Uber and Lyft are mounting a full court press to convince policymakers in California that their drivers should be classified as independent contractors and not employees. Uber’s chief executive and Lyft’s founders claim that the designation is critical for the companies. They recently argued “we can make independent work better if we update century-old employment laws.” In other words, don’t change our business model, just change the law.
As the former head of the federal agency that enforces some of those laws (which are nowhere near a century old), I understand the complexity of this issue. There are certainly companies whose workers operate in the gray area between employees and contractors. In those cases, workers in some ways act like employees (e.g. because their activities are supervised in part by the company and they are closely integrated into the company’s operations), but in other ways they act like contractors (e.g. because they determine the way they deliver that service, set their prices and face entrepreneurial risk).
Uber and Lyft are not among those close, gray area cases. Their status as employers is really quite clear. And though that designation would reduce their profits, it wouldn’t be a threat to their existence.
Let’s start with the basic question of what these companies are delivering and how they are doing it. Uber and Lyft argue they are technology platforms that connect customers needing transit from point A to B with drivers who operate as independent contractors.
If you provide a service whose corporate name is so dominant and pervasive that it has become a verb, it suggests you have created a very strong brand. Until Uber and Lyft, most of us followed the same advice we gave our children: “Don’t get into cars with strangers.” People jump into a car with a “U” on it because they view it as part of a larger company they trust. Why would our capital markets value a digital-enabler of hitchhiking at $75 billion (Uber) or $25 billion (Lyft)? Those values reflect investments in a brand and a belief that those companies can deliver on it.
If you provide a service whose corporate name is so dominant and pervasive that it has become a verb, it suggests you have created a very strong brand.
This gets us to a second reason why Uber and Lyft are clearly employers. Their success arises from connecting users and drivers quickly and efficiently in ways the old taxi system failed to do. They deliver on that promise through hypersensitive pricing (set entirely by the companies) that consistently incentivizes drivers to be in the right place at the right time. Service quality is reinforced by customer feedback, making drivers, who fear low ratings, highly responsive to the needs of customers.
In other words, these companies have created a sophisticated management system to achieve core strategic ends. It just happens to be a management system based on software rather than human beings to send, evaluate, act upon and record those decisions, millions of times a day.
Through algorithmic systems, Uber and Lyft produce a highly valued brand experience for consumers and investors based on their ability to control and direct drivers who are central to the service they provide. And that means under the three-part test established by the California Supreme Court and proposed in AB 5, currently being debated in Sacramento, those workers are employees, not contractors.
Uber and Lyft insist that they cannot survive if they no longer can treat their drivers as independent contractors. Such a change would mean that they would have to factor in the real costs of drivers into their business model. They would have to figure out how to comply with workplace laws like the minimum wage, provide certain baseline protections like unemployment insurance and workers compensation, and collect and pay state and federal payroll taxes. In other words, they would have to do what millions of other businesses do every day.
Yes, this would be more costly. Given the higher cost per trip facing these companies, Uber and Lyft would have to deploy fewer drivers on their platforms than they do under the present system where they can act as if the costs related per driver are very small (because so many of the costs, from gas to insurance, are absorbed by the driver, not the companies and their investors).
As extremely smart, innovative companies, however, Uber and Lyft can figure out clever ways to use their data-driven platforms, algorithms, and high-powered incentives to deploy “employee” drivers efficiently in a manner similar to their current system. I am sure they would still allow driver flexibility on start and stop times and incentives to get the right number of vehicles to the right places at the right time. That’s because flexibility is not only valued by the drivers — it is critical to their business strategy whether the drivers are employees or contractors.
I have little doubt that these companies, had they started with the employee model, would still have outcompeted the old taxi system hands down. They would have had to charge somewhat higher prices and be a little less profitable. But their great idea would not have been undermined. They would simply have had to operate in a world of workplace regulations.
We all value companies that innovate, build and grow. But there’s no reason that new businesses can’t be built on a system of rights and protections — like fair wages, rules against discrimination and safeguards against work-related injury — that we also value as a society.
David Weil is dean and professor at the Heller School for Social Policy and Management at Brandeis University. He served as the wage and hour administrator at the U.S. Department of Labor in the Obama administration from 2014-2017.