Should gig workers be considered employees?
There’s been a lot of news here in California about the “gig economy” and whether or not the people who work for companies like Uber and Lyft should be independent contractors or actual employees.
The difference is huge, to the bottom lines of the companies involved. If the workers are “just” independent contractors, they make only as much money as they earn when they work, and they get no benefits: healthcare, vacation or sick time, or contributions to retirement funds. If the workers are deemed to be actual employees, the companies are going to have to cover those costs.
Obviously, there are billions of dollars at stake, which is why the gig companies are trying to kill pending bills, and get initiatives passed, that limit their financial exposure by ensuring that their workers remain “contractors.” Opposed to them are labor unions, who believe that if you’re working for a gig company, you deserve the same benefits as if you’re working for a “traditional” company, like (say) Apple, Chevron or the local school district.
As a former, longtime independent contractor, I’d like to offer my views.
I worked for wine magazines for decades: Wine Spectator and Wine Enthusiast. I was a gig employee before the term was invented. I never had any benefits. This became more of an issue when I worked for Wine Enthusiast because my public visibility increased and so did my work load and importance to my employer. I never made a big deal about it to my boss, but on those occasions when talk of benefits did arise, he would claim that I didn’t really need benefits because I had so many perks as a wine critic.
He had a point: the restaurants, hotels, wine…it was enjoyable. I enjoyed my status as an independent contractor. I got to choose my own hours of work. I could take days off without permission. As long as I turned in my work assignments with professionalism—and I did–I was golden.
Of course, I would have loved to have health insurance, a 401K retirement contribution from my employer, and the rest of the benefits that “real” employees enjoy. But it was not in my nature to make such demands, which my boss would have denied anyway, with the threat that there were plenty of people ready to take my place if I was unhappy. I understood that, from the point of view of my employer, I was a good deal: he was getting the milk, but he didn’t have to buy the cow.
So I understand the argument on the part of the gig employers that they’re trying to protect their workers’ flexibility. On the other hand I also see the flaws in this argument. I did indeed have lots of benefits in my job. But if you’re an Uber or Lyft driver, you get no such benefits. I suppose there are plenty of gig company workers who prefer independence to benefits. There are probably an equal number who would like to have the benefits; indeed, I’ve seen news reports of both groups expressing their preference.
What should the law mandate under such circumstances?
This is not an easy decision. One the one hand, lawmakers don’t want to stifle entrepreneurialism by being overly-restrictive on companies. On the other, they need to protect the rights of workers against being exploited. America has a long history of rich employers sucking the lifeblood out of workers, from the forced child labor of yesteryear to the coal mines of today that expose workers to black lung disease to the gig companies themselves. But where is the line between excessive mommy-state intrusion, and mandating a more equal sharing of wealth?
As a moderate Democrat, I wrestle with this question. As usual, I try to find the middle ground. Is there a way to protect Uber’s and Lyft’s interests so they remain viable employers for the many people who obviously want to work for them? At the same time, is there a way to offer their workers the benefits which a majority of Americans have come to expect? And is there a way to protect drivers who do not wish to be fulltime employees—who value their freedom to work only when they want and choose not to have the benefits?
I don’t know. But if anyone can figure this stuff out, it’s us Californians, led by our brilliant, innovative and problem-solving Governor, Gavin Newsom. California leads the way in just about everything progressive. We’re Blue, baby, and we’re gonna lead the #BlueWave2020!
You answered your own question in the penultimate paragraph. I spent 33 years in the sales end of the wine business, retiring in January of 2016. On day two of retirement I knew I had to find something to do to get out of the house. Uber fits the bill for me. Work when I want, leave the app off when I don’t. As an employee, I would be subjected to the demands that Uber would make, be it a certain number of hours on the app, certain number of weekly trips, and whatever else they would impose. So I am fine with my situation.
Why can’t Uber and Lyft offer two classes of positions, employees and independent contractors? They can specify requirements for drivers, and subject potential employees to the same interview process and background checks that all potential job seekers are subjected to. A statement pronouncing the delineation between employed drivers and contractors would allow people looking for work to make the choice that fits their situation.
Let’s explore how poorly Uber drivers are compensated.
They are subsidizing Uber by personally funding out-of-pocket the “wear and tear” on their vehicles — whose depreciated resale value falls with each mile driven without compensation for that economic loss.
From The Wall Street Journal “Opinion” Section
(August 14, 2019, Page Unknown):
“How Uber Makes Its Drivers Pay”
URL: https://www.wsj.com/articles/how-uber-makes-its-drivers-pay-11565737028
By Ken Wiles and Kep Sweeney
[Mr. Wiles is a clinical associate professor of finance at The University of Texas at Austin. Mr. Sweeney is managing director of Acceleron Group.]
Uber lost $5.24 billion in the second quarter this year and seems to have no clear path to profitability. But even that loss is understated, because a substantial part of the expense is not included in Uber’s income statement and is instead pushed onto drivers: the wear and tear the job puts on their cars.
Most Uber drivers seem unaware of how their job costs them when it comes to the value of their cars. We spoke with more than 50 Uber drivers in Los Angeles, Portland, Austin, Dallas, Houston and Charleston, S.C., in recent weeks and asked them to tell us their revenues and costs. The revenue—the payments Uber made to them—are recorded in detail, but the costs aren’t as clear. The drivers all included gasoline. Some noted the price of water or candy for riders, and a few included maintenance—but only one detailed the loss in value of the car he was driving, and even then only after we inquired about it specifically.
That driver has an accounting background and wanted to make a little extra money over the holidays. He drove a few-years-old Mercedes M Class SUV, which was worth about $20,000 when he began driving for Uber. He kept meticulous records of his total costs, which he netted out against income. He drove for Uber for a couple of months.
When he stopped driving, he had made about $5,000, but the value of his SUV had dropped from $20,000 to about $15,000. Reviewing his records, the driver found that at least 80% of the miles he drove during that period were for Uber, making about $4,000 of the decline in value attributable to his work for the firm. He was going to have to pay for two service visits, higher insurance rates, and new tires sooner than if he hadn’t been an Uber driver—which all added up to somewhere north of $3,000 in additional costs. In short, he was worse off financially than when he started.
For drivers who depend on Uber to make a living, their cars’ loss in value is serious. If a driver carries passengers for 40,000 miles a year and incurs depreciation of 29 cents a mile—the average reported by the American Automobile Association in 2018—the annual expense is $11,600, or $967 a month, $223 a week, $5.58 an hour based on 40 hours a week.
For Uber, this cost transfer to drivers is worth billions of dollars. Uber reported about 1.7 billion trips on its platform during the second quarter of 2019. If, as has been reported, the average length of a trip is 6.5 miles, Uber drivers would have provided more than 11 billion miles of rides. Using the depreciation rate of 29 cents a mile—which Uber used in the registration statement it filed with the Securities and Exchange when it went public—drivers incurred nearly $3.2 billion that quarter in costs, many without realizing it.
It gets worse. Drivers are allowed to expense the miles that they drive, which offsets some of the loss, but Uber reports only the mileage incurred when riders are in a car, which may be far less than the total miles driven. The drivers we spoke with only reported the miles reported by Uber and are thus underreporting their miles driven on the job.
Not all of Uber’s reported trips were in cars. Some were on scooters, but let’s assume that 90% were car miles, as that’s roughly how much ride-sharing and UberEats account for in Uber’s business. Not accounting for growth, drivers would absorb more than $11 billion in annual costs.
Once drivers understand that they are liquidating the value of their vehicles, in effect receiving payday loans with their cars as collateral, the effects may be significant. Companies like Uber, Lyft, Grubhub and DoorDash may find it more difficult to recruit and retain drivers unless they raise prices and pay drivers more.
Restaurants that rely on delivery will find their revenues under pressure. Even Tesla, which recently announced that it plans to have a million robo-taxis on the road next year, may find it more difficult, since the company doesn’t plan to own the taxis and instead wants owners to make their cars available for rides.
If these services were profitable, these companies would want to own the vehicles. They don’t, and we know why.
Uber got out of the business of purchasing new vehicles, and “leasing” them to vehicleless drivers.
From The Wall Street Journal Online
(August 8, 2017):
“Uber Plans to Wind Down U.S. Car-Leasing Business;
Move by the ride-hailing company is due to unsustainably high losses”
URL: https://www.wsj.com/articles/uber-plans-to-wind-down-u-s-car-leasing-business-1502200046
By Greg Bensinger
Staff Reporter
Uber TechnologiesInc. is winding down its U.S. auto-leasing business, according to people familiar with the matter, after the ride-hailing company discovered it was losing 18 times more money per vehicle than previously thought.
The Xchange Leasing division—begun two years ago to attract drivers whose credit prevented them from getting their own cars—had been estimating relatively modest losses of $500 per vehicle on average, these people said. But managers recently informed Uber executives and board directors that the losses were actually around $9,000 per car, or at least half the sticker price of a typical leased vehicle.
After investing billions to rapidly expand its ride-hailing app into more than 70 countries, Uber has sought to tame losses that totaled more than $3 billion last year alone. Last month, Uber merged its unprofitable Russian operations with the more-popular app in that country, Yandex.Taxi.
Investors have exerted pressure on Uber to rein in costs and prepare for a possible initial public offering following the ouster of Travis Kalanick as chief executive in June. As Uber’s board searches for a new CEO, a 14-member executive committee is making weighty decisions while also dealing with the aftermath of a monthslong investigation into its culture, a trade-secret lawsuit from Alphabet Inc. and fierce ride-hailing battles around the world.
News of Xchange Leasing’s planned shutdown follows a report from The Wall Street Journal that exposed safety problems at Uber’s rental-car operation in Singapore, which the company began in 2013 and has since extended to Vietnam and India.
Uber launched the U.S. car-leasing program in 2015 under Mr. Kalanick, and had high hopes for it, investing some $600 million in the business, according to the people familiar with the matter. The idea was to offer leases to new drivers who otherwise may not be able to get cars because of spotty credit histories, in an attempt to maintain a healthy supply of vehicles, crucial to keeping fares and wait times low.
But executives in recent weeks decided to phase out the auto-leasing unit after realizing the extent of their expected losses, culminating in a board committee briefing in late July, the people said.
The ride-hailing company is aiming to close out or sell most of the business by year-end, these people said. As many as 500 jobs could be affected by the exit of the Xchange Leasing program, representing roughly 3% of Uber’s 15,000-employee staff.
Uber struggled to control losses at Xchange Leasing despite rates of more than $500 a month—well above an equivalent lease price from a regular dealer. The high lease fees pushed many drivers to work longer hours and return the vehicles in poor shape, damaging their resale value, these people said. A fickle pool of drivers mixed with inconsistent earnings made it a challenging business to maintain, they said.
Uber’s financing operations have run into trouble before. Early this year, Uber settled for $20 million a Federal Trade Commission lawsuit that alleged, in part, that the ride-hailing firm falsely claimed it offered the “best financing options available,” irrespective of drivers’ credit history. The FTC found Uber’s advertised rates of between $119 and $140 a week were actually between $160 and $200 a week during a period running from late 2013 and April 2015.
The FTC also alleged Uber gave its drivers worse rates than those with similar credit could get elsewhere. Uber admitted no guilt in settling the claims with the FTC.
For Xchange Leasing, Uber had relied on a network of established dealers to offer leases, but soon found they were pushing drivers into more expensive vehicles, lowering their likelihood of turning a profit, according to a person familiar with the business. So Uber decided to start opening leasing facilities of its own, where it could better control the lease terms and streamline the process of registering new drivers.
Another person familiar with the matter said Uber might try to sell off the vehicles or the whole division and has held some preliminary discussions already. Uber may move some of the 500 workers into other divisions of the company such as customer service, this person said.
Subprime auto leasing can be highly lucrative because of the starkly higher monthly fees, larger down payments and other tacked-on charges dealers can demand in exchange for taking a risk on drivers with poor or no credit history.
But subprime lessees are also more likely to miss payments or abandon their vehicles altogether, which can cut into profits or even turn a lease into a money-loser.
Uber has said Xchange Leasing was never meant to be profitable on its own, though executives were scrambling to bring the program closer to break-even, the people said. Vehicle depreciation and costly repossessions cut into Xchange Leasing’s profits, they said.
Unlike the Asian car-leasing program—which involves Uber buying cars from importers and leasing them to drivers—with Xchange Leasing, Uber holds titles in a trust rather than on its balance sheet. Uber has titles to nearly 40,000 vehicles through Xchange Leasing and would need to sell the vehicles. The San Francisco company has leased a variety of vehicles through the program, including Ford Focus, Hyundai Elantra and Nissan Sentra sedans.
A 2014 Toyota Corolla was recently being offered for a term of 130 weeks at $122 a week, totaling roughly $500 a month, according to marketing materials distributed by Uber. Leases for current-model Corolla sedans, by comparison, can be had for around $150 a month after a $1,500 payment, according to Toyota’s website, though generally for customers with high credit ratings.
A 130-week lease for a base-trim 2014 Corolla would end up costing a driver over $16,000, which compares with the Kelley Blue Book fair purchase price of about $11,700. As Xchange Leasing is only two years old, no driver has yet gone through to the end of a vehicle lease.
Unlike more-traditional leases, Uber allowed drivers to return vehicles with just two weeks’ notice after the first month and didn’t restrict mileage, a bid to keep the vehicles racking up rides. If a driver isn’t logging shifts, payment obligations continue to pile up.
Uber keeps a $250 deposit that drivers pay if they turn in their cars early, which is a fraction of typical termination fees. Drivers’ earnings are deducted through the app to help pay for the lease, which also gives them a disincentive to drive for rival Lyft Inc. or small competitors. Uber installs tracking devices on many of the vehicles, which can help them repossess the vehicles from drivers who miss multiple payments.
Uber is plagued by constant turnover among its drivers, who may find wages are less than anticipated or simply grow tired of the work.
As a result, Uber has tried a host of programs to get more drivers on the road, including a recent partnership with Avis Budget Group Inc. ’s Zipcar allowing for hourly rentals. Last year it reached deals with Toyota Motor Corp. and General Motors Co. to offer leases or rentals to potential drivers.
Write to Greg Bensinger at greg.bensinger@wsj.com
Uber does not deserve to be a company. It is only in business through the sheer force of investors who are subsidizing every single ride to gain marketshare. Their goal is to put taxis and even mass transit out of business by spending investor money while these other, established, previously profitable businesses go broke because their pockets aren’t deep enough to keep up with Uber’s losses. As soon as these established players are out, the prices will increase as necessary to make Uber profitable. This is out in the open and goes against everything a conscientious person should stand for.