Ross Rambles

On Wednesday, the California Labor Commission ruled that a former Uber driver had in fact been an employee at the company, rather than a contractor, and ordered Uber to reimburse her for costs incurred while an employee at the company. This is a big deal that could put a dampener on the hockey-stick growth currently enjoyed by on-demand companies such as Uber, Lyft, Homejoy, Taskrabbit and Washio, that rely on the contract-worker model to lower their cost base and allow for business model that can scale rapidly. In order to understand why there are opportunities to be found in our new, on-demand economy, a little background is required.

The Background

Uber and other on-demand “Uber for X” companies have benefited from and capitalized on a number of converging demographic (rise of the Millenials), economic (long-term effects of the financial crisis) and technological (pervasiveness of the smart phone) factors that have given birth to today’s digital nomad culture. As a result, today’s society is eschewing the traditional concept of property ownership in favor of tech solutions which promise convenience and ubiquitous access to the same goods or services at an affordable price point. Unburdening users of the responsibilities associated with ownership and offering a superior “experience” with a product or service has proven to be a hugely successful model.

In order to scale this model rapidly, on-demand companies have very intelligently leveraged their ability to use contractors instead of full-time employees, reducing the hiring process to a simple background check and, crucially, reducing the companies’ cost base by eliminating the need to pay benefits that would be entitled to a full-time employee (think pension plans and health insurance, overtime pay and paid vacation). Known as “1099 workers” for the tax form they file as opposed to typical W-2 employees, the availability of people willing to work as contractors allows companies like Uber or Handy (on-demand cleaning service) to rapidly on-board hundreds or even thousands of workers to their platform.

How big is this phenomenon? Much bigger than you might expect. Last September, a report commissioned by the Freelancer’s Union concluded that 53 million Americans, 34% of the working population, work in jobs classified as freelancing. That number is forecast to rise to 40% by 2020, according to another report.

The Pain Point

Many 1099 employees are only in the job because it is the best option available to them at the time – a survey of contractors found that less than a third planned to be in the job for more than three years. 1099 employees valued the ability to work on their own schedule, but would prefer access to health insurance and retirement benefits even more.

This poses an ethical dilemma: is it OK for companies to build business models that succeed partially because they are able to take advantage of the 1099 employment structure? What is the obligation of a company to employees who are W-2 workers in all but name?

I believe that the ability to rapidly scale and shrink a workforce is a huge positive, as it allows for a more flexible labor market as well as allowing employees to take on multiple jobs and work to their own schedule; however I believe that companies have an obligation towards their employees (even contractors) that goes beyond a simple exchange of payment for labor. I have previously argued that providing people with meaningful work is one of the core social responsibilities of corporations, and part of that responsibility includes offering benefits that allow an employee to live a rich and fulfilling life. This is where I see an opportunity.

The Opportunity

Imagine that Uber (or any other on-demand company) is able to take out insurance against all 1099 employees who work (on average) more than 20 hours per week in a monthly fee per driver. Uber is then able to offer its drivers paid sick leave, maternity/paternity leave and basic health insurance, making a claim to the insurance company to cover the cost of the benefit each time it is taken by a driver. By spreading the cost of insurance over its collective pool of drivers, Uber’s insurance premium per employee would be much lower than asking employees to purchase their own insurance. At a hypothetical cost of $10/employee/month, this policy would be expensive (Uber has more than 250,000 contractors), but more than worth it for the positive moral impact it would bring to its massive contract-workforce.

The benefit of such a solution is that it doesn’t change Uber’s flexibility around hiring – workers can still come and go as easily as they do today – but those employees who are full-time, W-2 employees in all but name would be able to access some of the benefits they deserve for dedicating so much of their time to the company. It’s important to note that this type of coverage would be different to the Auto Insurance that is required by law for on-demand drivers – this is not a product I have seen offered in the market today.

With more than 30% of working Americans employed in the freelance economy, it is time for the platform businesses that are reaping the fruits of their labor to recognize and reward 1099 employees with the benefits they deserve. While the added cost of such benefits would eat into the profit margins of these companies, it would surely not halt their rise to global domination, given the User Experience and Convenience they provide.

The wave of disruption that on-demand companies have spawned is wiping out many traditional business models, but opening up entirely new markets. The new pain points felt by workers in the Uber Economy present golden opportunities for those who can spot them and offer a solution.