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Do Traditional Labor Classifications Require Revamping?

July 06, 2017
Uber – the application-based, ride-hailing service with a multi-billion dollar company valuation—is known for its convenience, popularity and financial success. But behind its growing net revenue of over $600 million lurks complaints and formal lawsuits regarding the misclassification of its drivers as “independent contractors” rather than employees that could impact its future financial position and ethical reputation.

U.S. law equates independent contractors to entrepreneurs providing a service on their own schedule, in their own manner, and with their own finances. [1] Employees, on the other hand, are subject to their company’s control on how and when they are to perform the service. While independent contractors receive the benefits of freedom and independence in their work, they lose worker benefits entitled to employees such as a minimum wage, personal days, sick leave and repayment for costs to complete the service (e.g. gasoline).

Image: The graph shows the marginal cost per driver Uber would incur should it classify a driver as an employee as opposed to an independent contractor. Source: Fortune.Image: The graph shows the marginal cost per driver Uber would incur should it classify a driver as an employee as opposed to an independent contractor. Source: Fortune.
Uber claims that its drivers are independent contractors. The company argues that it does not hire employees but rather that it serves as a market maker that links suppliers (drivers) and demanders (passengers). While Uber takes a fraction of the revenue for making the connection, the company argues the drivers remain independent in that they receive most the fare, pay for their gas and set their schedule.

Over the past year, several Uber drivers have expressed frustration with their independent contractor classification. First, this classification does not guarantee them a minimum wage. According to Princeton economist Alan Krueger, the average hourly wage of an Uber driver was under $19, without including fuel and toll expenses on top of recent decreases in Uber pricing. More accurately, Rebecca Smith of the National Employment Law Project estimates that some drivers receive only $3/hour. [2] Second, the classification is supposed to grant them independence from the company, something many drivers say they do not currently experience. By definition, an independent contractor would be able to set his own schedule. Hypothetically, an Uber driver should be able to drive a customer to the movie theater and then take a break to watch a movie himself before driving his next customer to a grocery store. This break would not be possible, however, as Uber controls its drivers’ schedules by firing those who do not accept approximately 80 percent of requests within a certain timeframe. [3] Drivers claim that this control, along with the company recommending that they not accept tips, warrants employee classification.

Uber is not alone in this classification debate. In fact, the twenty-first century—with its abundance of mobile applications and high-speed devices—has introduced what is colloquially known as the “gig economy,” which is defined by quick freelance tasks rather than more everlasting employment. [4] Lyft offers car rides like Uber, Handy coordinates housekeeping jobs, Instacart delivers food from grocery stores to customers’ doors, and Postmates provides courier services.

The classification of workers as independent contractors over employees allows the companies to save millions in operating costs while simultaneously relying on workers to fulfill the main operations of their businesses. According to the nonprofit organization Jobs with Justice, the U.S. government is unable to demand over $3 million annually in unemployment and workers’ compensation taxes that would have been obtained if the companies classified workers as employees. [5] Moreover, the companies save thousands of dollars on expenses for each worker because of the independent contractor classification. For example, Uber does not have to pay for car maintenance or gasoline.

Academics have argued that the classification of workers as either independent contractors or employees in the “gig economy” is too restrictive because of its distinctiveness from the traditional notion of work. In 2015, Alan Kruger of Princeton and Seth Harris of Cornell proposed modernizing labor laws to include an “independent worker” classification. [6] While independent workers still cannot receive a minimum wage guarantee or overtime pay, they would have Civil Rights protections, Social Security and Medicare benefits, along with the ability to bargain, albeit weakly because of a lack of support from the National Labor Relations Board. In their paper, they explain that redefining labor laws could improve the twentieth century’s social compact between workers and employers, reduce uncertainty and increase the efficiency of the labor market. [7]

In addition to the legal question on how to classify workers in the gig economy, there remain additional questions, on matters such as corporate ethics. Some companies, like Alfred — which helps arrange laundry services and food shopping between suppliers and demanders — classified its workers as employees after the CEO noted that the company’s success is contingent on the work of its employees and thought giving more benefits to workers with the better classification was the right thing to do. [8]

These questions are difficult to answer. While classifying workers as employees may save companies in legal fees, it also could make them uncompetitive in saturating markets.

Student Blog Disclaimer
  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

References:                                             

  [1] “What’s the Difference Between an Independent Contractor and an Employee?” U.S. Department of Health & Human Services, March 24, 2015.

  [2] J.B. Wogan, “Employee or Independent Contractor? It’s the Uber-Important Question of Today’s Economy,” Government Technology, June 3, 2016.

  [3] Alan Pyke, “The Uber Revolution Hinges On One Key Question,” ThinkProgress, March 23, 2016.

  [4] Apps and Downsides: “Gig-economy” work sits outside normal employment categories, The Economist, November 5, 2016.

  [5] Joann Winer, “The hidden costs of being an Uber driver,” The Washington Post, February 20, 2015.

  [6] Huyen Le, “Are Uber Drivers Employees or Independent Contractors?” American University Labor and Employment Law Forum, February 20, 2017.

  [7] Seth D. Harrison and Alan B. Krueger, “A Proposal for Modernizing Labor Laws for Twenty-First-Century Work: The “Independent Worker,” The Hamilton Project, December 2015.

  [8] Sarah Kessler, “The Gig Economy Won’t Last Long Because It’s Being Sued To Death,” Fast Company, February 17, 2015.

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