Until the 1980s, big companies in America tended to take a paternalistic attitude toward their workforce. Many corporate CEOs took pride in taking care of everyone who worked at their corporate campuses. Business leaders loved to tell stories about someone working their way up from the mailroom to a C-suite office.
But this began to change in the 1980s. Wall Street investors demanded that companies focus more on maximizing returns for shareholders. An emerging corporate orthodoxy held that a company should focus on its “core competence”—the one or two functions that truly sets it apart from other companies—while contracting out other functions to third parties.
Often, companies found they could save money this way. Big companies often pay above the market rate for routine services like cleaning offices, answering phones, staffing a cafeteria, or working on an assembly line. Putting these services out for competitive bid helped the companies get these functions completed at rock-bottom rates, while avoiding the hassle of managing employees. It also saved them from having to pay the same generous benefits they offered to higher-skilled employees.
Of course, the very things that made the new arrangement attractive for big companies made it lousy for the affected workers. Not only were companies trying to spend less money on these services, but now there were companies in the middle taking a cut. Once a job got contracted out, it was much less likely to become a first step up the corporate ladder. It’s hard to work your way up from the mailroom if the mailroom is run by a separate contracting firm.
An important question in the coming years will be whether the contracting trend continues to gain steam—or whether opponents of the practice can convince companies to knock it off. Last year, for example, California passed AB 5, legislation that makes it more difficult for companies to classify their workers as independent contractors. Other states are considering following in California’s footsteps. Labor rights advocates hope that a mix of legislation, litigation, and public education campaigns can convince companies to treat more of their workers as employees.
It won’t be easy. Contracting strategies save companies a lot of money, and at this point they’re deeply rooted inside corporate cultures. But no one knows for sure whether the future will see more and more contracting—or if we’ll see a return to the more egalitarian workplaces of the mid-20th century.
“This practice has continued to move up the skill ladder”
A 2017 New York Times story illustrated how the contracting trend has affected ordinary workers. It compared the experience of a janitor at Kodak in the early 1980s (a time when Kodak was considered a successful high-tech firm) to an Apple janitor in 2017. Janitors’ pay, adjusted for inflation, had stayed about the same over 35 years, the Times‘ Neil Irwin calculated. But almost everything else about the job had changed.
As employees, Kodak janitors enjoyed paid vacation time, tuition reimbursements, job security, and opportunities for advancement inside Kodak. Irwin profiled one woman who was able to work her way up from a janitorial job to a professional-track IT job.
By contrast, Irwin reported, Apple janitors were employees of dedicated janitorial contracting firms that bid for work cleaning Apple’s offices. These workers got none of the perks that came with being an Apple employee, no real job security, and no opportunities to move up inside the company.
Similar trends can be found in a wide range of other industries. Today, if you stay at a brand-name hotel, there’s a good chance the person who checks you in and the person who cleans your room don’t work for the company whose name is on the building. If you call about a problem with your home Internet service, you’re likely to talk to someone at a sub-contracted call center. If a broadband technician comes to visit your home, that person is probably a contractor, too.
“Many tech companies solved this problem by having the lowest-paid workers not actually be employees. They’re contracted out. We can treat them differently, because we don’t really hire them. The person who’s cleaning the bathroom is not exactly the same sort of person. Which I find sort of offensive, but it is the way it’s done.”
And it’s not just janitors, housekeepers, and call center workers. “This practice has continued to move up the skill ladder,” author and Brandeis professor David Weil told me in a late February interview. Today, even many white-collar workers find themselves working for high-profile companies as contractors, not full employees.
The contracting trend has transformed corporate America into a two-tier economic system. If you’re lucky enough to get hired as an employee of a Fortune 500 company, you can expect generous benefits, decent job security, and significant autonomy on the job. Those who don’t make the cut wind up working for one of these companies’ many subcontractors. That likely means meager benefits, precarious employment, and few opportunities for advancement.
The existence of such a two-tier workplace is especially ironic in Silicon Valley, a region that takes pride in its egalitarian ethos. Former Google CEO Eric Schmidt gave a remarkably candid assessment of the situation in 2012, in a statement quoted by author Chrystia Freeland.
“Many tech companies solved this problem by having the lowest-paid workers not actually be employees. They’re contracted out,” Schmidt said. “We can treat them differently, because we don’t really hire them. The person who’s cleaning the bathroom is not exactly the same sort of person. Which I find sort of offensive, but it is the way it’s done.”