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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.

Uber's main job is simply to match the driver with the rider. It is hard to see how that creates an employer/employee relationship. In most cases where Uber takes on an additional task, it does so only because riders and/or regulators want it to. For example, both riders and regulators are pressuring Uber to screen its drivers carefully. Regulators have required it to ensure that drivers carry adequate insurance. By setting a nonnegotiable fare and handling electronic payments itself, Uber greatly reduces the hassle associated with getting a ride, especially for customers who interact with many different drivers. By letting drivers use their own cars, Uber increases their flexibility to work when and where they want. In each case, Uber's involvement increases the total value of the transaction.

Current labor laws impose a specific set of consequences once an employer/employee relationship exists. They lack the flexibility needed in a world where workers occupy a range between employee and independent contractor, where people doing essentially the same job can occupy different points on the line, and where specific individuals may want to occupy different points at different times, depending upon their personal needs. The consequences of the commission's decision may not be that great, but it almost certainly reduces the total value created by Uber.

One may suspect that the decision by the commission is motivated largely by a desire to protect workers. It is not at all clear that it will do so. The immediate consequence of the decision is that Uber will have to pay Berwick $4,100 to cover vehicle mileage and tolls. But the proportion of fares that Berwick received implicitly included these costs as well as the cost of insurance. Uber's response may very well be to reduce the percentage of fares that drivers receive. Uber may also decide to limit its platform to drivers who are willing to work full time. This would reduce the supply of drivers and foreclose a valuable option to at least some drivers. Current law fails to acknowledge that the combination of flexibility, lower overhead and individual circumstances often makes the lack of a formal relationship better for both the company and the worker. If both parties truly value the looser arrangement of an independent contractor, why should the government try to force them back into the outdated employer-employee relationship?

Uber is a large company and probably has a lot more negotiating power than individual drivers. But drivers have many alternatives. They can work for one of Uber's competitors, including Lyft or taxi companies. They can drive delivery trucks or rent a limousine. They can also choose a career that does not involve driving. Presumably most of them use Uber because the combination of income, convenience and freedom offers them the best opportunity for a good life. Regulators should be extremely reluctant to interfere with that relationship merely because a few drivers or riders think they should get a better deal.


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