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Labor laws are a mismatch with the sharing economy

Joe Kennedy | July 10, 2015
The recent Uber ruling has shown that U.S. labor law has remained frozen and out of touch with market realities.

Credit: Uber

U.S. labor markets are being roiled by a number of unstoppable forces, including globalization, the sudden rise and fall of major corporations and even industries, and demographic changes. In addition, a wave of new Internet platforms such as Airbnb, Lyft, and TaskRabbit have lowered the cost of matching buyers and sellers, and in the process have redefined how workers can thrive in the economy. Yet despite all these changes, U.S. labor law has remained frozen for decades. The result is an increasing mismatch between the market realities facing workers and the legal requirements that govern them.

A recent finding by the California Labor Commission highlights this disconnect. The commission determined that Barbara Berwick, a San Francisco driver, was an employee of Uber rather than an independent contractor. While the decision does not set a precedent, it may be reversed by courts and might be made moot by Uber making minor changes to its standard contract, this conflict nonetheless highlights the difficulty of applying antiquated laws to new and rapidly evolving industries. Current labor laws were written at a time when large companies were regarded as permanent fixtures in the economy, workers tended to stay with one employer for many years, employees had one full-time job, and many industries were heavily unionized. Those conditions no longer exist. As a result, our laws are increasingly ineffective in giving guidance to companies and protection to workers.

Whether or not a worker is an "employee" is governed by the federal Fair Labor Standards Act and specific state laws and typically involves balancing the relative importance of several criteria, many involving a large degree of uncertainty. Because of this, employers can face a great deal of uncertainty about whether workers are truly independent contractors or not, even when workers voluntarily sign an agreement identifying them as such.

But besides being vague, existing labor laws are increasingly inappropriate for today's industries, especially Internet platforms that create significant social value by making it easier for buyers and sellers to find each other, negotiate a satisfactory contract and ensure performance. In this case, much of the value goes to the platform, thus explaining Uber's $50 billion valuation. But much is shared with drivers (who find it much easier to work when they want and find passengers) and riders (who get quicker rides, cleaner cars, often cheaper fares and an easier booking and payment process than with traditional taxis). These platforms in particular let sellers who have assets that are not fully utilized (such as a car, their time or a bedroom) earn money by selling them. Because the barriers to entry and exit are low, sellers have the freedom to participate as much or as little as they like.


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