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Will the sharing economy strike the right legal balance between empowering and exploiting workers?

Cath Everett Profile picture for user catheverett April 5, 2015
Lawsuits facing Uber and Lyft have the potential to damage the emerging digital sharing economy. But will the cases strike the right balance between letting workers and the businesses thrive, without the costs of employee benefits?


Uber private driver
One of the big questions facing the emerging digital economy with its progressive shift to online skills marketplaces is just how to get the balance right between empowering workers and exploiting them.

The issue is a pressing one that needs to be addressed sooner rather than later, believes Rachel Botsman, author and founder of advisory firm Collaborative Lab, as these marketplaces are already beginning to disrupt existing business models.

During her keynote speech at the HR Tech Europe show in London at the end of March, she explained the rationale:

Marketplaces are starting to eat firms due to their distributive power – power shifting from centralised institutions to distributed, connected networks and marketplaces, creating fear and massive change in how we access and create services.

She cites the Uber and Lyft so-called ‘ride-hailing’ services as classic examples of this model. Neither business own assets or inventory, such as cars, nor do they employ staff in the traditional sense. Instead they simply connect people who are looking for a ride with those offering to provide one, all via mobile ‘phone apps.

Although barely out of start-up phase, the two companies have already been subject to a series of legal actions against them, the latest one having been taken out by a number of drivers in California who are disputing their employment status.

The drivers argue that they should be classified as full employees rather than independent contractors and are seeking reimbursement for expenses including petrol and car maintenance, to which they would be automatically entitled if they had that status.

Uber, for one, has maintained that the drivers’ claims are baseless as it is simply a tech company that licences its software out to them so that they can do business – nothing more.

Empowerment or exploitation?

The drivers argue, on the other hand, that the firm is playing with words by describing them as “partners’ rather than “drivers”, in order to get out of paying them what they are entitled to. But Botsman believes such legal definitions will prove crucial in future:

There are 40 million contractors or freelancers globally - so in this situation, is it empowerment or exploitation? We have to get an answer as these companies are quickly becoming mainstream.

On the plus side, she believes, marketplaces are opening up employment opportunities to lots of people who have until recently been marginalised in employment terms – and we’re not just talking Generation Y here.

In fact, these so-called “micropreneurs” include everyone from university students and stay-at-home parents to retirees and professionals who have either been out of the workforce for a while or who find traditional nine-to-five jobs too rigid for their lifestyle.

On the downside, however, such workers receive no employee benefits, no guaranteed income, are often not in control of their own pay rates and have all of the business risk transferred over to them as individuals.

But the situation is just as unclear in legal as it is in philosophical terms. Under US law, what these cases hinge on the degree of autonomy that employees have from their employer. David Cessante, partner in the labor and employment group at Clark Hill, a US member of Globalaw legal network, explains:

At the heart of all of these types of cases is the issue of what is the maximum control an employer can exercise over an individual before they are deemed employees? The more control that is exercised, the more likely companies are to become employers. And there are significant benefits in not having individual employees, which include being exempt from worker compensation liability, anti-discrimination laws and the like.

While the judge in the Uber case appears to be leaning towards the notion that drivers could be employees due to the demands placed upon them by the firm, which includes firing them if their passenger rankings are too low, the judge in the Lyft case has so far been more circumspect.

But there are other considerations that are only serving to complicate the case further. Cessante elaborates:

What I find to be the conundrum is that, in a traditional employment context, employees are generally told the hours they’ll work - and they’re given the space to do that to the exclusion of other jobs. What’s interesting here is that individuals, even if they use these companies as a primary source of income, generally appear to be free to drive or not whenever they like, and work for other people. But if they have the free will to do so, in my estimation, that would cut strongly against the argument that they’re employees.

Far-reaching consequences

This means that, should the cases go to jury trial this summer rather than simply be settled out of court, the

outcome will likely be decided by the emphasis put on one or other of these two points of law.

Despite the current uncertainty, however, Cessante is confident that US legislation is well equipped to deal with the predicament - even if it is being applied to a new industry based on a new business model.

But he is just as sure that the outcome will have far-reaching consequences for both new and existing online marketplaces in terms of how – or even if – they choose to operate.

The presumption is that such firms are currently able to offer customers lower priced services because, unlike traditional taxi cab companies, they don’t have the overheads that result from having to pay to wage benefits and employment taxes. As a result, Cessante says:

I’m very curious to see how these cases are resolved as we don’t know that the pricing structure of these business models can be sustained if people are seen to be employed. The outcome could have a dramatic impact on current players and also on what other services enter the market in future.

Helga Breen, partner and head of employment London for DWF’s litigation and employment group, agrees that the stakes are high – and not just in the US as the cases will set a precedent around the world. She explains:

Like other organisations in the on-demand economy, Uber and Lyft have very tight margins. So if costs increase, it would shoot a hole in their business model, which would be very significant, both for them and for other organisations that operate in the sector. Because this business model is predicated on low-cost alternatives to using employees, if they’re not allowed to do so, they’d have to rethink it -and it’s that consideration which is of concern to providers globally.

But Mark Butler, a lecturer in law at the UK’s Lancaster University Law School, does not believe that, should the companies lose their cases, the emerging so-called ‘sharing’ economy in which they operate is likely to implode any time soon.

Instead he thinks it much more likely that the organisations concerned will simply make their relations with drivers more informal within the framework of the law and ensure that any rules and regulations become less visible on their websites.

Two-way street

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As for the empowerment versus exploitation issue, it is, in his opinion, a “two-way street” and “depends on the category of individual” being talked about and their personal situation.

Deborah Scales, an employment solicitor at the UK’s Cartwright King, agrees. She says:

When we’re talking about exploiting marginalised workers or not, UK courts have said that a crucial factor in employment relations is the level of inequality between the partners. So if you’re an online entrepreneur with specialist skillsets to sell to the market, you’re less likely to be exploited than someone without special skills.

But the fear is that into the long-term, if online marketplaces and virtual employment networks do become the de facto standard, thus allowing employers to tap into increasingly global talent pools as widely predicted by some employment experts, we could end up seeing a seriously two-tiered workforce.

While highly skilled workers would be able to name their price, unskilled people could find themselves pushed into taking on piece work or stuck on controversial so-called ‘zero hours’ contracts.

These casual contracts, which are becoming increasingly common in the UK and Europe although they have yet to hit US shores, allow employers to hire staff without guaranteeing a minimum number of hours work in any week.

In fact, employees only actually work when required by their employers to do so, often at short notice and on hourly rates – a situation that has become a hot political potato in the run-up to the UK’s general election. But as Clarke Hill’s Cessante concludes:

What we have here is a situation with many grey areas. The current lawsuits may help to provide insight into how this situation will work, but I don’t know if it’ll be the be all and end all. As new specific kinds of industry appear, we may well see other cases emerging too.

My Take

It seems that the proposed Uber and Lyft lawsuits are significant in that they set a global precedent for the emerging digital economy, whether it’s called collaborative, sharing or something else - and could end up helping to shape it.

But it also seems that such legal action may just be the start as the legislative system tries to feel its way forward and strike a suitable balance between inhibiting innovation and protecting workers rights.

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