Will making Uber classify its Drivers as Employees really be good for Drivers?
Background
Uber has had a long history butting heads with government and government officials. From a refusal by the Northern Territory Chief Minister in Australia to allow Uber to operate in the jurisdiction, to requirements for background checks in various operating geographies including Massachusetts, and many conflicts in-between. The most recent challenge has come in the form of Assembly Bill 5 in California, often called the “gig worker bill”, which stipulates that companies hiring independent contractors must reclassify them as employees unless three criteria are met. These criteria are explained in the bill as follows:
- The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact.
- The worker performs work that is outside the usual course of the hiring entity’s business.
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
Uber will find it difficult to assert that their drivers do not fall into the second criterion: the worker performs work that is outside the usual course of the hiring entity’s business. There may actually be a question about what the scope of Uber’s “usual course of business” is, in that Uber focuses on providing a matching mechanism for drivers and riders, not on actually delivering transportation services to customers. However, while I claim no legal expertise, this sounds like it might not realistically stand up in a legal defense.
As a quick aside: This law applies to companies in other industries besides ride sharing, namely the music industry and journalism. In response to the bill, Vox Media “ended contracts with about 200 freelance sports writers and editors who wrote for the blog network SB Nation, and announced it would replace them with 20 new part-time and full-time employees.” That is a 90% reduction in personnel. It is not clear how those in the journalism industry who have lost contracts will adjust, perhaps there will just be a transition from lots of independent freelancers connected to multiple companies into groups of several employees each connected to only one company.
What could the California Government be hoping to accomplish with this bill? Purportedly, the aim of this bill would be to make things better for labor by giving them employee-style benefits, compensation, and reliability in their employment. More facetiously, it could also be simply just posturing by government officials to garner votes, or maybe they just really have it out for Uber. What is the official statement? According to Wikipedia: “Proponents of the bill said it would give workers previously classified as contractors minimum wage, overtime, sick leave, unemployment and other benefits, and prevent the state from losing $8 billion from payroll taxes that independent contractors and companies who use them do not pay and social benefits required due to lower pay.”
Based on that statement, labor does factor into the advocacy for the bill, but the other side is taxes. How much does each contribute to government officials decision to pursue AB5? Well it is hard to say but I tend to be a little bit cynical of government officials (see City of Bell Scandal and California Public Official Salaries) and I suspect if that tax revenue wasn’t there, there may not have been an AB5. But for the focus of this article, let’s focus on labor. Do they benefit from this bill?
We will approach this by understanding the status quo from each actor’s perspective: drivers, customers, and Uber. Then we explore what changes if drivers are classified as employees for each actor.
Status Quo
Drivers
Drivers primarily value two aspects of driving for Uber: compensation and flexibility. Compensation has been a divisive subject among drivers in the past, but flexibility has always been a boon. Questions about benefits like sick pay and health insurance, especially for those drivers attempting to make a full-time living through ride-share, have been raised in the past and continue to be a concern today, as well as questions about drivers bearing the cost of depreciation and other vehicle expenses.
Riders
Riders have benefited from the ride-share model more generally, and from Uber specifically, by gaining increased availability of transportation both in location pick-up and drop-off, on-demand ride hailing, and variation on the type of service available e.g. UberBlack vs standard Taxi service. There were other smaller benefits such as automatic payments but the real innovation was in the former. The service vehicle was also guaranteed to be of a certain minimum quality as stipulated by Uber’s requirements for drivers.
Uber
Uber did something unique in the hired transportation industry; they took an economics first approach rather than an operations first approach. Traditionally, hired transportation companies have been operation first companies, including smaller taxi operators. They obtained a taxi or several, often times a taxi medallion (a form of barrier to entry, which raises market power of the industry and is bad for consumers), and then planned some routes or locations where the taxi or taxis would operate. Perhaps an enterprising operator would try to map expected demand and schedule taxis to that location. However, Uber did something different and novel.
Rather than relying on some type of operations model, Uber’s innovation was two-fold. First it allowed customers to signal exactly where they wanted to be picked up without needing to resort to a pooled pick-up location. Second, it relayed this information to drivers and so let the market tell drivers where there was demand, empowering them to respond to demand in real-time, both in terms of location and excess demand. This was an economics first approach to solving the transportation problem; let the market mechanism for matching supply and demand do the work of planning routes and scheduling supply in real time. A big part of that innovation was in allowing drivers to make their own decisions in response to the information. “Do I want to work right now?” a driver can ask him- or herself, “Is the wage that I can earn by going out in this snowstorm worth the risk and effort of driving in the snow to me?”
In order to facilitate this matching, the company introduced Surge Pricing as a mechanism by which the wage would rise until enough drivers answered “yes” to that second question. Surge Pricing would turn out not to be well received by customers and Uber has since tuned down that mechanism for incentivizing additional drivers on the road, but its original economics first approach remains, and with it remains the flexibility it affords drivers.
Changes if Drivers become Employees
Uber
To understand Uber’s likely response, first note that Uber is not profitable. For a profitable company, a move like the one proposed in AB5 could conceivably be good for workers. Here’s how that would work.
A profitable company must be making money above what it costs to run the company, including operations, salaries, and taxes. The money leftover after paying all its costs goes into the coffers of the company as profits and eventually back to shareholders. By increasing salaries, i.e. costs, and assuming the profits are significantly large enough, the company could respond by simply continuing business as usual but with less money going into the company coffers and more money going to its employees; they’re still making a profit, just less of it. However, Uber is not profitable so they definitely do not have this excess profit margin that can be redistributed to employees by higher wages. They will have to rethink their business operations in response to dramatic cost changes, and this is how that is likely to look.
With Uber now classifying drivers as employees rather than contractors, and being on the hook for the increased cost of employees such as benefits, payroll taxes, and vacations, their cost structure increases dramatically. In response they will have to do two things:
- Increase prices to consumers to account for the higher cost of providing transportation services.
- Reduce the number of drivers Uber has on its platform and instead of offering flexibility, will have to rely more on standardized scheduling and primarily full-time employment, i.e. drivers no longer work when they want, but when they’re told.
The key idea here is that full-time, or part-time, employee benefits mean corresponding employee responsibilities. While Uber has been operating as a market maker and supply and demand can freely choose to engage in transactions on the market, it allowed drivers to choose whether to drive or not, but in forcing Uber to consider its drivers as employees, you are also forcing drivers to be employees. Uber will basically become a taxi service with better operations infrastructure than the taxi operators of old, and this is indeed how they will likely have to respond to continue operating.
With the switch to employees instead of contractors, Uber loses the flexibility of its market mechanism, but the offsetting change is that they now have employees, and we will explore how Uber can use this to adapt their business model later.
Drivers
As touched on in Uber’s response, drivers with employee benefits also means drivers with employee responsibilities. Drivers will no longer have the flexibility to choose when they work, but rather will have to respond to a schedule determined by their employer, Uber, or face termination if they cannot meet employer demands. This will be bad for drivers not interested in working full-time but rather interested in working as a means of an additional flexible income stream in addition to their existing primary income, and it seems the majority of Uber drivers fall into the latter category. According to website Ride Guru, over 50% of Uber drivers work less than 16 hours per week, and 30% work between 16 and 34 hours per week with Uber. The vast majority of drivers, then, would be cut off from what they use as a part-time or less than part-time income source, presumably in addition to their full-time or other part-time work.
Riders
The accompanying cost changes in classifying drivers as employees will have to be passed onto customers. This is going to mean higher prices for customers, but it may mean more than just higher prices. In response to higher prices, less customers will be willing and/or able to rely on Ubers as their mode of transportation, which means that Uber will have to reduce supply in the face of reduced demand. This has impact on drivers in addition to the loss of flexibility described above, but the reduced demand also has negative implications for riders in the form of less supply. While there will be less supply overall, dense urban areas with lots of riders are more likely to whether the reduced demand better than less dense urban or rural areas. Dense urban areas tend to have higher incomes and the density means there will be sufficiently concentrated geographic demand to support drivers. Less dense urban or rural areas are unlikely to fare as well on the demand side, and Uber may cease operating in those areas altogether due to the low demand.
In an analysis by Alison Stein of Uber, she estimates that prices will increase between 20–40% in denser urban areas, 40–60% in less dense urban areas, and upwards of 60% in rural areas. She also estimates the effect on drivers at between 70–100% of work opportunity lost for drivers. Lyft also offers a similar analysis leading to similar conclusions.
How Can Uber Adapt its Business
As alluded to earlier, Uber’s response to this change is likely to convert its economics first approach to the hired transportation problem into an operations first approach. Specifically, since they would now have employees they would have control over those employees’ schedules.
The best response for Uber would be to employ its logistics infrastructure in prediction rather than in managing real-time supply and demand, much like a modern taxi operator. There would be some benefit to this in that Uber would have direct control over its logistics and can schedule employees to drive whenever and wherever they predict demand, in rain, snow, or shine. They can also use cross-dispatch to schedule employees both as drivers for people, and for their UberEats business. Perhaps they may also be able to expand into grocery delivery to compete with companies like Instacart and GoPuff. When a business has employees, they are able to make use of that resource as best as they can, and for Uber that would mean keeping those employees as efficient as possible by distributing their transportation capacity across as many transportation tasks as possible.
How likely is the response I paint? While Uber does not seem to have made any specific statement about their operations plans if the bill is passed, Lyft has alluded to theirs in their press release. Specifically, they say, “80% of drivers would lose work and the rest would have scheduled shifts,” which suggests they too understand their strategic response will be to go operations first, and Uber likely is planning the same.
Conclusion
If, as is purported, the driving reason behind AB5 is to benefit labor, then the proposed law may actually do more harm than good. There will be upwards of 70% of drivers with Uber that will lose their jobs if the bill passes successfully. What’s more, consumers are likely to suffer losses as well, especially those in less urban and rural areas. This is not even to take into account the loss of jobs within Uber itself as Uber scales back staff as it scales back operations.
A smarter decision might be to use a carrot rather than a stick. Uber has a number of long term issues that can be used as negotiation points to encourage Uber to give more value to drivers. For instance, Uber’s (and Lyft’s) path to profitability hinges on a bet that autonomous vehicles will replace their driver labor expenses. Autonomous vehicles are going to face a number of hurdles to get onto the road; technological yes, but even more than that, regulatory. I predict there will be incredible push-back from lobbying groups against autonomous vehicles. As many as 4.4 million people in the US work as drivers in some form or another, that’s 4.4 million people who are not going to be pleased by the threat of automation displacing their livelihoods. If the government really cares about labor, and growth of the economy, they could dangle positive regulation intended to work with Uber to help it get access to road testing and other assistance for its autonomous driving bet in exchange for better conditions for labor.
Even further on the theme of dangling a carrot, in an autonomous vehicle world, ride share companies will use drastically different vehicles for two reasons. The first is that things like steering wheels and dashboards will be obsolete necessitating a redesign. The second is that existing passenger vehicles are not built with the intent of continuous use. Passenger vehicles are designed and built with the understanding that they will be sitting idle for the majority of the day. Autonomous vehicles will have a much higher usage rate, and will have to be designed accordingly. In order to prepare for an autonomous vehicle world, there will need to be a lot of testing and perhaps even redesign of roads, which will require government cooperation, another carrot to exchange for improvments for labor.
However, if the motivation is more tax revenue as the cynic in me postulates, then none of the above carrots will be of interest to the government. Rather than work with Uber (as well as Lyft and WayMo) to help build a path for autonomous vehicles, the government is more likely to work against them in exchange for lobbying “incentives” from various unions and labor organizations. However, with the scale back of operations in response to AB5, it is unlikely additional tax revenue from Uber is going to dig the California Government out of its deficit.
You can find me @bradchattergoon on Twitter.
