by Megan E. Hansen, Research Director
Posted May 15, 2019 In Scholar Commentary

This article was originally posted on the Medium publication The Benchmark

The past week has been a big one for the sharing economy. Last Friday, Uber joined Lyft on the New York Stock Exchange. And, yesterday, the National Labor Relations Board concluded that drivers for Uber are not employees but independent contractors.

This isn’t to say that it was all rainbows and unicorns for the ridesharing companies. In fact, Uber’s IPO fell flat and Lyft’s stock is down nearly 40% from its IPO. Some are now beginning to question whether “unicorns” exist at all.

On top of that, Uber and Lyft drivers across the world took to the streets calling for better wages in advance of Uber’s IPO last week. Drivers expressed frustration about falling pay despite rising gas prices in many cities. Others expressed concerns over a lack of transparency by the ridesharing companies about why certain drivers have been deactivated or what percentage of a rider’s fare Uber is taking.

A driver in Boston who joined last week’s protest told Business Insider:

“The rate per trip has been decreasing every year, while the city is getting more expensive to live.”

These concerns are not new. As the gig economy has continued to grow, critics argue that employers are increasingly taking advantage of workers by misclassifying them as independent contractors and that this will only erode workers’ protections and create a new class of workers more susceptible to economic instability.

Writer and lawyer Ephrat Livni recently summarized some of the key criticisms about how gig economy workers often lack access to “health insurance, workers’ compensation protections, employer contributions to Social Security and payroll taxes, paid time off, family leave protections, discrimination protections, or unemployment insurance benefits.”

The quick, easy, and wrong response to these concerns is to simply make more rules in an effort to protect workers in the gig economy. One response, seen in both the US and abroad, is to try to classify all gig economy workers as employees, allowing workers to have access to benefits like health insurance and pre-tax retirement plans. Others have argued for setting a limit on the percentage of fares that companies can keep and establishing a minimum wage for gig economy workers. Last year, New York City took action on this front by enacting a $17 an hour minimum wage for app-based drivers within the city.

Although these policy solutions are meant to protect drivers, they don’t address the real problem with how we regulate the workforce. It’s not that there aren’t enough rules to protect workers — it’s that the rules we do have weren’t designed with today’s workplace in mind. Most US labor laws were designed for a 20th-century workforce, written by those born nearly 150 years ago, but expected to work for today’s tech-fueled gig economy that is nothing like anything we could have imagined a century ago.

The fundamental problem with our current approach is that we are applying a binary system, in which workers are either an “employee” or an “independent contractor,” to a world that doesn’t work like that anymore. As Cornell professor and former Deputy U.S. Secretary for Labor Seth Harris explains, legal protections for employees were created to help address the possibility that “individual employees do not have sufficient power in their relationships with employers to protect themselves from socially unacceptable and economically disadvantageous outcomes.” When they enter into a traditional job, employees relinquish control over when and how they work, making them dependent on their employers. US labor law is meant to help protect these workers from exploitation by guaranteeing them certain protections.

Independent contractors, on the other hand, are not solely reliant on one employer and are free to choose when they work, how they work, and who they choose to contract with. As a result, they are not subject to the same kind of legal protections as traditional employees.

The growing gig economy has undermined the traditional, binary structure by creating what Harris calls a “gray area” between the two categories. In fact, there is ongoing disagreement about how workers in the gig economy should be categorized. On the one hand, drivers for Uber have many freedoms that would seem to land them in the independent worker category. For example, they can drive when they want, set criteria for what kinds of trips they want to take, and can simultaneously be looking for riders both on Uber’s app as well as its arch-rival Lyft. On the other hand, a key criterion for determining whether someone is categorized as an employee is whether the work being performed is considered “integral” to the employer’s business. Harris argues that for Uber and Lyft drivers in particular, “there is no Uber without drivers,” and thus the work should be considered integral.

This binary system of regulating workers creates ambiguity that results in ongoing legal conflict that wastes the time and resources of workers and employers alike. But more importantly, it also discourages innovative arrangements that might work better both for workers and for companies. Instead of a binary system designed for labor markets of the past, we need a more flexible approach that will work for today’s flourishing gig economy.

What would a more flexible approach to protecting workers in the gig economy look like?

There are lots of possibilities. In a 2015 paper, Harris and coauthor Alan Krueger proposed creating an entirely new category for those who fall between employees and independent contractors, which they call “independent workers.” Their proposal is that independent workers that work through an intermediary would qualify for some benefits, like the right to organize and collectively bargain, tax withholding, and employer contributions for payroll taxes. But they would not qualify for hours-based benefits like overtime or unemployment insurance, that only make sense in the context of a single employer.

Others, like Senator Mark Warner from Virginia, have suggested allowing workers to put pre-tax dollars (as well as employer-matched funds) into a “Lifelong Learning and Training Account” that they could then use to pay for retraining to stay competitive in an evolving workplace.

Another option would be to allow for and encourage portable benefits systems. Instead of being tied to a particular employer, portable benefits move with the worker and allow multiple employers to contribute. For example, Trupo offers disability insurance to independent workers on a sliding scale, and with monthly contracts that can easily be ramped up or down. Online platforms have also partnered with startups including Stride Health and Zego to help workers get access to insurance.

Current policies, however, discourage platforms like Lyft and Uber from providing benefits to workers. If they provide too many benefits, they risk being categorized as a traditional employer and thus being subjected to much more stringent labor laws. As Jessi Hempel wrote for Wired:

“Gig-economy companies have so far shied away from any moves that could be construed as providing traditional benefits to contractors out of fear they will be sued.”

This inflexible system of regulating an ever-changing workforce is creating poor incentives that may actually discourage companies from finding innovative ways to help provide stability for workers. In their 2015 paper, Harris and Krueger suggest that independent workers would benefit from allowing platforms like Uber and Lyft to pool workers to purchase insurance and other benefits without the risk of being categorized as an employer-employee relationship.

More flexibility would be good for both gig economy workers and for platforms that work with them. Workers would no longer have to choose between flexibility and autonomy on the one hand and security and benefits on the other hand. Instead, they could find the right balance between the two by working with platforms providing secure portable benefits that move with them.

Platforms would benefit too. Without the fear that they might have their entire business model challenged, platforms would then be able to compete for the best independent workers by offering benefits.

The gig economy continues to provide options for workers who seek autonomy, flexibility, and the option to earn additional income on the side. Instead of sorting workers into rigid categories with rigid rules, we should explore more flexible policy options that allow for new and better arrangements that benefit both innovative companies and modern workers alike.

CGO scholars and fellows frequently comment on a variety of topics for the popular press. The views expressed therein are those of the authors and do not necessarily reflect the views of the Center for Growth and Opportunity or the views of Utah State University.