Gig Economy: Changes We Need And Changes We Don't Need

Joe Kennedy May 2, 2016
May 2, 2016

Originally appeared on Law360.

Internet platforms have been growing rapidly for over a decade now. Apple Inc., Google Inc., Inc. andFacebook Inc. are huge companies, dwarfing many bastions of the traditional economy. More recently, sharing or gig platforms, which help the sellers of goods or personal services find customers, such as Uber Technologies Inc. and Airbnb Inc., have captured the attention of regulators.

A natural question is whether these businesses are different enough from other firms that they require new regulations. European regulators have generally taken a more hostile attitude toward Internet platforms, partially because the majority of dominant companies are American. In the United States the approach has generally been lighter. Still, many public officials believe that, because of their size and business model, the platforms pose novel dangers that require new government powers.

This approach is mistaken. The possible problems that Internet platforms pose to the economy are no different in kind than those posed by traditional companies. Because of this, existing regulations give regulators all the authority they need to deal with any actual problems as they occur. In some cases, existing law no longer meets the needs of the marketplace and needs to be updated. This is especially true for labor law. Where this is true, however, platforms are merely one instance of how outdated laws impose unnecessary burdens on the economy.

Internet platforms exist to connect two or more sides of a given market. Many of them match buyers and sellers of a good or service. However, others aim at different audiences. Tinder and eHarmony allow prospective couples to find each other. Facebook lets friends keep track of each other while giving advertisers an identifiable audience. The Microsoft platform brings hardware manufacturers, software developers and consumers together. The success of any platform depends upon keeping all sides happy. App developers will not write apps for phones that no one buys, and consumers will not buy a phone that has no apps.

Platforms provide great value to society. Even simple platforms increase social wealth by reducing the transaction costs that normally accompany cooperative endeavors. By making it easy for buyers and sellers to find each other, negotiate mutually beneficial agreements, and build a reputation for good performance, they reduce the cost of existing deals and make new ones possible. The most innovative platforms create products and services that deliver tremendous value. Apple’s app store, Google’s search and Facebook’s communities benefit billions of people. Ad-generated revenue allows them to give this benefit to people for free.

Concerns about Internet platforms usually take one of three forms. The first is that, because of their size and the nature of their competitive advantage, platform markets are more likely to converge toward monopoly, giving companies the ability to exert market power to foreclose competition and extract consumer surplus from buyers. The second is that platforms gather and store too much data on their users, generating a series of concerns including discrimination and security. Lastly, critics have alleged that platforms are unfairly denying their workers the protection of labor laws by forcing them to operate as independent contractors rather than employees. This is especially the case with gig platforms that create a marketplace for the offering of personal services such as rides, plumbing, or home visits by a doctor. None of these fears is grounded in fact.

Much of the benefit from Internet platforms comes in the form of efficiencies of scale and network effects. Five equally sized Facebooks would be far less valuable than one. So platforms often grow quite quickly. But platforms have a difficult time turning market size into market power. For one thing, even though platforms like Facebook and Google offer different services, they still compete with each other for ad revenue and large advertisers tend to be very sophisticated buyers, using advanced software to help them evaluate where to spend their dollars.

Second, even when they charge for services, they have less scope to raise prices. If Uber raises its fares, riders might drop off. But this will also make the platform less attractive to drivers, causing some of them to leave. Fewer drivers in turn will make the service less attractive to riders. In fact, many users have come to expect to use platforms for free. Although services like Pandora offer a premium model, most people use the free version and would probably leave if they had to pay.

Internet platforms are certainly capable of anti-competitive behavior. But existing antitrust laws give regulators all the powers they need to punish any actions that unfairly harm consumers or competitors. Lately, academics have recognized that the normal rules of antitrust theory may not apply to platforms. Certain behavior that would normally indicate serious market harm, such as price discrimination and tying, may actually increase consumer surplus in platform markets. Regulators therefore need to carefully examine the actual effects of firm behavior on all sides of the market, not just the one that is immediately affected.

The second major focus of attention is on the use and collection of data. Cheap storage and massive computing power have ushered in the era of "big data," in which every company tries to gather and store as much information on its customers as possible in the hope that sophisticated algorithms will someday translate it into deeper market insight and higher sales and profits. In this, Internet platforms are no different. Much of the data they collect is socially useful. Storing credit card information saves a user from having to enter it each time. Ratings systems give both buyers and sellers information on who they are dealing with. Histories give Google the uncanny ability to predict your searches and allow Amazon to suggest amazing movies that you might otherwise never see. While it is true that even their developers may not understand how adaptive algorithms eventually work, companies are still subject to anti-discrimination laws. And because they are information based, platforms are likely better positioned to realize the importance of data security. When problems do come up, the Federal Trade Commission already has significant powers to police the market and take action against actual harms. Consumers also have a common law remedy in the courts for any damage they suffer.

The final bone of contention is over labor law. A number of people have complained that Internet platforms unfairly classify their workers as independent contractors rather than employees, thus denying them the protection of major laws such as the Occupational Safety and Health Act and the Fair Labor Standards Act. These criticisms are mainly aimed at platforms that match individual workers providing goods and, especially, personal services, with consumers. But rather than being unique to the sharing or gig economies, this problem highlights the general inability of labor law to keep up with the fast-changing nature of work.

Official data on alternative work arrangements is scarce, but a recent report estimated that more than one in six workers is involved in an alternative arrangement.Another study found 54 million workers, roughly a third of the workforce, were independent contractors, held more than one job or had a temporary job. Although they have been growing rapidly, gig platforms still represent a very small fraction of the market. Another study estimated that only 600,000 workers use an Internet platform to find work and roughly 400,000 of these are Uber drivers. The problem is that labor laws still assume a neat division between employees, who are totally dependent on their employers, and independent contractors, who run their own businesses and have many clients. In the real world there are large gradations between these two poles and finding the right place to draw that line is difficult.

In a way it is unfortunate that much of the debate has centered around Uber, which did introduce a new service and employs most of the gig workers. Focusing on a single company obscures that fact that many gig platforms serve existing contractors who would otherwise have to rely on advertising and word of mouth to find work. It does little to enlighten people to the fact that a large number of taxi drivers, barbers and other regular workers work as independent contractors even though we assume they are employees. Finally, it ignores the degree to which such arrangements are driven by workers’ increased need and desire for flexibility and control over their work-life balance. 

The employer-independent contractor distinction is a centuries-old relic of common law governing whether someone should be liable if someone working for him causes an accident. Judges have refined it to a varying number of subjective factors revolving around the control exerted by the various parties. The fact-based nature of these rulings provides little guidance to companies or workers. More important, it bears little relationship to the substance and purpose of individual labor laws. Why should discrimination laws hinge on whether a worker is an employee or an independent contractor? Shouldn’t tax withholding laws contain clear thresholds that firms can understand rather than a set of 11 vague criteria?

Adherence to outdated concepts is creating damage. Because all federal labor laws use the common law distinction, either all the laws apply or none do. Companies that want to escape the application of one law have a strong distinctive to provide any unnecessary support to their workers, even if doing so would be mutually beneficial. Valuable services that firms might choose to offer their workers include training, tax withholding, business advice, and assistance with branding and recordkeeping. Each of these would benefit workers and be relatively easy for employers to arrange.

In a recent paper, I described three paths by which Congress could modernize labor law to meet the needs of the 21st century workforce. The most ambitious approach would be to fix the problem by amending each of the nation’s major labor laws. Rather than base their application on the outdated employer-independent contractor distinction, lawmakers could tailor it to the specific purpose of the law and the need and ability of each party. In some places the law would probably expand. In others it should contract. Given the subject matter and the current political polarization, this might be a long and contentious process, however.

The second approach would adapt the law by creating a third category of “independent worker” for those who use an intermediary to sell personal services. Some, but not all, labor laws would apply to the relationship between the intermediary and the worker. This approach risks replacing one fuzzy boundary with two. It also still requires Congress to amend at least some of the labor laws to specify how they apply to the new category.

The third approach would suspend the law temporarily for Internet platforms that help workers sell personal services. The platforms would have to serve the general public and give workers a large amount of freedom to accept or reject specific projects. Platforms could still set prices, collect ratings, handle payment and eject poor workers and users because these activities add value for all parties. A temporary exemption would let Congress see whether these platforms step forward to offer more support to their workers, potentially creating new models of the work relationship that increase worker security while still preserving flexibility. If so, these models could quickly spread to the rest of the alternative workforce.

We need to acknowledge that many of the complaints against Internet platforms come from traditional industries facing new sources of competition. Although these businesses often complain that platforms have an unfair advantage because they are not regulated, their real problem is that platforms are delivering better service for a cheaper price. Companies like Google and Facebook significantly expand our capabilities without charge. Based on polling of both users and workers, gig platforms deliver tremendous value to all parties. We should encourage their spread.