The Uber Economy Requires a New Category of Worker, Beyond ‘Employee’ and ‘Contractor’

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WASHINGTON, DC  - JULY 16: Brendan Kownacki rides in the UBER Car that he beckon via a smartphone app in Washington, DC on July 16, 2012.  He pays a little more than cabs but says it's worth it.  It's automatically billed to his credit card, tip included, and the quality of the cars and drivers leaves no surprises for him or his clients.  (Photo by Linda Davidson / The Washington Post)
Photo: Linda Davidson/The Washington Post

Consider your average Uber driver. He clearly works for Uber. He is indispensable to the operations of the company. It sets his pay and tells him how to do his job. It fires him if he falls below certain strict standards. But he also clearly works for himself. He has no boss. He chooses his own hours. He accepts and rejects work at will.

According to American employment law, though, our driver must be one or the other, a 1099 contractor or a W2 employee. And the gulf between the two in terms of mandated government protections and benefits is as wide as the line between them is blurry. As such, thousands of on-demand-economy employees and scads of lawyers are at war in court to determine what camp our average driver should fall into.

The presumption in that legal war is that one side will win — our driver, and thousands and thousands of other workers like him, will either remain contractors or become employees. But more and more politicians and labor experts are arguing that neither the employee nor the contractor designation really fits. It might be time for a new standard that splits the difference between the two — a “dependent contractor,” as some labor experts call it — that would be better for businesses, consumers, and all those workers themselves.

In the meantime, of course, the employee-or-not-employee war drags on. Last month, the California Labor Commission ruled that one former Uber driver named Barbara Ann Berwick was indeed an employee, awarding her $4,152 in reimbursement for business expenses. (Uber has appealed the ruling.) A number of other legal initiatives, including a major class-action suit, are also ongoing.  

Perhaps partly in response to those legal challenges, some businesses are preemptively making their contractors employees. Take Shyp, a kind of Uber-for-mail that will pick up your items, package them, and send them for you. “As we gear up for national expansion, it’s a good time to look at our current model and see how we can improve it,” Shyp’s chief executive officer, Kevin Gibbon, wrote in an open letter this month. “After careful consideration, we’ve decided to transition Shyp couriers, the individuals who complete pickups at our customers’ homes and offices, to W2 employees. This move is an investment in a longer-term relationship with our couriers, which we believe will ultimately create the best experience for our customers.”

But there are significant downsides to both the employee and the contractor designation — for the worker, for the customer, and for the business mediating between the two. “The jury in this case will be handed a square peg and asked to choose between two round holes,” Vince Chhabria, a California judge, wrote in a case concerning Uber’s competitor Lyft earlier this year. “The test the California courts have developed over the 20th century for classifying workers isn’t very helpful in addressing this 21st-century problem.”

Take the contractor designation first. The downsides for the workers are obvious. Per-gig pay that sometimes works out to less than the minimum wage. No benefits. Responsibility for costs incurred while at work. The need to pay payroll taxes out of pocket. And there are downsides for consumers and businesses, too. The contractor designation prevents start-ups like Uber and TaskRabbit from giving their workers too much supervision or direction, making their services uneven and their workforces occasionally unreliable.     

Then consider the employee designation. There, the downsides for businesses are obvious. Companies generally have to provide employees with minimum-wage protections, overtime, workers’ compensation, health insurance, and unemployment insurance. Were contractors for businesses like Uber, Lyft, Homejoy, Handy, TaskRabbit, and dozens of others to become employees, that would mean far more limited scalability and much more costly overhead for those businesses. There would be downsides for consumers and workers as well: higher prices for the former, far less workplace flexibility for the latter.  

But there are ways to correct some of the worst problems associated with the contractor model while avoiding the worst problems associated with the employee model. State, local, and federal governments could create a system that allowed for flexible, low-commitment work that still provided at least $7.25 an hour and basic benefits.

The government could, for instance, levy a surcharge on businesses using “dependent contractors,” a new worker designation. Those funds could pay for unemployment insurance, workers’ compensation, and other minimal benefits. At the same time, Uncle Sam could require on-demand businesses to reimburse workers for basic expenses and pay out at least the local minimum wage for any hours spent on the job.

That would require the businesses to better track their workers’ hours. It would probably raise prices for consumers, too. But it would ameliorate one of the worst problems with the 1099 economy without fundamentally quashing the business model, namely pay that works out to less than the minimum wage. And that low pay is a big, big problem: One recent survey found that while “greater schedule flexibility” is the top reason for workers to join on-demand firms, “insufficient pay” is the most common reason for them to quit. Businesses might end up with more ability to control their workers and standardize their services, too.

Another, more holistic solution would be for the government to create a system of prorated fundamental benefits, paid for by deductions from all workers’ paychecks, no matter how big or small. Those benefits could include sick leave, maternity and paternity leave, retirement savings, unemployment insurance, and workers’ compensation. Nick Hanauer and David Rolf have a fleshed-out version of such a plan in Democracy, and argue that a “shared security system” would help guarantee a pathway to the middle class without crushing these nascent businesses or precluding the rise of flexible, part-time work.

With 1099 businesses flourishing alongside the legal threats to their business models, a number of politicians and labor experts have started pushing for Washington to think about developing new rules or a third major worker designation. Sarah Leberstein, a senior staff attorney with the National Employment Law Project in New York, said that she would rather see the on-demand economy reclassify its contractors as employees. But were that not to happen, the state and federal governments should get creative, she said. “Given how rapidly work is changing, and given that there is so much dependent on classification of a worker as an employee, we should find other ways to guarantee workers baseline standards and social safety net protections outside that designation,” she said. And some politicians are starting to listen to the calls for change: Senator Mark Warner of Virginia, for instance, has urged Congress to address the issue.

There is one giant hitch: Any of these changes would require legislatures to act. Right now, at least on a federal level, that seems as remote a possibility as Uber suddenly deciding to make all its workers full-timers with health insurance and 401(k) matching. But the black-and-white decisions before the courts — and the current system of designations afforded workers and businesses — might not be the right ones. States and local governments should start functioning as the laboratories of democracy that they are, trying out third designations and negotiating terms with 1099 businesses. New kinds of work need new kinds of laws. Think of it as Uber for worker designations.