DURING a recent ride with Uber, this passenger received a surprising word of thanks for talking softly. To complete the job, the driver needed to follow the route provided by Uber, read out turn-by-turn by his phone; noise from the back seat drowned out the critical instructions. The control Uber exercises over its drivers, whom it calls “independent contractors”, is increasingly a point of dispute. Two were recently judged to be entitled to some employment benefits—such as a minimum wage and holiday pay—by a tribunal in London sceptical of the degree of independence they actually enjoy. In fact, the drivers sit within a grey area in employment law; rules regarding firms’ obligations to their workers will need to adjust in response.
More than the profitability of Uber is at stake. According to a recent report by the McKinsey Global Institute, 162m people in America and Europe, or more than 20% of the working-age population, work outside normal employment. Nearly half rely on such work for their primary income. Sensible changes to work rules to take account of the rise in gig work could make life better for millions of workers; bad ones could mean fewer new jobs will be provided by gig-economy apps.
The way employment relationships are classified is commonly based on who is empowered to take which decisions. In a contract relationship, for example, the hiring party might choose what is to be supplied, but not how, while in an employment relationship the firm can specify the worker’s equipment and how and when to use it. Economic logic often pushes partners towards one arrangement rather than the other. Self-employment works best when the value of the service provided is easier to assess than the effort a worker expends on providing it. A firm which retains a graphic designer on contract knows whether or not it likes the resulting logo, but cannot easily say which of the sketches that went into it was time well spent (nor does it care).
Over the past 150 years, regular employment has been the norm. Worker protections have evolved accordingly. Most rich countries accord particular privileges to those considered to be employees, including the right to earn a minimum wage, a minimum of paid holiday and sick leave, and (in some cases) the right to severance payments or pension and health benefits. Some economists grouse about such rules, which can interfere with the smooth functioning of competitive labour markets and impose some efficiency costs. Societies have nonetheless chosen to adopt such rules in order to reduce the risk borne by employees and make labour markets more equitable. Yet such benefits are not usually extended to the self-employed. The difficulty in monitoring the time and effort spent at a task and other factors that often make independent work an economically sensible arrangement also make it hard to know when a self-employed worker should be able to collect unemployment benefits or how minimum-wage payments should be determined.
The threadbare safety net available to the self-employed can be a problem. Independent work is not always the result of a willing free agent taking greater control over production. It can instead reflect a dearth of attractive employment options for struggling workers. When good jobs are scarce and the search for new or better employment is costly, firms have the opportunity to cut costs by using more contract workers. Outsourcing tasks to independent workers frees firms from the expense of mandated benefits and shifts risk onto workers which might otherwise be shouldered by the firm. A shortfall in work, for example, falls directly on independent workers in the form of lost pay rather than on the firm, which might otherwise face the choice to pay the worker to stay idle or to accept the cost of severance pay.
Whether Uber drivers are empowered to be their own bosses or are the victims of a powerful corporation is debatable. Those who reckon drivers are employees point to the extensive control Uber exercises over its workers. It sets guidelines for behaviour and vehicle choice, and its app governs which passengers can be picked up, what the fare will be and what route the driver ought to take. On the other hand, drivers can choose to operate whenever they please, for as long or as short a period as they like. They are also able to select where they will operate, and can accept or decline potential fares as they see fit. Resolving whether the workers who provide services on platforms like Uber’s are employees or contractors is difficult, because they are not obviously either.
Over and above
Uber’s self-employed contractors are good for its bottom line. They cost the company less and improve the function of the service. If it had to pay all drivers a minimum wage, more of them would stay on the road when demand is low; either revenue would have to fall or fares rise. At the same time, the elements of control Uber exercises—like management of ride matches and payment, and the routes it provides to drivers—make it easier for inexperienced drivers to start working. The ability to earn income driving for Uber increases workers’ flexibility and, therefore, their ability to drive harder bargains with other employers.
Not without cost. Uber asks its drivers to accept all the financial cost when weak demand or a bout of illness keeps them from working: a hardship for those who depend on income from driving to make ends meet. Though Uber and its gig-economy peers are right that their workers are not traditional employees, regulators are justified in concluding that they owe workers more than wages alone. As work arrangements grow more flexible, work categories and benefits should too: paid leave could be allocated to workers in proportion to hours worked, for example. To get there, technology firms and workers must each show a willingness to bend in response to the concerns of the other.
This article appeared in the Finance & economics section of the print edition under the headline "Apps and downsides"