Labor laws are a mismatch with the sharing economy

The recent Uber ruling has shown that U.S. labor law has remained frozen and out of touch with market realities


U.S. labor markets are being roiled by a number of unstoppable forces, including globalization, the sudden rise and fall of major corporations and even industries, and demographic changes. In addition, a wave of new Internet platforms such as Airbnb, Lyft, and TaskRabbit have lowered the cost of matching buyers and sellers, and in the process have redefined how workers can thrive in the economy. Yet despite all these changes, U.S. labor law has remained frozen for decades. The result is an increasing mismatch between the market realities facing workers and the legal requirements that govern them.

A recent finding by the California Labor Commission highlights this disconnect. The commission determined that Barbara Berwick, a San Francisco driver, was an employee of Uber rather than an independent contractor. While the decision does not set a precedent, may be reversed by courts and might be made moot by Uber making minor changes to its standard contract, this conflict nonetheless highlights the difficulty of applying antiquated laws to new and rapidly evolving industries. Current labor laws were written at a time when large companies were regarded as permanent fixtures in the economy, workers tended to stay with one employer for many years, employees had one full-time job, and many industries were heavily unionized. Those conditions no longer exist. As a result, our laws are increasingly ineffective in giving guidance to companies and protection to workers.

Whether or not a worker is an “employee” is governed by the federal Fair Labor Standards Act and specific state laws and typically involves balancing the relative importance of several criteria, many involving a large degree of uncertainty. Because of this, employers can face a great deal of uncertainty about whether workers are truly independent contractors or not, even when workers voluntarily sign an agreement identifying them as such.

But besides being vague, existing labor laws are increasingly inappropriate for today’s industries, especially Internet platforms that create significant social value by making it easier for buyers and sellers to find each other, negotiate a satisfactory contract and ensure performance. In this case, much of the value goes to the platform, thus explaining Uber’s $50 billion valuation. But much is shared with drivers (who find it much easier to work when they want and find passengers) and riders (who get quicker rides, cleaner cars, often cheaper fares and an easier booking and payment process than with traditional taxis). These platforms in particular let sellers who have assets that are not fully utilized (such as a car, their time or a bedroom) earn money by selling them. Because the barriers to entry and exit are low, sellers have the freedom to participate as much or as little as they like.

Uber’s main job is simply to match the driver with the rider. It is hard to see how that creates an employer/employee relationship. In most cases where Uber takes on an additional task, it does so only because riders and/or regulators want it to. For example, both riders and regulators are pressuring Uber to screen its drivers carefully. Regulators have required it to ensure that drivers carry adequate insurance. By setting a nonnegotiable fare and handling electronic payments itself, Uber greatly reduces the hassle associated with getting a ride, especially for customers who interact with many different drivers. By letting drivers use their own cars, Uber increases their flexibility to work when and where they want. In each case, Uber’s involvement increases the total value of the transaction.

Current labor laws impose a specific set of consequences once an employer/employee relationship exists. They lack the flexibility needed in a world where workers occupy a range between employee and independent contractor, where people doing essentially the same job can occupy different points on the line, and where specific individuals may want to occupy different points at different times, depending upon their personal needs. The consequences of the commission’s decision may not be that great, but it almost certainly reduces the total value created by Uber.

One may suspect that the decision by the commission is motivated largely by a desire to protect workers. It is not at all clear that it will do so. The immediate consequence of the decision is that Uber will have to pay Berwick $4,100 to cover vehicle mileage and tolls. But the proportion of fares that Berwick received implicitly included these costs as well as the cost of insurance. Uber’s response may very well be to reduce the percentage of fares that drivers receive. Uber may also decide to limit its platform to drivers who are willing to work full time. This would reduce the supply of drivers and foreclose a valuable option to at least some drivers. Current law fails to acknowledge that the combination of flexibility, lower overhead and individual circumstances often makes the lack of a formal relationship better for both the company and the worker. If both parties truly value the looser arrangement of an independent contractor, why should the government try to force them back into the outdated employer-employee relationship?

Uber is a large company and probably has a lot more negotiating power than individual drivers. But drivers have many alternatives. They can work for one of Uber’s competitors, including Lyft or taxi companies. They can drive delivery trucks or rent a limousine. They can also choose a career that does not involve driving. Presumably most of them use Uber because the combination of income, convenience and freedom offers them the best opportunity for a good life. Regulators should be extremely reluctant to interfere with that relationship merely because a few drivers or riders think they should get a better deal.

Instead, government’s role should be to work with private groups like the Freelancers Union to protect workers who make much of their living using platforms like Uber by ensuring that they have easy access to the things that employers often provide, such as low-cost, no-frills programs for health care, savings accounts and job training. These government platforms, like many of their private counterparts, should be available to individuals regardless of their employment relationship with any company. Creating programs like these that support valuable new industries is certainly more important than trying to impose an obsolete model on a dynamic market.

Joe Kennedy is a senior fellow at the Information Technology & Innovation Foundation and the former chief economist at the U.S. Department of Commerce.


Copyright © 2015 IDG Communications, Inc.

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