California recently passed a law that tries to assign employee status to workers in what has become known as the gig economy. The law begs the question, once again, of what an employee is and is entitled to given the uncharted role of labor in new business models.
Until now, these workers have had the status of contractors, not employees, and thus are not entitled to any of the benefits of being an employee, such as receiving overtime or unemployment pay or even the minimum hourly wage. They are also not bound by the constraints of employment, such as having their time scheduled or their work assigned.
Those that hire these contractors—most prominently the ride sharing companies Uber and Lyft—have argued that they accommodate people who want to work in their spare time and pick up some extra money, that the business model is based on allowing an individual to monetize idle assets, such as a personal vehicle or even just personal time, and that the company does not hire individuals so much as it provides access to a market where they can sell their services.
Ride sharing has become hugely popular in areas with the population density to support it. It has disrupted the monopoly held by taxicabs not only by underpricing them but also by being so much more available and convenient to use.
Ride sharing apps allow riders to find available drivers nearby. Drivers are rated not by government inspectors but by the wisdom—and ranking—of their riders. Passengers can get information on these ratings, including cleanliness, politeness, and safety, before accepting a ride. This gives drivers an incentive to keep their vehicles clean, be polite, and drive efficiently.
A great competitive advantage of the business model is not just that it creates convenience in matching up riders and drivers, but also that it eliminates fare uncertainty. Riders know the fee for the ride before they get into the car. The fare is based on distance and the expected time of the trip, not the actual time, so there’s no meter running: whether you are moving or stuck in traffic, the fare will be the same.
That is great for riders, and eliminates the problem of drivers taking the “scenic route” when the rider is from out of town. It gives drivers incentive to finish the ride as efficiently as possible, using their local expertise to avoid traffic or construction, for example.
But circumstances are often beyond a driver’s control, so in areas where volume makes traffic likely to snarl unpredictably or accidents to happen—the very areas where population density makes the service so attractive—drivers’ hourly compensation can be quickly eaten away. The certainty of fares attracts customers, but it is the drivers who pay for that.
The company’s profit comes from a service fee, which is a percentage of the fare. That service fee pays for the algorithm, platform, and infrastructure that allow the customers and drivers to find each other. And, the fewer fares generated, because of traffic, say, the fewer fees and less profit the company makes as well, so, arguably, it does share the cost of that fixed fare that consumers love.
But all traffic is local, while the company is not: it has scale and thus diversification. It has millions of service fees from millions of fares from millions of drivers in thousands of places, and that diversification can minimize its losses. In contrast, a driver can only drive one car at one time and be in one place at once, and so remains exposed to the risks of road conditions and traffic.
And so, the argument goes, the company owes them a bit of protection from the slings and arrows of random road misfortune. It owes them the status of “employees” and thus a guarantee that their hours of labor will not come to nearly naught or at least not end up short of minimum wage, despite an accident up ahead, a freeway that becomes a parking lot, or even just bad weather.
Gig “employers” will fight this, of course, because their business model depends on it. It’s not just about being less profitable, which they could afford to be. It’s about being able to use labor without having to be an employer, and without the cost or responsibility of a workforce. They are proposing a different deal—one which may eventually be the way we work—and it will take a while to come to terms.