Uber and the Costs of Employment Regulation


shutterstock_251175352Uber and its customers are rightly concerned over a recent ruling out of California that calls into question whether the company’s drivers can continue to be classified as independent contractors. As I note in my new column for Defining Ideas, however, the problem runs much deeper than just the application of California law. The entire legal framework is ill-equipped to deal with the complexities of modern labor markets:

The clear lesson to learn from this fiasco is that it is a hopeless task to apply traditional regulatory structures to modern arrangements, especially when they block the implementation of new business models. Indeed, it is necessary to go one step further: it makes no sense to apply these regulatory statutes to older businesses, too. Time after time, these statutes are drafted with some “typical” arrangement in mind, only for the drafters to discover that they must also try to apply the statutes to nonstandard transactions that do not fit within the mold. Rigidity is not just a problem today. It was a problem with the [Fair Labor Standards Act] and other New Deal labor statutes even when they were first passed.

This point is unfortunately lost on a lot of modern commentators who think that their real challenge is only to update the employment laws for the sharing economy, rather than scrap them altogether. For example, James Surowiecki, writing in the New Yorker, comes out in favor of “Gigs with Benefits,” a great title for a bad idea. He rightly notes the scads of critics who claim that Uber is disguising its employees as independent contractors are wrong, and he recognizes that calling Uber drivers employees could be the death knell for many of these gigs.

But he then turns plain wooly by praising worker-protection regulation: “when there’s a tough call like this, we should put workers’ interest above corporate ones,” without explaining where the conflict arises in the ex ante position or how these regulations actually would collectively benefit workers ex ante. So his solution is to create some “third legal category,” that would hold employers responsible for benefits like “expenses and workers’ compensation” but not for perks like “Social Security and Medicare taxes.”

The proposal may sound reasonable, but it is wrong on all counts. Surowiecki has no idea whether Uber can survive the stripped down version of benefits grafted on to the labor contract. Nor does any outsider. He also has no idea whether one such scheme will work for all shared services, or how long any such scheme will last. Nor does he explain why regulation done in the name of worker protection outperforms a competitive labor market in which low transaction costs and ease of entry and exit offer workers huge protections. His third way leads to a new set of stifling regulations that will inhibit the next generation of business practices. We don’t need cleverness. We need the emphatic recognition that misguided labor protections can strangle Uber and other firms in the sharing economy, just as they have on all too many occasions impeded or destroyed more traditional businesses.

You can read the argument in full here.

Published in Law
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  1. Arizona Patriot Member
    Arizona Patriot

    Thanks as always, Prof. Epstein.

    Of course, the legal framework of employment regulation didn’t work well with the simplicities of pre-modern labor markets, either.

    • #1
  2. Tim H. Inactive
    Tim H.

    I don’t know that I have a really entrepenurial mind, but every now and then I think of something I might consider turning into a business on the side. But what will absolutely keep me from ever venturing into these waters is the mess of regulation that exists.

    There is, thankfully, a lot of variation from state to state, and in principle, I could move somewhere with a more business-friendly climate. But there’s still Washington to deal with. I don’t see that a business that operates within the boundaries of one state can legitimately be regulated by the Federal government, but as things stand, there are a lot of those, and I wouldn’t know where to begin. So I stay out of it entirely. I’m sure our regulators are glad to have one fewer businessman to deal with. And society winds up with just that little bit less economic vitality as a result.

    • #2
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