Alternative Work Arrangements, Payout Policy, and Employment: Evidence from Independent Contractor Misclassification Statute

Abstract

Using the 2004 Massachusetts Independent Contractor Law that discourages the use of independent contractors, I find that firms adopt conservative financial policies by reducing payout since companies attempt to reduce financial risk in response to increased operating leverage. I find that the effect is more pronounced in industries with a higher proportion of independent contractors, and in firms with high financial constraints and operating leverage. I also find that the state government’s attempt to improve the mis-classified worker’s status reduces the number of employees at the firm level by 4.4%, highlighting that reclassification does not lead to an increase in the number of employees. The findings imply that heightened operating risk caused by the law may lead to risk-averse financial policies and subdued job creation at the firm level.