Why the Uber ruling is bad for American entrepreneurship and innovation

Demid Potemkin
Jul 8, 2015 · 6 min read

We need to talk about American labor laws, and fast. A California court’s decision about the nature of platforms may have dramatic repercussions not just for the sharing economy, but for the future of innovation.

I’m talking, of course, about the Uber ruling. The California Labor Commission recently determined that an Uber driver is an employee, not an independent contractor. As the country shifts from a labor and goods economy to a service and knowledge based economy, this decision sets a symbolic (but dangerous) precedent. An estimated 50% of America’s workforce will be self-employed by 2020 — and with good reason. Online platforms have made it easy for workers to find jobs, set their own schedules, and take charge of their own careers. The success of companies like Uber show that more Americans are prioritizing the flexibility of independence over the security of the traditional 9 to 5. In short, lawmakers must now consider the possibility that the 20th century employee/contractor binary no longer apply to today’s jobseekers.

The rise of independent contractors and micro companies indicate a shift away from the strictly defined business models of large corporations. Instead, corporations are becoming platform providers, connecting buyers with individuals selling services, tools and technology on their own terms. Unfortunately, the court’s decision has the potential to cripple the very innovations that are shaping this future. What’s more, the ruling appears to have less to do with the integrity of Uber’s business model than it does the limitations of current California labor laws.

In essence, the California Department of Labor differentiates employment and contract work based on whether the service provided is integral to the business. The court also cited Uber’s required background and DMV checks, as well as its ability to fire drivers who fall below a certain quality rating. However, with over 160,000 active drivers in 57 countries, Uber must take measures to protect both the company and its customers from fraud and safety risks. In fact, virtually all online marketplaces have rules that determine who can and cannot do business via their platform. In the case of Uber, it would be a disservice to their customers (not to mention a major liability) to knowingly list a driver who fails to meet basic quality and safety standards. Should these standards really be exclusive to employer-employee relationships?

Interestingly enough, taxi companies such as California Yellow Cab in Orange County also requires its drivers to undergo a background check, submit to drug and alcohol screenings, and have a clean driving record. As a California business, Yellow Cab is subject to the same state labor policies as Uber — however, their drivers are still classified as independent contractors.

Uber is no different than any other platform designed to connect buyers and sellers. We primarily think of these platforms as a means for exchanging goods, whether through a newspaper-esque service like Craigslist, or an internet auction house like eBay. And as lucrative and convenient as platforms like eBay, Etsy and Craigslist are, we’d never consider someone with a 5-star embroidery shop to be an Etsy employee. Now, with the economy rapidly shifting towards knowledge- and service-based transactions, we need to ask whether there’s a meaningful difference between selling goods and selling services in a peer-to-peer marketplace.

Of course, ridesharing isn’t the only service facilitated by a tech platform. Freelance writers, designers, and consultants have long found gigs via Elance, O-Desk and Upwork. Airbnb provides a means for travellers to find and rent spaces from qualified hosts. Like Uber, these services simplify and automate the process of helping sellers find interested buyers. Each also employs varying degrees of control to ensure the safety of its users. While Airbnb hosts aren’t required to pass a background check (though the company does retain the right to investigate you), they are taking steps to require that hosts prove their identity by submitting a picture of their driver’s license or passport.

These peer-to-peer systems represent a major shift in the way we perform, and even think about, work. While some Uber drivers work full time, over 62% merely see ridesharing as a supplemental source of income. Thanks to the ease and flexibility of Uber’s platform, drivers are free to pick and choose jobs at their leisure. The emphasis on freedom and the “income on demand” model has even led to the creation of supporting services. For example, those without cars can subscribe to Breeze, a business that rents hybrid vehicles to individuals for the purposes of ridesharing and paid deliveries. But perhaps most importantly, platform systems lower the barrier to entry for individuals and small businesses, allowing them to sell to larger markets without having to shoulder advertising, development and marketing costs. They make self-employment a possibility for those who might not otherwise have the means to start their own businesses.

So why are Uber drivers asking to be classified as employees? Well, many of them aren’t. In this case, the plaintiff Barbara Ann Berwick sought, and was awarded, reimbursement for her vehicle expenses. Still, other drivers are worried about more than the cost of gas and upkeep. For many, a major concern is the lack of an affordable, job-based healthcare plan. It’s an unfortunate fact that outrageous healthcare costs have plagued self-employed Americans long before the advent of ridesharing apps. But classifying independent workers as employees is not an effective solution. To do so is to misunderstand the larger problem, reinforcing companies’ ability to hold employees hostage with the promise of affordable coverage. With more and more Americans becoming self-employed, now is the time re-examine our policies and find a way to help all hard-working individuals succeed in a service-based economy, regardless of their legal classification.

The fact is, classifying Uber drivers as employees negatively affects both the company and its drivers. The hallmark of independent contracting is the ability to choose where, when, and how often you work. Employees rarely, if ever, have this sort of freedom. And with additional costs such as tax withholding, California overtime, benefits, expenses, and insurance, Uber would most likely be unable to afford to keep their part-time or weekend drivers. The flexibility and independence previously afforded to driver-contractors will be lost, and with it, the potential for innovation and industry growth.

Our reactive legislative system simply cannot keep pace with modern technological innovation. Waiting around for the courts to fix problems after they’ve already occurred will only result in measures that are perpetually out of date. Instead, the government must now make an effort to follow, and fully understand, emerging industry trends. It needs to engage with entrepreneurs and tech companies to ensure that issues are identified early — only then can we create effective solutions that run in tandem with innovation.

One cannot dispute that contract workers are the future of American businesses. Nor can one dispute that platforms have tremendous power to innovate and expand freelance marketplaces. Companies like Uber create accessible opportunities for people want the freedom to work for themselves. The court’s ruling would force them to drastically raise their prices, resulting in less market demand and fewer available jobs. While this shake-up may benefit those whose goal is to work for Uber full-time, it will be at the expense of those who used the platform to provide their services part-time or as needed. Luckily, economists are already discussing a solution that will encourage platform innovation while ensuring service providers can still earn a living wage.

We need a new class of workers for a new economy; contractors who can retain their legal and financial independence even while relying on a single company. Canada already recognizes these workers as “dependent contractors,” and recently found them entitled to reasonable notice of termination. Rather than shoehorn independent service providers into one of two New Deal-era categories, the IRS and the Department of Labor should empower them with better tax regulations, minimum wage legislation, and reduced healthcare and business costs. The particulars are open to debate, but to simplify the issue by classifying platform users as just “employees” is to misunderstand the nature of platforms and emerging technology.

Innovation isn’t possible without risk. But platforms have the power to minimize the risks to individuals by building an accessible path to entrepreneurship. In many ways, some aspects of this future are inevitable — we can’t stop technology and market forces from creating new systems. Instead of struggling to fit square pegs into round holes, we should focus on making the service based economy as healthy and inclusive as possible. This is about more than Uber’s profit margins. We can’t allow this ruling to set a precedent that will limit the opportunities and tools available to those who really need them.

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Demid Potemkin

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Strategic visionary for early-stage products, with a particular passion for business productivity software and companies looking to reinvent themselves.

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Life in the new economy.

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