Uber’s business model under fire

A crop of tech startups, including Uber and Lyft, that employ armies of contractors instead of direct employees is drawing scrutiny from Washington, where lawmakers and other officials are raising concerns about the way “sharing companies” are regulated.

Critics from across the political spectrum — from liberal Sen. Elizabeth Warren (D-Mass.) to a Republican member of the National Labor Relations Board — are signaling it may be time to overhaul regulations for companies that avoid paying benefits by classifying their workers as contractors.

{mosads}“I think there is evidence that increasingly employers use independent contractors not in ways that were originally intended but in ways that permit them to treat employment laws differently than they otherwise would be responsible for, and I think that’s a real problem,” Warren said last week at a conference in California.

On Thursday, Sen. Mark Warner (D-Va.) will call for Washington to explore changes to the way workers are classified during a “major policy address” on the issue. He will suggest that “we could recognize that the 20th century definitions that we are using do not work in the 21st economy” instead of waiting for the courts to resolve the question, a Warner aide said.

“We need to be thinking about what kind of safety net functions” can be developed to help the workers, the aide said.

The issue plays into the left’s growing focus on income inequality.

When workers are considered employees, they usually receive benefits such as unemployment and are subject to protections such as the minimum wage that Warren and others on the left say are crucial to building prosperous working and middle classes. Contractors are much less likely to receive those benefits and protections, which saves the companies money.

The rapid growth of many startups in the “sharing economy” has been fueled in part by the ability to bring workers on board without the added costs of classifying them as employees. The result has been called the “1099 economy,” named after the tax form contractors fill out instead of the W-2 form used by employees.

The practice “shifts risks entirely onto workers, and eliminates minimal standards completely,” former Secretary of Labor Robert Reich said in a February blog post.

The difference between a contractor and employee has to do with the degree of control an employer has over the worker in question. Advocates say that many sharing economy companies classify their workers as contractors but treat them like employees.

“They call them independent contractors but they set their pay, they screen them, they sometimes train them, they evaluate them, they discipline them, and all of those characteristics look an awful lot like an employer-employee relationship,” said Rebecca Smith, deputy director of the National Employment Law Project.

The companies say that characterization is misguided. They argue that they simply create a marketplace for a customer to connect with someone providing a service, like home cleaning or a ride, and point to the fact that workers can often do jobs for competing companies at the same time.

A spokeswoman for Sidecar, a ride-hailing app, said “drivers set their own hours, name their own price and even choose which rides they wish to accept.”

In court, however, Uber drivers have argued that requirements imposed on workers by the company are evidence they are employees and not contractors.

Uber said in a 2013 filing that, “there is no explanation how such purported requirements constitute a comprehensive and immediate level of day-to-day authority over employment decisions.”

Many of the regulatory battles fought by sharing economy startups take place on the state and local level. But advocates who want to ensure that workers for these companies get greater access to benefits and increased protections say that lawmakers and regulators in Washington could take steps to make sure companies are treating workers fairly, short of reclassifying contractors as employees.

“Congress could at the very least require that they comply with wage and hour laws and require that they pay into universal systems like Social Security,” Smith said.

To do so, she said, Congress would not need to tackle the complicated question of whether workers in the sharing economy are employees, which could deal a financial blow to the companies.

“They can just say, companies in the on-demand economy, and you can define that any way you want, must pay minimum wage, must pay into workers’ compensation and the Social Security system,” she said.

The Department of Labor could also take steps to investigate instances in which workers are being misclassified as contractors. The National Labor Relations Board (NLRB) could similarly hear a case with implications for the sharing economy’s workers.

Among the federal regulators who deal with labor issues, there appears to be a growing consensus that the system must change to accommodate the sharing economy. 

Republican NLRB member Harry Johnson said in April that the board would have to adapt to deal with the questions posed by the sharing economy.

“One of the challenges … is going to be how the National Labor Relations Act adapts its casual employee doctrines, how it adapts its employee doctrines, how it adapts its independent contractor doctrines to that pending development in the economy,” Johnson said at an event in April.

The Federal Trade Commission will host its own workshop on the sharing economy next month to “consider if, and the extent to which, existing regulatory frameworks can be responsive to sharing economy business models while maintaining appropriate consumer protections.”

As it stands, answers about the status of the sharing economy workforce will take time.

Judges have ruled that the lawsuit against Uber and a similar one against Lyft should be heard by juries, but those cases are far from resolved. In a ruling earlier this year, the judge in one of the cases admitted the question that would be before the jury is complicated. 

“As should now be clear,” federal Judge Vince Chhabria said in March, “the jury in this case will be handed a square peg and asked to choose between two round holes.”