Who will survive in the gig economy?

Uber has a headache, and California moves to amputate.

Disclaimer: while I am currently a full-time employee of Uber Technologies, all positions and opinions presented in this essay are mine alone and unaffiliated with the company. Uber is the largest on-demand marketplace and as such stands in for other services like Lyft and DoorDash in this writing, but the ruling in California would have the same deleterious effects on all companies relying on freelance labor.

Last Monday, August 10, a California court ruled that Uber contractors ought to be classified employees - giving Uber, Lyft, DoorDash et al 10 days to appeal the decision.

In response, Dara Khosrowshahi, CEO of Uber, penned the following op-ed in the New York Times:

I Am the C.E.O. of Uber. Gig Workers Deserve Better.

Our current employment system is outdated and unfair. It forces every worker to choose between being an employee with more benefits but less flexibility, or an independent contractor with more flexibility but almost no safety net… America needs to change the status quo to protect all workers, not just one type of work.

Critics have long held that driving for Uber is an untenable way to make a living. Without guaranteed pay, benefits, health insurance, overtime, and other stipulations of traditional employment, drivers - who are often from immigrant, underserved, and vulnerable populations - are particularly liable to be exploited.

Uber is quick to point out that, as a percentage of the entire base of signed-up drivers, few support themselves solely off gig economy earnings. Switching to a full employment model would benefit only a small percentage of rideshare drivers while driving away the majority of flexible time workers, and crippling the platform’s availability and price competitiveness for consumers.

The scale and ubiquity of Uber-like transportation and delivery services clearly demonstrates the demand for the business. With Uber achieving verb status in the standard lexicon, it’s difficult to imagine a time without it. That said, according to an internal study by Uber, the forced reclassification of contractors to employees will decrease the availability of the service to the tune of 23-59%, and result in ride costs doubling in certain areas, especially in non-metro zones that are historically underserved by taxis and public transit. Many riders will find it unacceptably difficult or expensive to get where they need to go.

In short, this ruling will be a lose-lose-lose for the vast majority of players involved in the gig marketplace. Yes, some of the drivers whose rights are at stake will receive job security, but far more will be unable to access gig economy platforms for any kind of work at all.

This being a many-sided marketplace with many interested parties, there are far more stakeholders who are inconvenienced or displaced entirely as a result of the change. Beyond the convenience and simple logistics of A to B transportation, we are only beginning to understand and appreciate the positive network effects of ridesharing at scale. In the case of employees vs contractors, heavy handed regulation is certain to do more harm than good.

One major point that this court decision does not seem to take into account are the varying needs of individual workers who find themselves driving and delivering for gig economy apps. I’d categorize any given rideshare worker into one of the following camps:

A. Wants to drive for fun, not for earnings
I’ve met just a few folks in this category, but an example would be retirees looking for social interaction. I also had one driver in a BMW M5 who claimed he was doing UberX for tax purposes. Whatever their reasoning for working, earnings are just a cherry on top for these drivers.

B. Wants to drive for earnings, as “nice to have” supplemental income
These are people who want to flexibly earn a few extra bucks for discretionary spending. They’re not close to financial jeopardy, but might be a few hundred short for the new motorbike they’ve been eyeing. These earners tend to be goal oriented and on the platform for short periods of time.

C. Wants to drive for earnings, as a necessary supplemental revenue stream
These are people who do need supplemental income, because their other job(s) are not enough for their expenses. They may be burdened by debt, temporarily out of work, or covering for a sick family member - but the outcome is the same. Driving is their recourse because it’s convenient, especially if they already have access to a vehicle, though if they didn’t drive they might find some other employment to get by.

D. Wants to drive for earnings, as their only revenue stream
These are those who have made a “career” out of professional driving. They may have held other jobs even recently in the past - waiting tables, packing for Amazon, even driving taxis. In any case, driving is all they choose to do to stay afloat. They know all the ins and outs of the apps and do their best to game the system before it games them. They tend to enjoy rideshare for one reason or another (the flexibility and social aspect come up often), but could pick up other work if they had to.

E. Has to drive for earnings, as their only revenue stream
These are often recent immigrants or seasoned ex-drivers who don’t have much optionality when it comes to finding lines of work. Driving is their lifeblood, often to support multiple family members, and they may drive three hours each way to metro areas just for better earnings opportunities. Driving is all they can do, and they are often the most vulnerable population of workers - one bad accident or one too many tickets could push them under.

F. Has to drive for earnings, as a necessary supplemental revenue stream
A bit of an edge case similar to E, these people find it difficult to get work, and so driving is a rare opportunity for them to make ends meet. An example might be a disabled person who can only work in short bursts, looking to supplement their disability income.

You can see how it’s basically impossible to extrapolate the needs of all these groups and serve them equally, while it is the sum of all these groups’ efforts that creates a consistent service for the customer. In terms of the occurrence of these types of workers on gig economy platforms, I’d hazard a guess that it roughly falls into a skewed bell curve as shown below:

What happens when the employment hammer falls on Uber?

Types A and B will take flight in response to such a mandate; their goals don’t align with the commitment that employment entails.

Types C and D - people who choose to drive, and make a living out of it - make up a bulk of Uber’s contractor population. These career drivers often have thousands of trips of experience and the skills to show for it. They are critical in maintaining standards of service for customers. Many enjoy their work and might chafe at being displaced.

Types E and F - drivers who have very little opportunity outside of driving, and so are a smaller, more vulnerable population - are the workers who stand to benefit most from the employment model.

It’s clear that the employment mandate will directly result in the loss of livelihood for most drivers. A difficult question: how does Uber decide who to convert to full time employment?

Looking at metrics like rating or lifetime engagement with the platform seem like a good analogue for “high quality drivers”. But these metrics may not capture the motive underlying the distinction between type C, D, E, and F drivers. If the goal of legislation is to protect the wellbeing of drivers, groups E and F should receive the rights and benefits associated with employment.

Even so, the dynamic of flexible work is lost entirely, as Uber will have to mandate shift hours and dictate where drivers should be at various times of day to ensure a smaller worker supply can meet demand. This requires a grounds-up technical, operational, and cultural rebuilding that strips Uber of what made it Uber.

Foisting the employment model onto on-demand transportation and delivery marketplaces creates an existential crisis for these businesses, and by extension a very real threat to the livelihoods of the workers who still depend on them. Nor is it a cure-all to the issue of driver exploitation, because not every driver will receive salvation. Most, in fact, will lose access to a scarce income stream in this financial downturn.

The true solution to the fundamental conflict of interests - marketplaces looking to maximize profit, riders looking to minimize spending, and drivers looking to receive livable wages and basic protections - requires a more thoughtful approach that may well result in an all-new worker classification. It’s clear that our modern day approach to employment and productivity has moved far beyond the contractor/employee dichotomy that was defined in 1917, over a hundred years ago.

Uber and its gig economy compatriots have fewer than 10 days to make an appeal on the ruling. If California holds firm on this stance, it is effectively disbarring ridesharing, and on-demand service work as it exists today, by making its economics unviable.

Looking at the bigger picture, it’s clear that this decision harms opportunities for both riders and drivers far more than it benefits the select few drivers who will remain. If other jurisdictions follow suit, our regulatory system will have failed to accommodate the innovation of the on-demand marketplace with a narrow-minded, false solution to the very real and troubling issue of worker exploitation - one that demands a more nuanced approach than this.

Uber has proposed remediations to begin to make things right. Regulators need to go back to the drawing board and create legislation that acknowledges the new normal of the on-demand economy, provides support for the disenfranchised, and maintains the opportunities that freelance service work provides.