May 10, 2023
State-level Costs of the PRO Act: Update
- The recently reintroduced Protecting the Right to Organize (PRO) Act (H.R. 20) seeks to strengthen labor unions through provisions that include repealing right-to-work laws, reclassifying independent contractors, and broadening the joint-employer standard.
- Many of the provisions ignore stated worker preferences and would likely harm the labor market by limiting worker freedom and increasing costs to small businesses, franchisees, and entrepreneurs.
- This state-by-state analysis of these provisions, updating previous American Action Forum Research, indicates that the right-to-work states that would be most harmed through increased employment costs and risk of gross domestic product loss by the PRO Act are Alabama, Florida, Georgia, Nebraska, North Carolina, South Carolina, Texas, Virginia, and Wyoming.
The Protecting the Right to Organize (PRO) Act (H.R. 20) is sweeping legislation that seeks to strengthen labor unions by increasing their collective bargaining power. The PRO Act would, among other things, repeal all right-to-work (RTW) laws, narrow the classification criteria for independent contractors (ICs), and broaden the joint-employer standard. Though intended as pro-worker legislation, many of the bill’s provisions do not align with most workers’ stated preferences, would likely limit worker freedoms, and put upward pressure on costs to employers, freelancers, and entrepreneurs.
Previous American Action Forum (AAF) research estimated the economic costs of the noted PRO Act provisions to the nation as a whole. As these impacts are unlikely to be evenly distributed across states, however, this analysis attempts to quantify how they would affect each state. This update to previous AAF research finds the right-to-work states that would be most negatively affected by the PRO Act are Alabama, Florida, Georgia, Nebraska, North Carolina, South Carolina, Texas, Virginia, and Wyoming. These states would see the greatest rise in employment costs and risk of reduced gross domestic product.
Right-to-work and the PRO Act
RTW laws, found in 26 states nationwide, prevent union membership from being a condition of employment and make compulsory union dues illegal. Research suggests that RTW states generally enjoy higher levels of employment, greater state investment, and enhanced productivity. Repealing every state’s RTW law, as the PRO Act would do, would therefore carry significant economic costs.
Right-to-work and Employment
The benefits of RTW laws on employment apply not just to specific industries but state economies broadly. According to a 2018 report from NERA Economic Consulting, states with RTW laws witnessed 27 percent employment growth from 2001–2016 compared to 15 percent growth in non-RTW states. Looking at year-to-year changes in employment, RTW states outpaced non-RTW states in employment growth. From March 2022–2023, for example, RTW states averaged 2.5 percent employment growth, whereas non-RTW states hovered around 2.1 percent growth.
Unemployment rates are consistently lower in states with RTW laws, too. NERA Economic Consulting also found that the annual unemployment rate in RTW states was 0.4 percentage points lower than in non-RTW states. Currently, the average unemployment rate for RTW states is 3.1 percent, compared to 3.5 percent in non-RTW states.
Right-to-work and Investment
RTW states benefit from higher employment relative to non-RTW states in part due to the preference of businesses to invest in and relocate to RTW states. Data suggest that RTW states have preferable business environments. Between 2009–2021, California, closely followed by New York, saw the greatest loss in the number of corporate headquarters. The states that gained the most corporate headquarters over the same period were Arizona, Florida, Massachusetts, and Texas, three of which are RTW states.
Businesses also openly testify on the importance of RTW status for determining their location. In a 2017 survey of 500 CEOs, over half indicated a preference for locating in states with RTW laws.
In addition to economic benefits, RTW laws provide workers with greater freedom of choice regarding employment and representation.
Workers value free choice. A 2018 paper by economist Christos Makridis found, for example, that RTW laws are associated with improvements in employee well-being, workplace conditions, and culture. In addition, survey data find that voters support the protections that RTW legislation provides, with 70 percent reporting concern that the PRO Act would abolish RTW and force workers to pay union dues.
Independent Workers and the PRO Act
The PRO Act would narrow the definition of ICs in the National Labor Relations Act, resulting in the reclassification of many independent workers as traditional W-2 employees. States with high concentrations of independent contractors would be disproportionately affected.
The independent workforce has been steadily growing and could include as many as 73.3 million workers (up to 46.2 percent of the labor force) in the United States. Of these workers, only 9 percent report preferring traditional employee status over their IC role. Many ICs cite higher wages and the flexibility that independent work provides as motivation to participate in independent work. Reclassifying ICs as traditional W-2 employees would erase these benefits and put upward cost pressures on employers, particularly in California, Florida, Georgia, Illinois, New York, Pennsylvania, and Texas (see appendix for all states).
Benefits of Independent Work
Independent work allows individuals to supplement existing sources of income or accumulate multiple sources of income to cushion against economic instability. 12 percent of the workforce reported turning to some form of independent work during the pandemic, for example. Of those, 75 percent reported doing so for financial stability. What’s more, approximately 44 percent of freelancers say that they make more money from gigs than they would as traditional W-2 employees. This includes full-time independent workers who earn, on average, $69,000 per year from gig work alone.
Another benefit of independent work is the flexibility it affords workers. When surveyed about the motivation to freelance, approximately 73 percent of independent workers report wanting a flexible schedule as a driving factor for their participation in the gig economy.
Beyond impacting workers’ incomes and flexibility, the PRO Act’s reclassification of independent contractors as traditional workers would put upward pressure on employers’ costs. To calculate the costs of reclassification, this study used data from the Chamber of Commerce to estimate the number of independent contractors by state. The original data reports the IC workforce of 2016, which is about 220 percent smaller than the current IC workforce. Ideally, this research would have access to more recent data that breaks down the IC workforce by state. As such data is not available, this research bases all calculations off the 2016 data by assuming that the distribution of independent workers across states is similar to the conditions of 2016 and therefore that the IC population in each state grew by 220 percent between 2016–2023. Table 1 reports the approximate number of independent workers per state proportional to 2016.
The latest regional Employer Costs for Employee Compensation data for legally required benefits of traditional W-2 employees were used to identify the increase in employer costs due to reclassification (see regional benefit costs in appendix). This analysis does not estimate the effects of alternative cost-saving measures, such as layoffs or increasing consumer prices, that employers could take to counteract cost increases. In addition to the 15–50 percent of ICs likely to be impacted, the reclassification would also interrupt small business operations.[i] This analysis indicates that RTW states facing the greatest costs from reclassification are Florida, Georgia, North Carolina, Texas, and Virginia (see Table 1). Nationally, the total cost amounts to $18 billion at the 15 percent reclassification level and $61 billion at the 50 percent reclassification level.
Table 1: Estimated State-level Reclassification Costs
|RTW States||Est. Number of Independent Workers||Est. Cost of Reclassification ($) – 15% of workers||Est. Cost of Reclassification ($) – 50% of workers|
Joint-employer and the PRO Act
The PRO Act would also significantly affect how business is conducted by broadening the joint-employer standard. Under the broader definition, a business entity could be classified as a joint employer if it “possesses the authority to control or exercises the power to control particular employees’ essential terms and conditions of employment.” This would be a change from the previous standard specifying that the employer must also exercise that power to fulfill joint-employment status. If classified as a joint employer, an entity may be responsible for participating in union negotiations and responding to unfair labor practice claims. They would likely also be subject to accretion, the addition of employees to existing bargaining unions without an election. (See additional information about the joint-employer rule here.)
A broadened joint-employer standard would likely disincentivize franchising significantly. Under the current joint employer standard, franchisors are not considered employers of the franchisees, but the broadened definition would likely cause franchisors to be labeled as joint employers because of the brand-specific rules and procedures that they impose on franchises. Though this oversight is often beneficial for the franchisee when starting a business, it will likely be seen as possession of authority to control terms and conditions of employment, therefore subjecting the franchisor to the responsibilities of a joint employer. Such reclassification would significantly disincentivize the franchise business model. Research surrounding the broadened standard finds that it would cost franchises $33.3 billion a year, lead to the loss of over 350,000 jobs, and increase lawsuits by 93 percent. In addition, recent AAF research estimated that if the PRO Act were to pass, between $20–$38.7 billion of U.S. gross domestic product would be at risk.
The potential change to the joint-employer standard would impact states differently based on the prevalence of franchising across states. RTW states that could experience significant consequences from a broadened standard include Alabama, Georgia, Nebraska, South Carolina, and Wyoming. (See Table 2.) Among all RTW states, franchise employment represents at least 5.4 percent of total employment and nearly 4.5 million workers.
Table 2: State-level Franchise Employment
|RTW States||Franchise Employment||Percent Franchise Employees|
The PRO Act would increase unions’ collective bargaining negotiation power at the expense of worker freedom and higher costs for small businesses and entrepreneurs. The state-level effects would vary, but the costs of repealing RTW laws, IC reclassification, and broadening the joint-employer standard as estimated in this research indicate those states that will face the greatest challenges under the PRO Act are Alabama, Florida, Georgia, Nebraska, North Carolina, South Carolina, Texas, Virginia, and Wyoming.
|State||RTW||Number of Independent Workers||Cost of Reclassification ($) – 50% of Workers||Franchise Employment|
Cost of Legally Required Benefits by Region
|Region||States||Cost of Legally Required Benefits ($/hour)|
|Middle Atlantic||New Jersey
|East South Central||Alabama
|West South Central||Arkansas
|Midwest||East North Central||Illinois
|West North Central||Iowa