OMG!! Uber drivers would NOT lose their flexibility if they became regular employees!
In the ongoing rhetorical and legal battle over whether sharing economy companies should treat their workers as independent contractors (known as “1099 workers”) or regular employees (known as W-2 workers), a lot of misinformation gets propagated as the company’s jockey for position.
One claim that Uber, Lyft, Instacart and other companies have made is that if their workers are treated as employees rather than contractors then the workers would lose the flexibility that many of them allegedly say is one of the attractions of the job. Forbes has echoed this line, writing that “many drivers may not realize that the flexibility they value could easily disappear with W2 status.” NYU business professor Arun Sundararajan, who has been a frequent go-to source for the media looking for an academic quote on the sharing/on-demand economy, was quoted in the New Yorker saying that if the drivers are treated as employees, “[t]hey would be able to drive more hours, but they’d have less flexibility in how they worked.”
But that’s actually not true, and one of the reddest of herrings, legally speaking, in this discussion.
Benjamin Sachs, a professor at Harvard Law School and an expert in labor law and labor relations, has a recent post clarifying this situation. In a post titled “Uber: Employee Status and Flexibility,” Sachs makes the point that “this argument gets the causal arrows backward…In fact, a finding of employee status in itself has no effect on the amount of control — or flexibility — experienced by workers.” Sachs says that even if a court were to find that Uber drivers are employees instead of contractors, “Uber would not somehow then be required to exercise additional control over when and how long the drivers worked, or over other aspects of the job that are currently flexible.”
Of course, says Sachs, Uber might choose to respond to a legal determination that its drivers are employees by imposing greater control over its workforce. It is true that if the drivers are employees, then in some states Uber would have to deal with legal requirements for rest breaks and over time, which Uber might react to by exerting more control over drivers’ schedules. But in terms of overtime, this loss of flexibility would be Uber’s choice, driven by the company wanting to pay its drivers who work overtime at straight time rather than overtime rates. This point was succinctly clarified by Carmel DeAmicis at re/code in her aptly titled article, “Despite Uber’s Arguments, Flexibility for Employees Is a Company’s Choice.” She wrote “In a business like Uber’s, where apps track when workers are logged in, it would be easy for a company to send a push notification to people after four hours of work, requiring them to take a 15 minute break, or for the app to turn off after a 40-hour workweek to prevent overtime. Monitoring drivers would be easy for a company whose algorithms have optimized pricing at all hours.”
So restricting drivers flexibility would be 100 percent Uber’s business decision, and not something that is inherent to its sharing economy model, as Uber currently claims. Writes Sachs, “Flexibility to avoid legal responsibility is not the kind of flexibility we should want.”
I have always regarded Uber’s claim that drivers would have to lose their flexibility as yet another of Uber’s excuses for maintaining its unfortunate business model (like their lame rationale for not spending another 100 bucks per driver for better background checks, including fingerprinting, even though they actually charge each fare $1 for background checks they say are “industry-leading” when in fact they have been described as “completely worthless” by San Francisco’s district attorney, and aren’t as thorough as what most taxi companies do).
The real reason these companies continue to maintain this “1099 worker” model seems completely obvious to me. If they were to hire regularly employed W-2 workers, Uber, Lyft, Instacart and all the others would have to contribute to unemployment and injured worker insurance for each driver, contribute also to Social Security and Medicare, and comply with minimum wage, safety and health and anti-discrimination laws. These startups don’t want to be bothered with any of that. Not only is it a hassle from their point of view — yes, treating workers decently can feel that way to a certain type of employer, I suppose — but even more importantly they save upwards of 30 percent on their labor costs by not having to comply with the laws for how you must treat W-2 workers.
For these companies in the current (still) early stages of their trajectory, it’s all about gaining market share over their competitors. And it’s not clear that any of these companies, Uber included, are making any money at this point. In late June it was reported that Uber had lost $470 million (though it wasn’t clear over what time period). In my conversations with representatives from some of these companies, as well as with venture capital firms that are backing these companies, it’s clear that these startups operate under tight financial margins as they spend like mad to expand and scale. So for both CEOs of startups and VC’s in startup mode, the idea of taking on obligations for W-2 employees is too much to load into their business model.
To a certain extent, one can understand why, when a firm is just beginning, it might feel that it needs a honeymoon period from all those legal obligations as they gain their legs in the race against the competition. Unfortunately, however, converting to regular employees doesn’t seem to ever fit into their strategy, until perhaps they are the “last one standing” in their digital space, as they duke it out for dominance.
And even then, well, if a company can save 30% on its labor costs by hiring all 1099s…it’s just too tempting. It’s like the “steroids of the economy,” if your competitors are all doing that, you feel you have no choice but to do it as well in order to keep up in the race. Yet if you step outside that startup mindset, it’s pretty obvious that it’s a race to the bottom.
To be sure, certain businesses have good reasons to deploy some degree of labor flexibility. They need to have an ability to ramp up and down the inputs to their business, whether material resources or workers, in response to fluctuations in demand. To some degree, that’s legitimate. But hiring a 1099 workforce so that you can lower labor costs by 30 percent by wiping out the safety net for workers? That undermines other key components that have made the US economy so successful in the post-World War II era.
Fortunately, there is a solution to this tension. We can remove the distinction between W-2 and 1099 employees when it comes to providing safety net protections by enacting Individual Security Accounts, in which businesses would pay a pro-rated amount into the ISA of each worker, whether a 1099 or W-2, depending on the number of hours worked for that company. Doing that would get beyond these worker classifications, get beyond all the legal wranglings over who’s in and who’s out. And we would remove the steroid incentive that currently exists of using contractors because the employer saves so much on labor costs, which drives a race to the bottom.
Note that requiring all businesses to pay into their workers’ ISAs would not hurt the competitiveness of any those businesses, because all employers would be subject to the same rules and therefore affected equally. And the costs for this kind of “insurance plan” could be passed on by businesses to their customers, since that is the largest pool capable of efficiently absorbing these costs. And many of the customers would benefit too, because they are the workers receiving the safety net benefits. It would be a virtuous circle in which “a rising tide floats all boats.”