract Work on Wages

To celebrate the 75th anniversary of the Fair Labor Standards Act, we invited three Foundation grantees to address the unfinished work of the Act and the next generation of reforms to protect working families at the bottom of the labor market. What follows is one of those responses. The opinions expressed are those of the author, and are not necessarily those of the Public Welfare Foundation.

By Chris Owens

Executive Director, National Employment Law Project

Four years into the recovery, the legacy of the Great Recession persists:  a jobs deficit of more than eight million, unprecedented long-term unemployment, and wage losses across all occupations, with the greatest decline in jobs that pay the lowest wages.  Yet, as devastating as the downturn has been, its most profound impact may be the way it has cemented and intensified trends of the preceding three decades.  

Between 1979 and 2007, the economy’s share of good jobs with living wages and employer-provided benefits fell, even as the average age and education level of the workforce rose.  For the bottom fifth of wage-earners, real hourly wages grew only slightly, and all of that growth occurred between 1995 and 2000; for most of the 28-year period, wages fell for workers at the bottom.   And the share of the workforce represented by unions, at 23.3 percent in 1983, was only 12.5 percent in 2012 (with fewer than seven percent of private sector workers unionized).

Multiple factors – globalization, technology, deregulation and the erosion of labor standards – are driving these trends, but a significant cause that has received less attention is growth in contracted employment. In every sector and across all occupations, as corporations have restructured (“vertically disintegrated”) and governments have privatized, work once performed in-house has been outsourced either to contract companies providing specialized services, such as janitorial services, or to temp agencies offering everything from a small menu of services to a soup-to-nuts banquet for staffing needs.

The employees of these agencies are not misclassified as independent contractors,  a ruse embraced by unscrupulous employers in order to avoid paying workers proper wages, offering benefits and otherwise complying with labor law obligations.  In fact, the contract firm or temp agency is the direct employer, and is most likely covered by the Fair Labor Standards Act. But many of these firms and agencies are under-capitalized and sometimes squeezed by the corporate giants with whom they contract. And while they often pay more than the minimum wage, few pay living wages and many skirt the law when it comes to overtime. As a result, contracted work can be considerably less remunerative than similar positions on the payroll of the larger firm that is contracting for the work.

Contracted employment is neither new nor inherently abusive.  Many organizations realize valuable efficiencies by contracting out non-core activities, like payroll processing.  But when the principal purpose or effect of using contracted services is to shave labor costs and/or to avoid complying with workplace regulatory standards, then achieving those objectives often comes at the expense of fair pay and workplace rights of contracted workers.

In some instances, the client company retains sufficient control — directly or indirectly — over the employment conditions of contracted workers to meet the legal test for “joint employer” status. That makes the client company potentially liable for unpaid wages or other violations by the contract firm.

But as new and evolving constellations of business structures and employment relationships emerge, with multiple layers of contracting and varying forms of staffing arrangements, accountability lines have become murky. As a result, questions about which companies or agencies are causing or contributing to lousy working conditions and how to hold them responsible are much more complicated.

The situation of warehouse workers who unload and reload products for Walmart is a case in point.  Depending on the warehouse, individuals working side-by-side doing identical jobs in the same location could be employed by any of the following: Walmart ; the company that owns or manages the warehouse; the logistics company  that contracts with the warehouse manager to provide staffing; or a temp agency that supplies workers to the logistics company to meet its staffing demands.

Walmart’s level of control within the warehouses that comprise its vast distribution network is not always the same.  It directly owns and staffs many warehouses, but then contracts for other operations, exerting various types and levels of control within individual facilities.  Even where Walmart’s exercise of onsite control is not evident, its absolute dominance of the retail sector enables the company to drive a hard bargain with contractors, often leaving them with little choice but to cut wages and corners to meet the company’s demands. When this occurs, workers toiling for a direct or secondary Walmart contractor may be unaware of who actually calls the shots.

And even when Walmart (or any other corporate giant) effectively controls working conditions throughout the supply and distribution chains, the relationship between its actions and working conditions on the ground may seem too far removed for the corporation to incur liability under existing labor and employment laws.

Walmart is not an isolated example nor are the problems associated with its multi-tiered arrangements unique.  But, quantitative data on contracted employment is limited and affects our ability to understand fully these  new employer-employee relationships and develop appropriate policy solutions.

In response, NELP has launched a major initiative to document the prevalence and consequences of contracted employment and craft solutions that will promote corporate accountability for workplace wrongs and remove barriers to workers’ ability to organize for job improvements. Our review is continuing and our findings incomplete, but they confirm not only the growth of contracted work, but also its contribution to eroding job quality and rising income insecurity, especially for low wage workers.

Preliminary estimates are that at least 40 percent of workers in low wage occupations, such as janitorial and cleaning services, industrial laundries and dry cleaning, security, construction, telemarketing and trucking are contract employees. In another large occupational category that includes warehouse workers, contracted and temp employees together are estimated at more than 35 percent of all workers in the category.

With contracted work so firmly etched into America’s economic landscape, we must develop policy models that enable these workers to achieve living wages and workplace fairness.  Since the recovery began, job growth has been concentrated in low-wage sectors, and between now and the end of the decade, six of the ten jobs likely to grow the most will be low paid.

As more and more workers are consigned to low wage futures, we simply can no longer afford to ignore the causes and consequences of declining job quality.  The overriding objective of American economic and labor market policy should be to ensure that all of America’s workers will be able to provide for today and prepare for tomorrow. Strengthening laws like the FLSA to give contract workers accessible, effective remedies against wage and other workplace violations and providing an unfettered right to organize for better jobs and working conditions are important steps in advancing that objective.


The Public Welfare Foundation supports efforts to advance justice and opportunity for people in need. These efforts honor the Foundation’s core values of racial equity, economic well-being, and fundamental fairness for all. The Foundation looks for strategic points where its funds can make a significant difference and improve lives through policy and system reform that results in transformative change. For more information, visit Follow the Foundation on Twitter or on Facebook.

Christine Owens

Christine Owens is Executive Director of the National Employment Law Project, a national advocacy organization for employment rights of low-wage workers. She worked previously with the national AFL-CIO as Director of Public Policy and as a senior policy analyst specializing in workplace equity issues. She was also the founder and director of the Workers Options Resource Center, which coordinated a broad-based coalition of national and community organizations to win the federal minimum wage increase in 1996.

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