Two U.S. District Court judges in California dropped ominous rulings for Uber and Lyft this week, clearing the way to a jury trial on the question of whether their drivers are independent contractors or bona fide employees.
The app-enabled car services want to be able to continue treating their drivers like independent contractors, which saves them lots of payroll-related costs. But the plaintiffs say they’re pretty much required to act like employees -- and should be entitled to all the benefits and protections that come with it.
What the juries eventually decide could have massive implications for the “Uber for X” business model, which is based on the use of independent contractors. But could these cases destroy it, as some have fretted? Not necessarily.
If the juries decide that Uber and Lyft exert too much control over their drivers for them to be actual independent contractors, then the companies will face a choice. Either they relinquish that control, by relaxing requirements about the types of cars drivers can use or how they solicit business. Or they maintain that level of control and treat their drivers like employees.
Both routes have downsides for the companies. Giving up control over things like the technology drivers have to use and the manner they have to project makes it very difficult to maintain the same level of service, which the firms market as a differentiator — lots of people prefer Uber because of the “classy ride” they’re selling. So that’s probably not a viable option.
Maintaining control, through making drivers into employees, comes with the cost of workers compensation, payroll taxes, health care, social security taxes, unemployment insurance and liability for labor law violations. According to employment law attorney Richard Reibstein, that adds an extra 30 percent on average in costs on top of wages.
So, consider Uber. The company takes 20 percent of its drivers' fares; the drivers keep the rest. Adding in the cost of benefits could hurt the company's profits, but Uber might not let that happen. Instead, it could then do a few things: Either reduce the driver’s cut, pay them some of what used to be their salary in taxes and benefits, and net slightly less from the transaction. Or, it could find some other way to cut costs and increase prices to maintain its margins. Or something in between.
(This is separate from the battle over whether Uber and Lyft cars should have to be licensed and insured to the same degree as regulated cabs, which could add additional costs.)
Now, if you’re a driver, you might think: Less pay for benefits that I might not even use until I’m old or injured or unemployed? That doesn’t sound very good! But consider that the perks of employment extend beyond the things that cost an employer money day-to-day: There’s also the ability to sue them if something goes wrong, and the ability to join a union with other drivers to press for better pay and benefits.
The point is, it’s possible for Uber to treat drivers as employees — they’d just have to adjust how they divvy up the money. That could dull the prospect of astronomical profits down the road, which are driving Uber’s eye-popping valuations, and it would just become a normal company with modest profits.
One more thing that’s interesting about the pair of judges' rulings that came down on Wednesday: They’re not sure that Uber and Lyft drivers absolutely should qualify as employees. In fact, the judge who heard the Lyft case thought that neither employment category really fit that well, writing that the jury “will be handed a square peg and asked to choose between two round holes.”
So, should there be something in between?
Over the years, some scholars have suggested the creation of a “dependent contractor” category, which would extend some protections to this quasi-contingent workforce, but not increase costs quite as much for employers. That status exists in Germany and Canada and grants a broader range of contractor types the right to join a union.
The danger there, of course, is that it just makes it easier for businesses that currently employ workers to sever that employment tie just enough to force them into the dependent contractor role, even if they couldn’t make them independent contractors outright. That’s why some worker advocates are leery of the idea.
“I think the first step is to enforce the broad definition of employment that’s in our current existing law,” says Rebecca Smith, deputy director of the National Employment Law Project. NELP has been kicking around another approach: regulating Uber-like platforms as labor brokers, which have existed for a long time to round up workers for businesses that need stuff done.
After all, the fundamental concept behind Uber isn’t new. Intermediaries have furnished workers to their employers for centuries. There were widespread abuses in that system in the early 1900s, which led them to be regulated, mitigating the wage theft and unpredictability that made life so hard for workers. (It also encouraged the formation of unions that engage in multiemployer bargaining, like the dockworkers, who are now among the most powerful unions standing.)
The temp staffing agencies that evolved from that regime morphed themselves enough to evade regulations in the 1960s, as the National Employment Law Project explained in a report last year. Some states, like Illinois, have caught back up, passing laws that protect day laborers. Still, they have a long way to go to prevent the kind of exploitation of temp workers that large companies use to keep labor costs low.
The next generation of regulation for companies that fall into the “sharing economy” bucket might require some tweaks, but really it’s not fundamentally different from what we’ve seen before.