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How Domestic Outsourcing Lets Companies Avoid Worker Protections

October 29, 2026

By Andrew Elmore

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Key Takeaways
Introduction: Domestic Outsourcing, Corporate Power, and Worker Protections
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Key Takeaways

  • Domestic outsourcing is a cost-cutting strategy wherein employers contract out for workers by classifying workers as independent contractors or contract with franchisees, staffing agencies, and subcontractors for workers.
  • Federal, state, and local lawmakers need to pass comprehensive workplace regulations to reduce the incentives for businesses to use domestic outsourcing as a cost-saving strategy.
  • Policymakers should penalize firms that employ deceptive and coercive workplace practices such as misclassifying employees or treating temp workers as solely employed by staffing agencies.
  • Reforms should also enable unions and worker centers to build countervailing power in fissured workplaces to strengthen workplace standards.

Introduction: Domestic Outsourcing, Corporate Power, and Worker Protections

Since at least the 1980s, cutting labor costs to increase profitability has been a dominant competitive strategy for corporations in the United States. Key among cost-cutting strategies is domestic outsourcing: contracting out for workers by classifying workers as independent contractors, or by contracting with franchisees, staffing agencies, and subcontractors for workers.1 Contracting out can be necessary for companies to obtain services outside their core functions. But outsourcing (or, using David Weil’s term, “fissuring”2) the workplace has also enabled businesses to evade prevailing norms about treating employees fairly by creating new classes of peripheral workers.3 Domestic outsourcing has accelerated as organized labor, once a powerful countervailing force, has been shorn of its membership and political power. It has facilitated low-road workplace practices such that noncompliance with basic workplace laws is now common in many industries.4 Many businesses in these industries turn to domestic outsourcing to avoid detection for unlawful pay practices, either by misclassifying their employees as independent contractors or by paying their employees off the books.5 It has been especially harmful to low-wage workers and workers of color, who disproportionately work in fissured workplaces.6

Many scholars and government and public policy reports have detailed the harms of domestic outsourcing, including eroding labor standards, contributing to income and racial inequality, and imposing often-insurmountable barriers on outsourced workers seeking to vindicate basic rights. This can prevent outsourced workers from pressing their employers for higher wages and can induce a race to the bottom across domestically outsourced workplaces:

  • Lower wages and lost overtime premiums. Domestic outsourcing depresses outsourced workers’ pay by separating them from the lead firm’s internal wage scale.7 Economists Arindrajit Dube and Ethan Kaplan found, for example, that outsourcing imposes wage penalties of 4 to 7 percent for janitors and 8 to 24 percent for security guards.

    • Independent contractors are additionally excluded from minimum wage and overtime protections under the Fair Labor Standards Act (FLSA),8 and unlawful misclassification compounds the direct wage loss. One recent study estimates that 1 to 2 million workers are misclassified in the construction industry alone, resulting in roughly $12 billion in unpaid wages and associated tax and insurance obligations.9

    • When lost health and retirement benefits are included, domestic outsourcing can degrade labor standards even further. A recent Economic Policy Institute report estimated, for example, that a typical construction worker’s job is worth over $20,000 less per year, or nearly one-third of wages and benefits, when the worker is treated as an independent contractor instead of an employee.10

  • Loss of federal labor rights. Independent contractors are excluded from National Labor Relations Act (NLRA) protections for joining unions, collective bargaining, and concerted activity. Fissured employees cannot effectively access labor rights unless the lead firm that makes all key decisions about the work is considered a joint employer (or legally responsible for NLRA obligations and liabilities).11 Employees of subcontractors and franchisees also face the justifiable fear, unless the lead firm is a joint employer, that the lead firm will respond to unionization by terminating their subcontractor’s or franchisee’s contract. In heavily fissured sectors, such as food and drinking services and commercial cleaning, union density hovers near or below 1 percent.12

  • Exclusion from unemployment insurance and workers’ compensation, and transfer of the employer’s share of payroll taxes to workers. Independent contractors are typically exempt from workers’ compensation and unemployment insurance requirements and so are unprotected from the expenses and loss of income from workplace injuries and job loss. Temporary workers hired through staffing agencies are often unable to access unemployment insurance benefits after their work ends if the staffing agency is treated as the sole employer despite the client’s direct control over the work. Classifying workers as independent contractors also makes workers solely responsible for both the employer-equivalent and employee-equivalent portions of Social Security and Medicare taxes, which an employment relationship ordinarily divides between the employer and employee.13

  • Unfair competition against law-abiding firms and downward pressure on labor standards across industries. Shifting work off payroll by fissuring and classifying workers as independent contractors creates a competitive disadvantage for competitors that classify their workforces as employees. It also places downward pressure on labor standards in sectors where fissuring and misclassification are common.14

Laws regulating the workplace have done little to limit these harms. Businesses can easily avoid labor and employment law liabilities and obligations by exploiting their exemptions and ambiguities. Indeed, workplace laws can provide significant financial incentives to hire temporary instead of permanent employees and to misclassify employees as independent contractors through federal tax credits, subsidized small business loans, unemployment insurance taxes, and workers’ compensation premiums.

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DEFINITION

Domestic outsourcing, for the purposes of this report, means any business arrangement that permits a business to classify workers as independent contractors or use a third-party intermediary, such as a franchisee, subcontractor, or staffing agency, as the sole employer of record, in order to save on labor costs.

There is both a need and popular support for policymaking to reverse these trends. Over the past decade, racial and economic justice campaigns by unions, worker centers, and other social movement organizations have strengthened workplace standards at the state and local levels.15 Collectively, these pro-worker campaigns have generated a new moral economy, or an understanding of how the values of fairness, democratic participation, and equality should shape economic activity in the United States.16 Some of these efforts even scaled up to the federal level, seeking to broaden the definition of employment to include domestically outsourced workers. In 2015, the Obama-era National Labor Relations Board (NLRB) decided in Browning-Ferris Industries of California that multiple businesses are joint employers (and therefore legally responsible for employment obligations and liabilities) as long as they share or codetermine those matters governing the “essential terms and conditions of employment.” This is true even if one of the businesses does so indirectly or through a contract.17 The decision opened the door to making lead firms, such as fast-food franchisors like McDonald’s, jointly responsible with their franchisees for workplace-related legal obligations and liabilities. The Protecting the Right to Organize (PRO) Act, which passed in the House but not the Senate in 2020,18 would have codified the Browning-Ferris test for joint employment and established the ABC test (discussed later in this report) for federal labor law, presuming that workers are employees and not independent contractors unless the workers truly operate as separate businesses free from the key business’s control.19

Congressional gridlock and administrative rollback by the first Trump administration stymied these and other important Obama-era priorities. But the Biden administration took new, important steps to respond to these demands through administrative agencies and executive orders, such as increasing the minimum wage for federal contractors.20 The Biden-era NLRB eased the pathway for workers to access labor rights,21 and the Federal Trade Commission (FTC) used antitrust and consumer laws to target coercive and exploitative employer practices.22 The Biden administration also elevated state and local strategies to enable unions to build countervailing power. For example, the Biden administration embraced local law innovations discussed below, such as project labor agreements (covering contractors in publicly owned assets like airports) and community benefits agreements (covering developers that receive public subsidies) as federal policy. It required project labor agreements on federal public works projects, covering an estimated 200,000 construction workers. The Department of Energy changed its scoring process to give preference to applicants with a community benefits agreement.23

The second Trump administration has once again sidelined these agencies and reversed many Biden-era policies.24 But there remains substantial bipartisan support for strengthening workplace standards and protecting labor rights.25 A wide spectrum of policy experts and organizations, including the Roosevelt Institute, have proposed that the next administration take bold action to improve the quality of work.26 While the PRO Act and similar proposals are important, they are only a few among many steps needed to reign in the harmful effects of domestic outsourcing. A comprehensive plan is needed across federal, state, and local law to reduce the incentives for businesses to use domestic outsourcing as a cost-saving strategy and to enable unions and worker centers to build countervailing power in fissured workplaces to strengthen workplace standards. This plan should include the following:

1. Removing legal exemptions, ambiguities, and incentives that encourage domestic outsourcing, by:
  • Establishing presumptions across federal and state workplace laws that (1) workers are employed by the businesses that contract for their work; and (2) businesses that hire third-party intermediaries to directly control workers jointly employ those workers.

  • Holding that lead firms in low-compliance industries that hire subcontractors and franchisees to direct work for their business are jointly and severally liable with their subcontractors and franchisees for workplace violations.

  • Requiring user firms to offer the same labor standards to domestically outsourced workers as their own employees if the user firm directly controls those workers, such as workers hired through staffing agencies.
2. Penalizing deceptive and coercive workplace practices, such as misclassifying employees as independent contractors or treating temp workers as solely employed by staffing agencies, as violations of federal and state antitrust and consumer protection laws.
3. Removing the tax, loan subsidy, and insurance advantages for domestic outsourcing by:
  • Excluding third-party intermediaries like franchisees and staffing agencies from claiming subsidies and tax credits intended for independent businesses that create good jobs.

  • Encouraging state unemployment insurance and workers’ compensation programs to adopt the ABC test.
4. Enabling workers to strengthen workplace standards and build countervailing power, by:
  • Conferring a private right of action for workers in the NLRA to enforce basic federal labor rights, including the right to engage in protected, concerted workplace activities free from unlawful interference and discrimination.

  • Relaxing federal labor law preemption of state and local labor law by administratively ceding the NLRB’s primary jurisdiction over the labor relations of private-sector workplaces to those states that aggressively enforce workplace standards.

  • Amending the NLRA to include a savings clause permitting states to enforce labor rights effectively while preempting state laws that permit employers to evade labor law obligations through domestic outsourcing.

  • Construing worker participation in setting and enforcing standards as concerted activity protected by federal labor law.

  • Using US Department of Labor funding for state and local enforcement of workplace standards to prioritize (a) states with effective models for setting sectoral standards and enforcing them; and (b) unions and worker centers that help workers vindicate workplace rights in states that do not enforce their own standards and/or that block local governments from doing the same.

These recommendations encompass federal administrative and congressional action to strengthen federal standards and to encourage pro-worker state and local measures. There are, to be sure, significant barriers that must be overcome to create a durable framework for reform. The overwhelming monetary advantage of large corporations and the decline of labor unions as a countervailing force have stymied large-scale congressional action in the past.27 And after recent Supreme Court attacks on the administrative state, administrative priorities are even more vulnerable to immediate reversal.28 Meanwhile, politically conservative interest groups—aided by state partisan gerrymandering and voting restrictions, especially in the Southeast—have successfully advanced anti-worker state policies and blocked pro-worker local policymaking despite a lack of popular support for these measures.29 But these realities only underscore the need for bold federal action to extend norms of fairness in the fissured workplace in the short term, and to enable unions and worker centers to build the countervailing power necessary for long-term structural reforms.

Footnotes
  1. Arindrajit Dube, The Wage Standard: What’s Wrong in the Labor Market and How to Fix It (Penguin Random House, 2026). ↩︎
  2. David Weil, The Fissured Workplace: Why Work Became So Bad for So Many and What Can Be Done to Improve It (Harvard University Press, 2014). Weil explains that “fissured employment strategies aim to improve profitability by focusing attention and controlling the most profitable aspects of firm value while shedding the actual production of goods or provisions of services.” ↩︎
  3. Dube, The Wage Standard, 125; see also Bruce Western and Jake Rosenfeld, “Unions, Norms, and the Rise in U.S. Wage Inequality,” American Sociological Review 76, no. 4 (2011): 513, 517, https://doi.org/10.1177/0003122411414817. Western and Rosenfeld note that unions advance a “moral economy” in which “norms of equity reduce inequality in pay.” ↩︎
  4. See, for example, David Weil, “Enforcing Labour Standards in Fissured Workplaces: The U.S. Experience,” The Economic and Labour Relations Review 22, no. 2 (2011): 33, 33–35, https://doi.org/10.1177/103530461102200203. Weil identifies home healthcare, grocery stores, restaurants and hotels, residential construction, security, and retail and drug stores as fissured industries where legal noncompliance is common. ↩︎
  5. Between 10 and 30 percent of businesses misclassify at least some of their employees as independent contractors or pay them off the books. See Government Accountability Office, Employee Misclassification: Improved Coordination, Outreach, and Targeting Could Better Ensure Detection and Prevention, GAO-09–717 (Government Accountability Office, August 2009), https://gao.gov/assets/gao-09-717.pdf. ↩︎
  6. See Rebecca Smith and Claire McKenna, Temped Out: How Domestic Outsourcing of Blue-Collar Jobs Harms America’s Workers (National Employment Law Project, 2014), https://nelp.org/insights-research/temped-out-how-domestic-outsourcing-of-blue-collar-jobs-harms-americas-workers. See also David Weil, “Understanding the Present and Future of Work in the Fissured Workplace Context,” RSF: The Russell Sage Foundation Journal of the Social Sciences 5, no. 5 (2019): 147–50, https://doi.org/10.7758/RSF.2019.5.5.08. In home healthcare, a fissured industry, over half of workers are women of color. See Jocelyn Frye, “On the Frontlines at Work and at Home: The Disproportionate Economic Effects of the Coronavirus Pandemic on Women of Color,” Center for American Progress, 2020, https://americanprogress.org/article/frontlines-work-home. The Bureau of Labor Statistics reports that women and people of color disproportionately work in fissured occupations in the United States. See, for example, “Labor Force Characteristics by Race and Ethnicity, 2021,” US Bureau of Labor Statistics, January 2023, https://bls.gov/opub/reports/race-and-ethnicity/2021/home.htm, table 8 (2022, home healthcare) and “Labor Force Characteristics by Race and Ethnicity, 2023,” US Bureau of Labor Statistics, December 2024, https://bls.gov/opub/reports/race-and-ethnicity/2023/, tables 1, 2, and 8 (food processing workers, nursing assistants, transportation workers, and housekeepers). ↩︎
  7. Arindrajit Dube and Ethan Kaplan, “Does Outsourcing Reduce Wages in the Low-Wage Service Occupations? Evidence from Janitors and Guards,” Industrial and Labor Relations Review 63, no. 2 (2010): 287, 287, https://doi.org/10.1177/001979391006300206. ↩︎
  8. 29 U.S.C. §§ 206(a), 207(a)(1). ↩︎
  9. Laura Valle Gutierrez et al., “Up to 2.1 Million U.S. Construction Workers Are Illegally Misclassified or Paid Off the Books,” Century Foundation, 2023, https://tcf.org/content/report/up-to-2-1-million-u-s-construction-workers-are-illegally-misclassified-or-paid-off-the-books. ↩︎
  10. Ismael Cid-Martinez et al., Misclassifying Workers as Independent Contractors Is Costly for Workers and Social Insurance Systems (Economic Policy Institute, April 15, 2026), https://epi.org/publication/misclassifying-workers-as-independent-contractors-is-costly-for-workers-and-social-insurance-systems. ↩︎
  11. See 29 U.S.C. §§ 152(3), 157, 158(a)(1), (5); and Weil, The Fissured Workplace, 179–88. ↩︎
  12. See Weil, The Fissured Workplace, 254. ↩︎
  13. See 26 U.S.C. §§ 1401(a)–(b), 3101(a)–(b), 3111(a)–(b) (payroll taxes); 26 U.S.C. §§ 3301, 3306(c) (unemployment insurance). Whether independent contractors receive lower net income than employees for equivalent work depends on whether the worker can offset the increased Social Security and Medicare tax liability, for example, with business-expense deductions. Shu-Yi Oei & Diane M. Ring, Tax Law’s Workplace Shift, 100 B.U. L. Rev. 651, 658–66 (2020). And whether a worker loses benefits as an independent contractor depends on whether the worker additionally performs full-time work as an employee. Id. at 712-14. ↩︎
  14. Weil, “Enforcing Labour Standards,” 36–37, 41. ↩︎
  15. See Andrew Elmore, “Labor’s New Localism,” Southern California Law Review 95, no. 2 (2021): 256–57, https://southerncalifornialawreview.com/2022/05/05/labors-new-localism. ↩︎
  16. See César F. Rosado-Marzán, A Baseline of Decency: The Moral Economy of Alt-Labor (University of California Press, 2027, forthcoming). Marzán argues that worker centers have advanced a new moral economy that is more inclusive of workers who are often excluded from traditional labor and employment law protections. Also see Sanjukta Paul, “Recovering the Moral Economy Foundations of the Sherman Act,” Yale Law Journal 131 (October 2021): 175, 198–204, https://yalelawjournal.org/feature/recovering-the-moral-economy-foundations-of-the-sherman-act. Paul traces the legislative history of the Sherman Act to the moral economy of the Progressive Era’s antimonopoly movement. These law scholars build on E. P. Thompson’s influential account of the moral economy to describe a strongly held, communal understanding of fairness among economic actors, including between workers and employers, that can lead to popular resistance when those norms are breached. See E. P. Thompson, “The Moral Economy of the English Crowd in the Eighteenth Century,” Past and Present 50, no. 1 (1971): 76, 78–79, https://doi.org/10.1093/past/50.1.76. See also James Scott, The Moral Economy of the Peasant: Rebellion and Subsistence in Southeast Asia (Yale University Press, 1976). James Scott explained the anger animating early 20th-century peasant revolts in Southeast Asia as a response to violations of a moral economy grounded in norms of reciprocity and the right to subsistence. ↩︎
  17. 362 NLRB 1599, 1614 (2015). ↩︎
  18. PRO Act, S. 1306, 116th Cong. (2019). ↩︎
  19. PRO Act, S. 1306, 116th Cong. § 2(a) (2019) (amending 29 U.S.C. § 152(3)); § 2(b) (amending 29 U.S.C. § 152(2)). ↩︎
  20. Increasing the Minimum Wage for Federal Contractors, 86 Fed. Reg. 67, 224 (Nov. 24, 2021). ↩︎
  21. Lynn Rhinehart et al., “The Biden Board: How President Biden’s NLRB Appointees Are Restoring and Supporting Workers’ Rights,” Economic Policy Institute, May 1, 2024, https://epi.org/publication/bidens-nlrb-restoring-rights. ↩︎
  22. Non-Compete Clause Rule, 89 Fed. Reg. 38,342 (May 7, 2024); Sandeep Vaheesan, “A Revival of Nondomination in Antitrust Law,” George Washington Law Review 93, no. 3 (2025): 610, 644–45. ↩︎
  23. Amy Kapczynski and Joel Michaels, “Administering a Democratic Industrial Policy,” Harvard Law and Policy Review 19, no. 2 (2024): 279, 340; see Exec. Order No. 14,063, 87 Fed. Reg. 7363 (Feb. 9, 2022) (codified as 3 C.F.R. 14,063 (2023)). ↩︎
  24. In 2025 President Donald Trump fired NLRB and FTC executives without cause despite their removal protections, which was upheld by the Supreme Court in Trump v. Slaughter, 609 U.S. 422 (2026). The NLRB’s new general counsel (GC) rescinded most of the GC guidance memoranda by the Biden-era GC Jennifer Abruzzo. William B. Cowen, “Rescission of Certain General Counsel Memoranda,” GC Memorandum 25-05, Office of the General Counsel, NLRB, February 14, 2025. ↩︎
  25. Generally, there is substantial popular support for raising the minimum wage and for unions. See Megan Brenan, “Labor Union Approval Relatively Steady at 68% in U.S.,” Gallup, August 28, 2025; Leslie Davis and Hannah Hartig, “Two-Thirds of Americans Favor a $15 Federal Minimum Wage,” Pew Research Center, July 30, 2019. The Faster Labor Contracts Act (FLCA), which would ease the path for newly formed unions to secure a first collective bargaining agreement, has attracted significant bipartisan support. H.R. 5408, 119th Cong. (2026). At this writing, the FLCA passed in the House and is pending in the Senate. ↩︎
  26. See Elizabeth Wilkins et al., The Good Life Agenda (Roosevelt Institute, 2026), https://rooseveltinstitute.org/publications/the-good-life-agenda; Ben Zipperer, “Setting High Standards for a Federal Minimum Wage,” Economic Policy Institute, May 21, 2026, https://epi.org/publication/setting-high-standards-for-a-federal-minimum-wage-raising-the-wage-to-two-thirds-of-the-national-median-wage-would-lift-pay-for-nearly-40-million-workers; Oren Cass, The Once and Future Worker: A Vision for the Renewal of Work in America (Encounter Books, 2018); Oren Cass, “Worker Power, Loose Borders: Pick One,” American Compass, December 15, 2020. ↩︎
  27. See Martin Gilens, Affluence and Influence: Economic Inequality and Political Power in America (Princeton University Press, 2012), 5; Larry M. Bartels, Unequal Democracy: The Political Economy of the New Gilded Age, 2nd ed.(Princeton University Press, 2016), 133–35, 158; Kay Lehman Schlozman et al., The Unheavenly Chorus: Unequal Political Voice and the Broken Promise of American Democracy (Princeton University Press, 2012), 87–88, 322–24. Politically conservative legal groups have (with the Supreme Court’s blessing) used antidemocratic political tactics such as partisan gerrymandering that further tilt federal policymaking away from the interests of median and minority voters. See generally Jed Handelsman Shugerman, “Hardball vs. Beanball: Identifying Fundamentally Antidemocratic Tactics,” Columbia Law Review 119, no. 3 (2019): 85, 88–89, https://columbialawreview.org/content/hardball-vs-beanball-identifying-fundamentally-antidemocratic-tactics; Joseph Fishkin and David E. Pozen, “Asymmetric Constitutional Hardball,” Columbia Law Review 118, no. 3 (2018): 915. The Supreme Court greatly limited the reach of the Voting Rights Act (VRA) by finding that racial gerrymandering does not overcome the presumption of legislative good faith unless race is the predominant factor (Alexander v. South Carolina State Conference of the NAACP, 602 U.S. 1, 33 (2024)), and that a map diluting minority votes only violates the VRA if made for the specific purpose of weakening the minority group’s influence, rather than the “nonracial” factor of partisanship. Louisiana v. Callais, 146 S. Ct. 1131, 1161, judgment entered, 146 S. Ct. 1111 (2026). ↩︎
  28. See Andrew Elmore, “Recentering Labor Law,” UCLA Law Rev.  73, no. 1 (2026 forthcoming), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=7643221. ↩︎
  29. Jacob M. Grumbach, Laboratories Against Democracy: How National Parties Transformed State Politics (Princeton University Press 2022), 8–9, 10–13; Alexander Hertel-Fernandez, State Capture: How Conservative Activists, Big Businesses, and Wealthy Donors Reshaped the American States––And the Nation (Oxford University Press, 2019), 1–14, 34–55, 178–90. ↩︎

Acknowledgments

The author thanks Kate Griffith, Rajesh Nayak, Patrick Oakford, Benjamin Sachs, and Paul Sonn for their excellent feedback on a previous draft; Nikolas Lindauer and Aaron Wuchterl for research assistance; and the Roosevelt Institute for its generous support.

Suggested Citation

Elmore, Andrew. 2026. “How Domestic Outsourcing Lets Companies Avoid Worker Protections,” Roosevelt Institute, October 29.

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Andrew Elmore

Fellow, Worker Power

As a Roosevelt Institute fellow, Andrew Elmore researches policymaking tools in joint employment relationships.

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