Deciding Who is an Uber Employee

In Manhattan or Brooklyn, Kitchensurfing will send a chef to your kitchen. For approximately $25 a person, a private chef will prepare, serve and clean up dinner in only 30 minutes.

Temporarily hired for a specific task, Kitchensurfing’s chefs were originally defined as independent contractors who typically absorb a job’s expense and have few if any benefits. Now though, because the firm has decided to call them employees, the laws mandate unemployment insurance, a minimum wage, overtime constraints, perhaps payment for employee expenses and Social Security.

Where are we going? To deciding who can be called an employee.

A Government Response

Uber and Lyft are trying to convince regulators and judges in California that their drivers are independent contractors. In a non-binding decision during June, the California Labor Commission said that an Uber driver is an employee. Moving the issue forward this week, a San Francisco federal judge said a case against Uber could proceed as a class action that involves as many as 160,000 Uber drivers. In court also because of drivers who claimed they were employees, Lyft was told by a California federal judge that a jury ruling should be the next step because 20th century laws did not apply to a 21st century problem.

Our Bottom Line: Tradeoffs

As economists we could say that firms and workers are contemplating the costs and benefits of the independent contractor/employee tradeoff. Hiring employees, the firm’s expenses rise and its incentives change. As a result, it could hire fewer workers, pay less, offer less flexibility. On the other hand, it can enjoy more consistent scheduling and worker quality. For workers also, the tradeoffs include more or less independence and benefits.

In our new sharing economy, firms like Kitchensurfing have decided the tradeoff they prefer and so too has Uber.