by Chang Wook Min
On May 5, 2020, California sued Uber and Lyft for violating the state’s new labor law that intended to reclassify ride-hailing drivers as employees. Though the new labor law—Assembly Bill 5— took effect on January 1, gig economy platforms such as Uber and Lyft do not appear to comply with it. They still treat drivers as independent contractors, claiming that AB 5 is unconstitutional and should be overturned by a ballot initiative in November 2020. Rideshare Drivers United, on the other hand, asserts that drivers have been wrongfully denied fair wages through misclassification. During the novel Covid-19 pandemic, a heated controversy over the drivers’ eligibility for unemployment benefits and sick days ensued.
Rising Income Inequality in Digital Platforms and the Role of Assembly Bill 5
The enactment of AB 5 is closely related to the widening income inequality in digital labor platforms. According to the Economic Policy Institute, the compensation of Uber drivers averages at $11.77 an hour, which is less than the $14.99 hourly compensation of the lowest-paid service occupational group. A Massachusetts Institute of Technology study revealed that in 2018, the median hourly profit for Uber drivers was $8.55, wherein 54 percent of the drivers earned less than the stipulated minimum wage in their states. On the other hand, Uber paid its CEO Khosrowshahi and COO Harford $45 million and $47.3 million in remuneration, respectively in 2019. Kalanick, the former CEO and the largest individual shareholder of the company, became a billionaire with stocks amounting to $52 billion after Uber’s Initial Public Offering (IPO) in May 2019. While digital platforms greatly increased market efficiency by lowering transaction costs, the benefits of smart communication technology seem to be distributed unevenly.
What makes Uber drivers earn such a low salary? Of course, this is partly because Uber’s business model is based on a low-wage strategy: by pricing its rides at 30 percent below comparable taxi services, the company has forgone the revenues available to compensate workers. This strategy, however, does not necessarily explain why Uber drivers are paid less than the minimum wage. There lies the misclassification issue. Since the app-based company classifies their drivers as independent contractors rather than employees, the drivers are not subject to employment protection such as minimum wage, overtime pay and unemployment insurance. Moreover, some paid hours in the employee model, including standby time, lunch time, sick leave, and vacation, is counted as unpaid hours for Uber drivers.
California legislators meant to address the income inequality in labor platforms by treating gig workers as employees. Section 1(b) of AB 5 stipulates that “The misclassification of workers as independent contractors has been a significant factor in the erosion of the middle class and the rise in income inequality.” Under AB 5, which codifies a landmark California Supreme Court decision, “a person providing labor or services for remuneration” would be regarded as an employee unless a hiring entity proves all the three conditions: (A) their work is not controlled or determined by the company; (B) their work is not the “usual course” of the business; and (C) they have an independent business.
The Trend Toward the Casualization of Labor: Misclassification and Disguised Employment
The misclassification in digital platforms is part of a wider trend toward the casualization of labor. Capital has two different types of desires: to improve labor productivity, and to save labor costs. For the former, employers control their employees through supervision, performance evaluation, and on-the-job training. More budget should be allocated to implement such human resource management programs. For the latter, companies reduce the degree of standard employment—jobs that are full-time and enable a direct relationship between employer and employee. By using non-standard forms of employment (NSE), such as temporary, part-time, multi-party, and disguised employment, businesses can shift their financial burdens and managerial risks to their workers or other contractors. The growing share of NSEs demonstrates that workers have been casualized globally for the last several decades.
Such a casualization trend appears to focus on low-skilled workers. While companies invest more on high-skilled employees in their core business, they either outsource or use temporary workers for simple and repetitive tasks. This trend results in labor market segmentation. High-skilled employees benefit from job security with decent salary, whereas low-skilled workers suffer from precarious work without training opportunities, being trapped in low-paid work.
The emerging forms of work in digital platforms, crowd-work and on-demand work, share several features with other NSEs. Platform workers mostly engage in short-timed fragmented gigs (temporary employment), operate in a trilateral relationship with the platform and the requester of work (multi-party employment), and are hired as independent contractors who are supervised as employees (disguised employment). Most importantly, the development of technology has allowed platforms to control gig workers without directly hiring them: workers are monitored through their phones and deactivated by customers’ ratings. The algorithmic management helps fulfill dreams of capital and allows employers to exert control over independent contractors without additional costs, effectively obscuring the underlying employment relationship.
Could a Third Worker Category Reduce the Income Inequality?
Some argue that there is a true “grey zone” between employee and independent contractor status, and introducing an intermediate worker category might address the misclassification problem. This category basically allows flexible work arrangement as independent contractors, but provides some employment protection. For instance, Harris and Krueger proposed an “independent worker” category which qualifies for collective rights and civil protections, but is excluded from minimum wage and unemployment insurance. The ballot initiative Uber and Lyft are backing has similar suggestions: the measure further guarantees minimum earnings, healthcare subsidy, occupational accident insurance, and protection against discrimination and harassment for independent contractors.
Could a third worker category reduce the income inequality in the online gig economy? Critics argue that creating an intermediate worker category with vague boundaries may result in the arbitrage of the classifications, degenerating workers possibly recognized as employees into quasi-employees. For example, while the Italian government introduced the semi-subordinate worker category (lavoro parasubordinato) to extend labor protections to independent contractors, it instead led to incentives for businesses to replace standard employment with the discounted status, increasing the number of precarious workers. On the other hand, if the definition of an intermediate worker is too narrow, only a few workers would benefit from the new category, as seen in the case of TRADE in Spain. Introducing a third worker category, in general, may be a controversial and ineffective option to tackle income inequality.
The ballot measure, though it is meaningful progress, appears to have critical limitations to prevent the erosion of the working class. Most of all, drivers are not paid by the hours they actually worked. The UC Berkeley Labor Center estimated that the 2020 ballot measure would only guarantee $5.64 per hour, mainly because Uber and Lyft neither pay nor reimburse the drivers’ waiting time which occupies nearly a third of their working hours on the road. Basically, Uber’s business model is based on the infinite supply of labor: anyone who drives can easily participate in the ride-hailing market. The low barrier of entry exposes ride-sharing drivers to greater competition, thereby extending waiting time which results in lower hourly earnings. Furthermore, as the drivers are not eligible for regular unemployment benefits, their future paychecks are likely to disappear in case of recessions or personal exigencies.
Job Quantity vs. Job Quality: Decent Work for All
Is it true that the gig economy creates more accessible jobs for the unemployed and the economically inactive population, thereby raising employment rates? The flexible work arrangement of the app-based rideshare platforms seems to encourage more people to sign up for driving, including parents, students and retirees who want an adjustable schedule or supplementary income. Household income inequality may decrease if household members can earn extra income through transport network companies.
The job quality of drivers, however, appears to have deteriorated in these platforms. The Organization of Economic Cooperation and Development (OECD) considers three dimensions to measure and assess job quality: earnings quality, labor market security, and quality of the working environment. Uber drivers not only stagnate in low-pay (earnings quality), but are also not covered by unemployment insurance (labor market security). Many drivers whose primary income source is Uber experience job strains because of intensive competition and unfair customer ratings (quality of working environment). Without the protection of labor and social security laws, “independent” drivers are locked in a race to the bottom which results in low income. This is why only 4 percent of Uber drivers continue to drive a year after joining the platform.
Of course, as Uber emphasizes, the flexible work arrangement creates additional earning opportunities for drivers who have limiting schedules. However, for nearly half of the ride-hailing drivers who work full-time, this flexible schedule means little. Further, those who drive part-time too have constraints on setting their own work schedule because demand is usually concentrated at particular times of the day. More importantly, AB 5 does not necessarily restrict flexibility. It appears that there is room for Uber to offer flexible working hours to their employee-drivers as technological advances enable calculating and matching the demand and supply of ride services more efficiently. Flexibility might be a trope, as Professor Sachs from Harvard Law argues.
Lastly, would enhancing job quality come at the price of higher unemployment rates? Not necessarily. Data from OECD countries reveal that there seems to be no fundamental trade-off between the job quality and quantity, and countries with better job quality tend to show higher employment rates. Rather than churning out low-paid gigs, policy makers should focus on securing a steady and decent income for workers in their primary jobs.
Conclusion
It is well known that Uber and Lyft have created many job opportunities through digital platforms. The problem, however, is that the economic benefits of digital technology appear to be concentrated in the hands of the rich. While Uber has significantly increased service efficiency by route monitoring and dispatch algorithm, many Uber drivers still earn less than the minimum wage. By classifying drivers as independent contractors, Uber has been able to save $3,625 per driver annually, owing $413 million of unemployment insurance taxes to the state between 2014 and 2019. On the other hand, the CEO of the company received $45 million in 2019.
Why don’t we move a step forward to share the benefits of technological development more equitably? At a macro level, Uber’s low-wage model may reduce aggregate demand, leading to slow economic growth: the drivers may not have adequate purchasing power to keep the economy growing, as argued by Robert Reich. Though there are some practical challenges, implementing the new California labor law seems to be the most suitable option to tackle income inequality in the online gig economy, reversing the trend towards the casualization of labor.
Chang Wook Min is an MPA student at the UC Berkeley Goldman School of Public Policy. After earning a JD at Seoul National University, he has been practicing law as an attorney at Jipyong LLC.
The views expressed in this article do not necessarily represent those of the Berkeley Public Policy Journal, the Goldman School of Public Policy, or UC Berkeley.
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