The Sharing Economy's Shift Away from Contract Labor

The Sharing Economy's Shift Away from Contract Labor

by on 2 Feb, 2016

Recently the sharing economy experienced its demise -- or revival, depending on whom you talk to. Spearheaded by companies like Uber and Airbnb that offer users an opportunity to turn a profit simply by tooling around town in their automobiles or letting out a free sofa, the industry has once again come under fire, this time from regulators who view those providing contract labor for such services as company employees.  

In the case of Uber, which provides a ride “sharing” service -- albeit one that comes complete with a driver -- where the company sees those who own and operate vehicles as contract workers, recent labor commission rulings in California and Oregon declared them employees who should get all the labor entitlements and protections that flow therefrom.

In response, Uber has begun transitioning many of its thousands of independent contractors into an employer-employee relationship.  

Contract Labor Shouldn’t Resemble Employment

Companies that primarily hire contract workers are nothing new. In businesses where employees come and go, such as construction, or where they remain at arm’s length, such as work-from-home telesales, contract employment is both widespread and common.

Uber is different, according to the state commissions, in that its model more greatly resembles permanent employment. Although Uber drivers use their personal vehicles and make their own hours, they must still meet performance standards, can be fired or investigated, and must use company equipment to perform specific tasks.

RELATED: Uber Facing Huge Fines in New England; 3 Takeaways for Small Business

Other sharing economy startups also let their “users” do the work. One example is Instacart, a grocery delivery service, which just one week after the California ruling began offering some of its contractors the opportunity to become employees. Another is Airbnb, which turns homes into hotels and homeowners into concierges.

Uber’s entry into the taxi ring has caused major disruptions to a heavily governed industry, which is perhaps one reason for the added attention from regulators compared to other sharing economy startups. Today Uber values nearly $75 billion. Sharing economy revenues hit over $13 billion in 2013, a number expected to rise to $335 billion -- or half the total rental market -- by 2025.

Contract Labor Boundaries & Benefits Are Made More Clear

Companies that want to use contract workers can learn a strong lesson from Uber, whose do-first-and-face-the-possible-penalties-later approach has led it to jump in with both feet where other companies may have been more cautious. In its bid to capture market share, the online cab service may have inadvertently helped to define the boundary between who is employed and those that remain independent. Providing company equipment and maintaining a supervisory relationship while failing to provide wages and benefits may, apparently, be a violation.

For businesses, more clarity is a good thing. Using contract work has many advantages, including:

  • Independence: In contact labor, the parties operate separately, each holding no duty to the other beyond providing agreed-upon services. Outside contractual provisions, individuals can decide when and how they work. Companies benefit from greater independence, too: they can shop the market for single or multiple contractors to complete projects and be to free sever ties afterward.  
  • A Smaller Workforce: With contract employees at their disposal, even businesses with few employees can have a huge impact. For example, even though it employs under 2,000 people, over 2 million Airbnb users offer lodgings worldwide.
  • Lower Tax Requirements: Businesses pay unemployment and FICA taxes for employees but not contract workers.

Contract Labor in a Changing Jobs Market

The jobs market has gone through major changes in the last several years. Businesses are transitioning to search-based hiring and seeking new employment models to operate with more  efficiency and speed. Meanwhile, U.S. unemployment continues to descend toward pre-recession levels: The rate dropped to 5.1 percent in September, 2015, down from a high of nearly 10 percent in 2009.

Today over 40 percent of the U.S. workforce is made up of “contingent” workers: temporary, part-time or otherwise. Contract workers make up 3 percent of this total. As the latest trailblazers in the sharing economy tack away from contract work and towards traditional employment, businesses should re-examine their own contractor relationships for irregularities and consider whether direct hiring or temporary employment would more makes sense.

Despite the setbacks experienced by Uber, its plan seems to have worked. Using contract labor, the taxicab-industry disruptor successfully expanded into dozens of urban markets around the globe. It is currently planning its eighth round of financing in the last five years, with its sights set on a $1 billion fundraising goal. Regulations or no, it’s hard to argue with that kind of success.

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