Uber business model does not justify a new ‘independent worker’ category Report. If so, Krueger and Hall’s analysis overstates Uber work hours and understates Uber’s hourly gross pay.2. As for Lyft, in its press release regarding a court settlement in January 2016, the company noted: “Roughly 80 percent of drivers who use the Lyft. The model is very different from what you’re used to if you’re accustomed to being a salaried employee, and while it has a few drawbacks, driving for Uber also offers some unique opportunities.
Of all the legal troubles that pestered Uber recently, the one that would fundamentally threaten its business model is not the licensing fight with an occasional rebel city. Rather, it is the employment status of its drivers. Are they independent contractors each owning his or her single car business, as Uber likes to claim, or are they Uber’s employees, entitled to benefits, overtime pay, and collective bargaining? The answer to this challenge could dramatically reshape the sharing economy.
(AP Photo/Jeff Chiu, File)
Uber uses legal language in its contract with drivers to define them as “partners,” not employees. It says it is providing drivers with “business opportunities,” and it refers to itself as a “technology company” or a “platform”—not a transportation company.
But in several lawsuits, drivers are arguing that despite this guarded Uber-speak, Uber in fact behaves like an employer. Drivers are therefore entitled to benefits that the law guarantees to employees, which Uber currently does not provide. The law defines an employer as one who has “the power or right to control and direct the employee in the material details of how the work is to be performed.” Various courts have now weighed in on the question: does Uber “control and direct” its drivers?
Lower courts in California and in New York, and this week a sweeping new British court decision found that the answer is “yes.” Uber is an employer because it does have significant control over how drivers perform their work. Other federal courts held the opposite. The issue is far from settled.
At first glance, it seems that Uber has a good argument—it does not control or direct its drivers. Surely, the most attractive feature for many Uber drivers is flexibility. Drivers are free to work or not to work, whenever and wherever they want, for as many or as little days or hours, and take any number of breaks. Drivers are their own bosses. They are paid not by Uber but by customers—Uber’s sole role is to collect and distribute these payments (minus its own cut). They are free to work elsewhere, and many indeed double up for Lyft or keep their day jobs. Whereas employers typically provide workers with tools, Uber drivers use their own cars and pay for gas. In fact, it is hard to imagine many employers who would exert so little supervision and grant such autonomy to employees.
But upon closer examination, some courts have found that Uber does have meaningful control over drivers. The fares are not negotiated with riders but rather set by Uber. Drivers have to abide by Uber’s code of performance. They must not fall below the minimum average rating that Uber sets. They are required to accept rides assigned to them and drive the route the Uber app plots. Uber “recommends” micro-rules for drivers’ conduct, like what to discuss with passengers, and forbids contact with passengers after rides. When drivers deviate from the rules, Uber sends “tips” to modify their behavior—a typical feature of an employment relationship. And it banishes drivers who repeatedly violate its rules. In reality, many of the drivers are economically dependent on Uber for continued work.
It is tempting to think that drivers would be better off if classified as employees. They would be entitled to pensions, employer-provided health insurance, workers comp, and other benefits. True, they might lose the freedom they cherish to choose their work hours, but it is not clear how important such freedom is to many among them who already drive every day for long hours.
On the other hand, the added benefits for drivers-employees would come at a cost. It is likely that Uber would significantly reduce the drivers’ direct pay from rides (which is currently 70-75% of the fare), to cover the cost of the mandated benefits. For drivers who prefer cash over benefits, this trade off would be a bust.
Even if the net effect on drivers income would be positive, the overall impact might be negative because many potential drivers would be left out. An employee status for drivers would inevitably alter the composition of Uber’s workforce. As an employer, Uber would bear greater liability for harms caused by drivers, and would have to screen them more closely. Instead of a large decentralized cohort of gig workers, Uber will end up having a smaller reserve of full time drivers. The employee status would likely slow down recruitment, sorting out many part-timers—perhaps those most desperate for the added side income from ridesharing.
The most fundamental change that employee status would bring is to the trajectory of the gig economy. Like Uber, many sharing platforms create opportunities to coordinate peer-to-peer exchanges, enabling people to freelance everything—cars, homes, goods, and skills. If Uber is a transportation company that employs its drivers, is Airbnb a hotel chain? Is TaskRabbit (an app matching freelance labor with local demand) a cleaning and repair company? Is Instacart (a grocery delivery platform) a shipping company employing errand runners? Would these services survive a shift to employment status?
The brave new sharing world did a lot of good by eliminating barriers to trade. It removed protectionism and increased competition. It promoted rapid entry into previously regulated professions. It reduced prices for consumers and helped deploy assets more efficiently. But, yes, it also circumvented longstanding welfare protections that previous generations fought hard to secure for workers. The Uber litigation might succeed in restoring these protections. But it will carry a great unintended cost, squandering many of the benefits of the sharing economy.
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Of all the legal troubles that pestered Uber recently, the one that would fundamentally threaten its business model is not the licensing fight with an occasional rebel city. Rather, it is the employment status of its drivers. Are they independent contractors each owning his or her single car business, as Uber likes to claim, or are they Uber’s employees, entitled to benefits, overtime pay, and collective bargaining? The answer to this challenge could dramatically reshape the sharing economy.
n this July 15, 2015 file photo, an Uber driver sits in his car near the San Francisco International Airport.
(AP Photo/Jeff Chiu, File)
Uber uses legal language in its contract with drivers to define them as “partners,” not employees. It says it is providing drivers with “business opportunities,” and it refers to itself as a “technology company” or a “platform”—not a transportation company.
But in several lawsuits, drivers are arguing that despite this guarded Uber-speak, Uber in fact behaves like an employer. Drivers are therefore entitled to benefits that the law guarantees to employees, which Uber currently does not provide. The law defines an employer as one who has “the power or right to control and direct the employee in the material details of how the work is to be performed.” Various courts have now weighed in on the question: does Uber “control and direct” its drivers?
Lower courts in California and in New York, and this week a sweeping new British court decision found that the answer is “yes.” Uber is an employer because it does have significant control over how drivers perform their work. Other federal courts held the opposite. The issue is far from settled.
At first glance, it seems that Uber has a good argument—it does not control or direct its drivers. Surely, the most attractive feature for many Uber drivers is flexibility. Drivers are free to work or not to work, whenever and wherever they want, for as many or as little days or hours, and take any number of breaks. Drivers are their own bosses. They are paid not by Uber but by customers—Uber’s sole role is to collect and distribute these payments (minus its own cut). They are free to work elsewhere, and many indeed double up for Lyft or keep their day jobs. Whereas employers typically provide workers with tools, Uber drivers use their own cars and pay for gas. In fact, it is hard to imagine many employers who would exert so little supervision and grant such autonomy to employees.
But upon closer examination, some courts have found that Uber does have meaningful control over drivers. The fares are not negotiated with riders but rather set by Uber. Drivers have to abide by Uber’s code of performance. They must not fall below the minimum average rating that Uber sets. They are required to accept rides assigned to them and drive the route the Uber app plots. Uber “recommends” micro-rules for drivers’ conduct, like what to discuss with passengers, and forbids contact with passengers after rides. When drivers deviate from the rules, Uber sends “tips” to modify their behavior—a typical feature of an employment relationship. And it banishes drivers who repeatedly violate its rules. In reality, many of the drivers are economically dependent on Uber for continued work.
It is tempting to think that drivers would be better off if classified as employees. They would be entitled to pensions, employer-provided health insurance, workers comp, and other benefits. True, they might lose the freedom they cherish to choose their work hours, but it is not clear how important such freedom is to many among them who already drive every day for long hours.
On the other hand, the added benefits for drivers-employees would come at a cost. It is likely that Uber would significantly reduce the drivers’ direct pay from rides (which is currently 70-75% of the fare), to cover the cost of the mandated benefits. For drivers who prefer cash over benefits, this trade off would be a bust.
Even if the net effect on drivers income would be positive, the overall impact might be negative because many potential drivers would be left out. An employee status for drivers would inevitably alter the composition of Uber’s workforce. As an employer, Uber would bear greater liability for harms caused by drivers, and would have to screen them more closely. Instead of a large decentralized cohort of gig workers, Uber will end up having a smaller reserve of full time drivers. The employee status would likely slow down recruitment, sorting out many part-timers—perhaps those most desperate for the added side income from ridesharing.
The most fundamental change that employee status would bring is to the trajectory of the gig economy. Like Uber, many sharing platforms create opportunities to coordinate peer-to-peer exchanges, enabling people to freelance everything—cars, homes, goods, and skills. If Uber is a transportation company that employs its drivers, is Airbnb a hotel chain? Is TaskRabbit (an app matching freelance labor with local demand) a cleaning and repair company? Is Instacart (a grocery delivery platform) a shipping company employing errand runners? Would these services survive a shift to employment status?
The brave new sharing world did a lot of good by eliminating barriers to trade. It removed protectionism and increased competition. It promoted rapid entry into previously regulated professions. It reduced prices for consumers and helped deploy assets more efficiently. But, yes, it also circumvented longstanding welfare protections that previous generations fought hard to secure for workers. The Uber litigation might succeed in restoring these protections. But it will carry a great unintended cost, squandering many of the benefits of the sharing economy.
Uber was scandalized this week by a scoop from The Verge revealing its aggressive way of poaching drivers from rival Lyft. But the other thing that caught my eye was an ad on the side of a bus. In the ad, a black Toyota Prius spews cash, accompanied by an Uber logo and the words 'Drive & Make $5,000.'
In smaller letters, the ad clarified the money was 'guaranteed' during the first month driving for Uber, the ride-hailing app-maker that's battling with local governments, taxi cab companies, and direct competitors like Lyft in an effort to reinvent transportation. I checked out the ad's link and discovered more fine print. The offer was limited to new UberX drivers who worked at least 40 hours per week and accepted at least 90 percent of the rides requested. This works out to about $30 per hour, a little more than some roughestimates of an UberX driver's typical wage.
However Uber's guarantee ends up working out for drivers, the ad unambiguously signals how Uber is spending its billion-dollar hoard of VC cash. Uber needs drivers, and the startup isn't afraid to shell out for them, whether by paying contractors to take rides in Lyfts or promising fixed payouts to drivers even as it slashes prices for passengers. In the case of its recruiting ride-alongs, part of what the company calls Operation Slog, Uber also must bear the cost of the public relations hit it took in the eyes of those who saw the tactic as underhanded.
But the real peril to Uber isn't bad PR. It's the costs of recruiting drivers and what that says about Uber's business model compared to those of traditional software companies. More drivers don't equal more value added. They simply equal staying alive.
The Burden of the Real World
To get, keep, and expand its roster of drivers, Uber must sink money into marketing, operations, and insurance in a way that, say, Google or Facebook never had to. Such on-the-ground expenditures don't carry the obvious promise of an exponential return on investment. In tech, spending on product, R&D, and talent create what entrepreneurs and investors like to describe as asymmetrical leverage.
Take Dropbox. The file-syncing startup only needed a few hundred employees and a few data centers to hit a multi-billion-dollar valuation. Uber needs that, plus an army of drivers in cars. (Uber says its 'generating 20,000 new driver jobs every month.') Though Uber is a tech company, its product doesn't make sense without the piece that inhabits the physical world. And the physical world is notoriously inefficient.
In the brief history of online businesses, competitive advantage typically has been gained by virtualizing away the costs of the physical, or lost by failing to shed that real-world weight. Amazon used the web to eliminate the overhead of brick-and-mortar retail stores. Newspapers were weighed down by the costs of paper and ink. But Uber isn't really using tech to make something that was once physical virtual. It's simply taking an existing service—hailing and dispatching rides—and making it better by leveraging mobile tech to make it more efficient. The need for a physical operation on the ground doesn't shrink.
On the contrary, Uber's physical footprint keeps growing. On Thursday, it announced its expansion into 24 more cities, bringing the worldwide total to 205 cities in 45 countries. Uber, as the company itself says, wants to be everywhere.
'Today we are one step closer to our vision of UberEverywhere—— a bold idea that no matter where you are, a reliable ride with Uber is just 5 minutes away,' the company said in a blog post.
Bold, yes. But also unobtainable without enough drivers.
Reliability Is Everything
Uber's algorithmic effort to match driver supply to passenger demand has many moving parts. Some pieces are complex, others not so much. One of the simpler equations: more people wanting to take Uber rides means more drivers needed to give them. Yes, Uber must compete with rival services like Lyft for the limited supply of willing and able drivers—a drain on the potential talent pool that has received most of the attention recently.
But it must also simply keep pace with the demand it's generating itself. And more than any kind of criticism it receives for how it gets those drivers, falling behind in meeting that demand is the error that could end Uber.
That, at least, was the dynamic in play during another Uber PR shitstorm, when a fare spike during a New York City blizzard provoked accusations of price-gouging. At the time, Uber co-founder and CEO Travis Kalanick defended the company's 'surge pricing tactic as a necessary tool for managing supply and demand, a way to nudge the system toward equalizing the number of drivers available and passengers who want rides. The issue, Kalanick told WIRED, came down to reliability: 'If you are unreliable, customers just disappear.”
>In the brief history of online businesses, competitive advantage typically has been gained by virtualizing away the costs of the physical.
In a way, driver recruitment is that blizzard writ large. For Uber, reliability means that any users at any time in any city the company serves must be able to open the app and see they can get a ride within minutes. The more times they can't, the more likely they are to stop opening the app. Whatever the ethics of its recruitment tactics, Uber's fear of being perceived as unreliable clearly outstrips any concern it may have about being seen as underhanded.
Consider the subset of Uber customers who heard the story of how it's poaching drivers, and then the subset of that group who actually cares, and then the subset of that group upset enough not to use Uber again. Historically, moral outrage has a spotty track record as a catalyst for changing consumer behavior. Speed, convenience, and price, on the other hand, build billion-dollar empires.
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