When, in August 2020, the SEC adopted a new requirement to discuss human capital as part of an overhaul of Reg S-K, the SEC applied a "principles-based" approach, limiting the requirement to a "description of the registrant's human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business (such as, depending on the nature of the registrant's business and workforce, measures or objectives that address the development, attraction and retention of personnel)." At the time, SEC Commissioner Allison Herren Lee argued for a more balanced approach that would have included some prescriptive line-item disclosure requirements and provided more certainty in eliciting the type of disclosure that investors were seeking. (See this PubCo post.) Subsequent reporting has suggested that companies "capitalized on the fact that the new rule does not call for specific metrics," as "[r]elatively few issuers provided meaningful numbers about their human capital, even when they had those numbers at hand." (See this PubCo post.) Accordingly, Corp Fin is reportedly working on a proposal to enhance company disclosures regarding human capital management. Now, Senators Sherrod Brown and Mark Warner, the Chair and a member, respectively, of the Senate Committee on Banking, Housing, and Urban Affairs, have written a letter to SEC Chair Gary Gensler, calling on the SEC to include in its proposal a requirement that companies report about-not just employees-but also the number of workers who are not classified as full-time employees, including independent contractors. It may be a topic to keep in mind as companies prepare the disclosures for this proxy season.
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The Gig Economy Data Hub, from the Aspen Institute and Cornell, estimates that over 25% of workers participate in the gig economy in some capacity. Online surveys cited by the Hub "indicate between 25 and 35 percent of workers had engaged in non-standard or gig work on a supplementary or primary basis in the preceding month." According to this data from Fortunly, 36% of U.S. workers participate in the gig economy, either through their primary or secondary jobs, and a study projected that, by 2023, 52% of the U.S. workforce will either be gig economy workers or have worked independently at some point in their careers. The article also reports that gig workers earn, on average, about 58% less than full-time employees, and 54% of gig workers don't have access to employer-provided benefits.
As discussed in the letter, Brown and Warner appreciate the SEC's renewed efforts to enhance requirements for human capital disclosure-how companies treat people-which they view to be the most critical asset of any company. Certainly, they acknowledge, investors need consistent, comparable and decision-useful disclosures, as Gensler has previously remarked, including "quantifiable and comparable datasets, such as metrics on turnover, skills and development training, compensation, benefits, workforce demographic, and health and safety."
However, they contend, that "picture would be wholly incomplete.if companies are not required to disclose information about the number of independent contractors they use on a regular basis and the entire workforce that is material to their business strategy." In recent years, they say, companies have contracted out-through subcontracting, on-demand work, or other forms of independent contractor labor-substantial work that previously was performed in-house. This trend, they suggest, may result in lower short-term costs for the company, but "come at the expense of workers, who receive fewer benefits, lower wages, and have less upward mobility within the organization." Examples they cite of subcontracted or independent contractor workers that they believe "should be considered part of the material workforce include security personnel, janitors, food service workers, housekeepers for hotels and lodging real estate investment trusts (REIT), and custodial workers."
According to Brown and Warner, the tension between cost savings and investment in workers "is one of the defining tensions that has emerged as companies have prioritized short-term profits at the expense of investments in their workforce and long-term productivity. As you know, these decisions have material effects on a business' financial performance."
As discussed in this article from MarketWatch, gig work and subcontracted work has become an increasing part of the economy, but these workers do not have the typical safety net that employees usually have-they usually do not qualify for healthcare, worker's compensation and other employee benefits. According to the article, "[g]ig workers are just the latest, and in some ways most high-profile, example of a long-term trend toward contingent work that includes the franchise and subcontractor model, which allow companies to push responsibilities and costs typically placed on companies onto the employees instead." A spokeswoman for Warner cited in the article said that Warner "is 'generally concerned about companies' increased use of subcontracted and contingent workers for work that used to be performed by direct employees.' She added that this has led to 'fissured workplaces'- a term for what happens when primary employers outsource 'non-core' functions to other companies but still largely control the work of those subcontractors."
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In this article from State Street Global Advisors on Human Capital Management and Diversity Disclosures and Practices, the authors observe that a "key dimension of a human capital management strategy is the composition and scale of the workforce. Not enough companies are disclosing the total number of workers at their firm, especially broken down by full-time, part-time, and contingent labor." In addition, they suggest, the "composition and structure of a company's workforce can also create and exacerbate risks. Without transparent disclosures, these risks are obscured to investors." Notably, they contend that "'gig economy' platforms and other employers that opt for a fissured workforce model might be obscuring real human capital risks and opportunities that ought to be managed more closely. We encourage companies to offer more transparent disclosure about all the people in their workforce, and consider how their business models might create risks related to workers."
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