Navigating the Uber Economy

One of the most controversial issues in labor and employment law concerns how workers should be categorized in “on-demand” businesses that rely more on smartphone applications and internet connections than hierarchical supervision within traditional brick-and-mortar workplaces. For example, former drivers for ride-sharing companies Uber and Lyft have brought lawsuits alleging that they were improperly classified as independent contractors and denied employment benefits. The companies have countered that they do not employ drivers and instead license access to a platform that matches those who need rides with nearby available drivers.

At stake are the prospects, not only for Uber and Lyft, but for a nascent, multi-billion dollar “on-demand” economy that relies upon independent contractors to offer goods and services as varied as home cleaning, software development, household errands, personal training, and apartment or home rentals. Employees cost more than independent contractors, because businesses are responsible for, among other things, payroll taxes, worker’s compensation insurance, health care, minimum wage, overtime, and the reimbursement of business-related expenses.[1] If saddled with those costs, the on-demand business model probably could not survive, at least not in its current form. At the same time, the importance of adequate protections for workers does not diminish, simply because workers’ tasks are coordinated through a high-technology platform.

Unfortunately, existing laws fail to provide adequate guidance regarding the distinction between independent contractors and employees, especially when applied to the hybrid working arrangements characteristic of a modern economy. Under the Fair Labor Standards Act (FLSA) and analogous state laws, courts consider several factors to assess the “economic reality” of a worker’s alleged employment status; yet, there is no objective basis for prioritizing those factors. As one court observed recently, deciding whether an on-demand driver is an independent contractor or an employee under current law is like being “handed a square peg and asked to choose between two round holes.”[2]

We argue that the classification of workers as independent contractors or employees should be shaped by an overarching inquiry: how much flexibility does the individual have in the working relationship? Those who can choose the time, place and manner of the work they perform are more independent than those who must accommodate themselves to a business owner’s schedule. Our approach is novel and would provide an objective basis for adjudicating classification disputes, especially those that arise in the context of the on-demand economy. By reducing legal uncertainty, we would ensure both that workers receive appropriate protections under existing law and that businesses are able to innovate without fear of unknown liabilities.[3]

Other scholars have recommended more far-reaching changes to the classification of workers.[4] However, in light of the politically polarized debate surrounding employment and labor law issues in general,[5] and Uber in particular,[6] a significant advantage of the approach we recommend is that its implementation would not require new legislation. Indeed, because worker flexibility clarifies the economic reality of labor arrangements in the on-demand economy, courts should already be obligated to consider it.

Aside from its congruence with existing law, the flexibility test we propose has three significant policy advantages. First, and appropriate for a standard designed for the benefit of workers, it tracks the expressed preferences of workers themselves: “Studies suggest that flexibility—no supervisors to answer to, working when you want rather than when the boss wants—is an important part of what attracts workers to companies like Uber.”[7] Many employees are now demanding “[f]lexibile schedules,” a “more supportive environment,” and “transparency” on the part of their employers. This new workplace looks nothing like the employment model of previous generations.[8] Often, on demand companies advertise flexibility as a benefit for their workers.

Second, at least in our view, a focus on flexibility comports with intuitive judgments about fairness. On the one hand, is a worker who performs tasks on an occasional basis, when and if he chooses to do so, really an employee and entitled to the full panoply of benefits under federal, state, and local law? On the other hand, is a worker who provides full-time services an independent contractor simply because the company formally acts as an intermediary between the worker and a client while taking care not to exercise too much control over the work provided? In both cases, we submit that the answer should almost certainly be “no.”

Third, because flexibility may vary greatly from company to company, and even for workers who operate within a single company, our approach offers a nuanced basis for analysis and avoids sweeping all workers in the on-demand economy into one category or the other.[9] That is, although flexibility is the hallmark of the on-demand economy, it is important to analyze who benefits from the flexibility. Those who work in the on-demand economy, and who may be characterized as independent contractors, may nevertheless function as employees if they lack the flexibility to set their own schedules. Workers who must show up for work when the employer directs them to do so are not, in an important sense, independent. In most cases, on-demand businesses will allege that their workers do have significant flexibility, but courts can and should go beyond broad-brush generalizations to ensure that actual practice matches aspirational goals.[10]

Our recommended approach is intended to be practical. We do not indulge in generalizations regarding the overall status of workers in the on-demand economy, both because we believe the inquiry is premature,[11] and because the law requires that each case be decided on its own merits. However, it may be that clarifying existing law will not be sufficient to protect workers in a changing economy in which the distance-bridging possibilities of technology are reducing the role of the firm and of traditional employment.[12] Perhaps laws that regulate at-will employment will need to be rethought in light of technological innovations that provide greater flexibility for those who are able to capture technology’s economic potential but threaten to leave vulnerable workers with even less control over their own schedules and lives.[13] The worker-flexibility framework we recommend provides a basis for evaluating the implications of changes in the structure of the labor market and, if necessary, for designing new protections to meet new challenges.

ENDNOTES

[1] The Department of Labor reports that the costs of employee benefits in addition to salary amounts to approximately 30% of total compensation. See Press Release, U.S. Dep’t of Labor, Bureau of Labor Statistics, Employer Costs for Employee Compensation (No. USDL-15-1132) (June 10, 2015), http://www.bls.gov/news.release/ecec.htm.

[2] Cotter v. Lyft, Inc., No. 13-cv-04065-VC, slip op. at 19 (N.D. Cal. Mar. 11, 2015).

[3] As one scholar summarizes Uber’s innovations, “Uber is sparking two major transformations of the car-hire sector. First, it is eliminating various transaction costs that have plagued the sector, particularly search costs, thereby creating something akin to a free market for car-hire services. Second, it is encouraging vertical and horizontal integration of the sector, which is highly fragmented in many cities.” Brishen Rogers, The Social Costs of Uber, 82 U. Chi. L. Rev. Dialogue 85, 86 (2015).

[4] See Matthew T. Bodie, Participation as Theory of Employment, 89 Notre Dame L. Rev. 661 (2013); Jeffrey M. Hirsch, Employee or Entrepreneur?, 68 Wash. & Lee L. Rev. 353 (2011).

[5] See Cynthia L. Estlund, The Ossification of American Labor Law, 102 Colum. L. Rev. 1527, 1530 (2002) (observing, with respect to labor law, that “a longstanding political impasse at the national level has blocked any major congressional revision”).

[6] The classification of workers has been characterized, perhaps caricatured, as a clash of free-market principles and worker protections. The issue has even become part of the presidential race. See, e.g., Michael Barbaro & Ashley Parker, Uber’s Much More Than Just a Ride Service in This Presidential Race, N.Y. Times, July 17, 2015, at A18.

[7] James Surowiecki, Gigs with Benefits, New Yorker, July 6 & 13, 2015, at 31.

[8] See Jeanne Sahadi, How Companies are Changing Old Ways to Attract Young Workers, CNN Money (July 23, 2015).

[9] The flexibility test is, itself, flexible. Obviously, a one-size-fits-all answer would provide greater certainty, but it would do so at the expense of careful assessment of the nature of each working relationship.

[10] As we discuss in the article upon which this blog post is based, formal freedom may mask hidden constraint. For example, if a driver enters into a vehicle lease arrangement with a company that requires the driver to work several hours a day simply to meet the lease obligation, one might argue that the terms of the economic arrangement in effect dictate a schedule.

[11] According to one line of argument, the on-demand economy promises to reduce wealth inequality by allowing more people to turn their consumption goods into capital goods—a car can be turned profitable by giving rides; an apartment can be rented. See Tim Worstall, Uber Reduces Capital Concentration and Increases the Number of Capitalists, Forbes (Aug. 2, 2015, 6:09 AM), http://www.forbes.com/sites/timworstall/2015/08/02/uber-reduces-capital-concentration-and-increases-the-number-of-capitalists/. Others deny that the technology makes any substantial difference. See Susie Cagle, There’s No Such Thing as “The Gig Economy, Pacific Standard, July 28, 2015, http://www.psmag.com/business-economics/your-gig-economy-is-some-kind-of-marketing-wizardry.

[12] See generally Bodie, supra.

[13] Trebor Scholz & Frank Pasquale, Serfing the Web: On-Demand Workers Deserve a Seat at the Table, Nation, July 16, 2015, available at http://www.thenation.com/article/serfing-the-web-on-demand-workers-deserve-a-place-at-the-table/.

The preceding post comes to us from Benjamin Means, Associate Professor of Law at the University of South Carolina School of Law, and Joseph Seiner, Professor of Law at the University of South Carolina School of Law.  The post is based on their essay entitled “Navigating the Uber Economy,” which is forthcoming in Volume 49 of the U.C. Davis Law Review and available here.

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