Uber, Lyft, and the new world of continuous partial employment

There is no better demonstration of how outdated maps shape public policy, labor advocacy, and the economy than in the debate over whether Uber and Lyft drivers (and workers for other on-demand startups) should be classified as “independent contractors” or “employees.” In the world of US employment law, an independent contractor is a skilled professional who provides his or her services to multiple customers as a sole proprietor or small business. An employee provides services to a single company in exchange for a paycheck. Most on-demand workers seem to fall into neither of these two classes.

Labor advocates point out that the new on-demand jobs have no guaranteed wages, and hold them in stark contrast to the steady jobs of the 1950s and 1960s manufacturing economy that we now look back to as a golden age of the middle class. Yet, outsourcing is the new corporate norm. That goes way beyond offshoring to low-wage countries. Even for service jobs within the United States, companies use “outsourcing” to pay workers less and provide fewer benefits. Think your hotel housekeeper works for Hyatt or Westin? Chances are good they work for Hospitality Staffing Solutions. Think those Amazon warehouse workers who pack your holiday gifts work for Amazon? Think again. It’s likely Integrity Staffing Solutions. This allows companies to pay rich benefits and wages to a core of highly valued workers, while treating others as disposable components. Perhaps most perniciously, many of the low-wage jobs on offer today not only fail to pay a living wage, but they provide only part-time work.

Why do we regulate labor? In an interview with Lauren Smiley, Tom Perez, secretary of labor during the Obama administration, highlighted that the most important issue is whether or not workers make a living wage. The Department of Labor’s Wage and Hour Division head David Weil put it succinctly: “We have to go always back to first principles of who are we trying to protect and how the people emerging in these new jobs fall on that spectrum.”

On first blush, it would seem that being an employee has many benefits. But there is a huge gulf between the benefits often provided to full-time employees and part-time employees. And that has led to what I call “the 29-hour loophole.” Unscrupulous managers can set the business rules for automated scheduling software to make sure that no worker gets more than 29 hours in a given week. Because employment law allows different classes of benefits for part-time and full-time workers, with the threshold being at 30 hours per week, this loophole allows core staff at the company to be given generous benefits, while the low-wage contingent workers get the bare-bones version. Once you realize this, you understand the potentially damaging effect of current labor regulations not just for new Silicon Valley companies but also for their workers. Turn on-demand workers from 1099 contractors into W2 employees, and the most likely outcome is that the workers go from having the opportunity to work as much as they like for a platform like Uber or TaskRabbit to one in which they are kept from working more than 29 hours a week. This was in fact exactly what happened when Instacart converted some of its on-demand workers to employees. They became part-time employees.

(Even before the advent of computerized shift-scheduling software, companies played shell games with employee pay and benefits. I remember student protests at Harvard that my daughter was part of in 2000 focused on the unfair treatment of janitors and other maintenance personnel. “You’re not a full-time employee and aren’t eligible for full-time benefits,” janitors were told. “You don’t work 40 hours for Harvard University. You work 20 hours for Harvard College, and 20 hours for the Harvard Law School.”)

When you are drawing a map of new technologies, it’s essential to use the right starting point. Much analysis of the on-demand or “gig” economy has focused too narrowly on silicon Valley without including the broader labor economy. once you start drawing a map of “workers managed by algorithm” and “no guarantee of employment” you come up with a very different sense of the world.

Perhaps as pernicious as the fact that companies limit workers to 29 hours a week, the capricious nature of many of the schedules that are provided by traditional low-wage employers and the lack of visibility into future working hours means that workers can’t effectively schedule hours for a second job. They can’t plan their lives, their childcare, a short vacation, or even know if they will be able to be present for their children’s birthdays. By contrast, workers for on-demand services can work as many hours as they like—many report working until they reach their desired income for the week, rather than some set number of hours—and equally important, they work when they want. Many report that the flexibility to take time off to deal with childcare, health issues, or legal issues is the most important part of what they like about the job.

It is essential to look through the labels—employee and independent contractor—and examine the underlying reality that they point to. So often, we live in the world of labels and associated value judgments and assumptions, and forget to reduce our intellectual equation to the common denominators. As Alfred Korzybski so memorably wrote, we must remember that “the map is not the territory.”

When you put yourself into the mapmaker’s seat, rather than simply taking the existing map as an accurate reflection of an unchanging reality, you begin to see new possibilities. The rules that we follow as a society must be updated when the underlying conditions change. The distinction between employees and subcontractors doesn’t really make sense in the on-demand model, which requires subcontractor-like freedoms to workers who come and go at their own option, and where employee-based overtime rules would prohibit workers from maximizing their income.

Professor Andrei Hagiu, writing in Harvard Business Review, and venture capitalist Simon Rothman, writing on Medium, both argue that we need to develop a new classification for workers—we might call them “dependent contractors.” This new classification might allow some of the freedoms of independent contractors, while adding some of the protections afforded to employees. Nick Hanauer and David Rolf go further, arguing that just as technology allows us to deploy workers without the overhead of traditional command-and-control employment techniques, it also could let us provide traditional benefits to part-time workers. There is no reason that we couldn’t aggregate the total amount worked across a number of employers, and ask each of them to contribute proportionally to a worker’s account. Hanauer and Rolf call this a “Shared Security Account” in conscious echo of the safety net of a Social Security account.

A similar policy proposal for portable benefits comes from Steven Hill at New America. Hanauer, Rolf, and Hill all suggest that we decouple benefits like worker’s compensation, employer contribution to Social Security and Medicare taxes, as well as holiday, sick, and vacation pay, from employers and instead associate them with the employee, erasing much of the distinction between 1099 independent contractor and W2 employee. Given today’s technology, this is a solvable problem. It would be entirely possible to allocate benefits across multiple employers. It shouldn’t matter if I work 29 hours for McDonald’s and 11 for Burger King, if both are required to contribute pro rata to my benefits.

However, none of these proposals have solved the deeper dynamics that drive companies to use the 29-hour loophole. It isn’t basic pay-roll taxes that lead companies to want to have two classes of workers. It is healthcare to start with (a single-payer system would solve that problem, as well as many others), but also other “Cadillac” benefits that companies wish to lavish on their most prized workers but not on everyone. More powerfully, it is the notion that workers are just a cost to be eliminated rather than an asset to be developed. Ultimately, the segregation of workers into privileged and unprivileged classes, and the moral and financial calculus that drives that segregation, has to stop.

Over time, we will realize that this is an existential imperative for our economy, not just a moral imperative.

It will take much deeper thinking (and forceful and focused activism) to come up with the right incentives for companies to understand and embrace the value of taking care of all their workers on an equal footing. Zeynep Ton’s Good Jobs Strategy is a good place to start. Ton outlines the common principles that make companies as diverse as Costco and Google great places to work. As Harvard Business School lecturer and former CEO of Stop & Shop José Alvarez writes, “Zeynep Ton has proven what great leaders know instinctively—an engaged, well-paid workforce that is treated with dignity and respect creates outsized returns for investors. She demonstrates that the race to the bottom in retail employment doesn’t have to be the only game being played.” Economists have long recognized this phenomenon. They call wages higher than the lowest that the market would otherwise offer “efficiency wages.” That is, they represent the wage premium that an employer pays for reduced turnover, higher employee quality, lower training costs, and many other significant benefits.

The algorithm is the new shift boss. What regulators and politicians should be paying attention to is the fitness function driving the algorithm, and whether the resulting business rules increase or decrease the opportunities offered to workers, or whether they are simply designed to increase corporate profits.

Even without radically changing the game, businesses can gain enormous tactical advantage by better understanding how to improve the algorithms they use to manage their workers, and by providing workers with better tools to manage their time, connect with customers, and do all of the other things they do to deliver improved service.

Algorithmic, market-based solutions to wages in on-demand labor markets provide a potentially interesting alternative to minimum-wage mandates as a way to increase worker incomes. Rather than cracking down on the new online gig economy businesses to make them more like twentieth-century businesses, regulators should be asking traditional low-wage employers to provide greater marketplace liquidity via data sharing. The skills required to work at McDonald’s and Burger King are not that dissimilar; ditto Starbucks and Peet’s, Walmart and Target, or the AT&T and Verizon stores. Letting workers swap shifts or work on demand at competing employers would obviously require some changes to management infrastructure, training, and data sharing between employers. But given that most scheduling is handled by standard software platforms, and that payroll is also handled by large outsourcers, many of whom provide services to the same competing employers, this seems like an intriguingly solvable problem.

Tim O’Reilly is the author of WTF?: What's the Future and Why It's Up to Us, from which this article is adapted.