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McJobs and UberJobs

Lawsuits about what it means to be an employee could shape the future of big industries

Jul 4th 2015 | From the print edition

THE French enjoy nothing more than resisting the forces of Anglo-Saxon capitalism. On June
25th French taxi drivers paralysed Paris in protest against Uber, a ride-sharing service, and
attacked a few Uber cars for good measure. On June 29th police arrested two of Ubers
managers in France for illicit activity. But from Ubers point of view, all this is but a minor
inconvenience: Paris is just one of 300 cities it serves. Far more worrying is what is
happening in the companys own backyard in San Francisco.

On June 3rd the California Labour Commissioner ruled that Uber owes a former driver,
Barbara Ann Berwick, $4,152, mostly in expenses, on the ground that she was an employee
rather than, as Uber claims, an independent contractor. Uber is appealing against the ruling.
But it is a harbinger of things to come: San Francisco courts are also hearing two more cases
that hinge on the same question. If the rulings go against the company, its labour costs may
rise significantly, as it is forced to pay drivers social security and other benefits as well as
their expenses. Its valuation, which is currently above $40 billion, may suffer.

Uber is not the only big American company whose business model may be upended by
employment law. Last year the National Labour Relations Boards general counsel said he
would treat McDonalds as a joint employer, together with franchisees, of staff in the chains
franchised restaurants. This opinion will soon be tested in a case brought by ten employees
who claim that they were sacked by a franchisee in Virginia on racial grounds.

Both Uber and McDonalds are up against powerful interest groups that are capable of both
fighting prolonged legal battles and playing on the publics heartstrings. Uber has to confront
state governments which stand to gain sizeable tax revenues if on-demand workers are
classified as employees. McDonalds has to wrestle with the Service Employees International
Union, which has been trying for years to unionise fast-food restaurants.

The legal situation seems to be murky in both cases. A pro-Uber lawyer could argue that the
firm is essentially little more than a marketmaker that provides a forum for buyers and sellers
of rides to come together. Its drivers own their vehicles and choose their working hours. They
are free to work for rivals, such as Lyft. An anti-Uber lawyer could retort that the company
exercises considerable control over its workers. It screens them for criminal records, and
weeds out those who get poor reviews from passengers. Likewise, a pro-McDonalds lawyer
could argue that it is the franchisees who hire and fire workers, and who run the business
from day to day. An anti-McDonalds lawyer could point to the detailed rules that the company
lays down on how workers in franchised restaurants are trained and how they should serve
customers.

The fundamental problem is that in America, as in many other rich countries, employment law
has failed to keep up with the changing realities of modern work. Its labour rules are rooted in
a landmark piece of legislation, the Fair Labour Standards Act, passed in 1938 during Franklin
Roosevelts presidency. In those days a far larger proportion of American men worked in
manufacturing; most women did not work; and the difference between employees, who
worked full-time for a company, and contractors, who were typically tradesmen such as
plumbers, seemed much clearer. The post-war growth of franchising, and the expansion of
companies like Amway and Avon that used freelance door-to-door sellers, began to blur the
distinction. Now, the on-demand economy is all but obliterating it, by letting people sell their
labour and rent out their assetsfrom cars to apartmentsin a series of short-term
assignments arranged by smartphone app.

That the law is so dated suggests that judges should exercise as light a touch as possible.
The franchise model has thrived because it allows local entrepreneurs to join forces with a
global goliath to scale up their businesses quickly while operating them according to local
labour-market conditions. Forcing McDonalds to become a co-employer would expose those
franchisees to co-ordinated union action and make it much more difficult for them to respond
to local circumstances.

The benefits of flexibility

The case for a light touch is even more compelling when it comes to Uber and its peers. The
most important thing to remember about the on-demand economy is that it has been a
dramatic success not just for consumers but also for workers seeking flexibility. That is why
Ubers number of drivers has been doubling every six months for the past couple of years.
Some on-demand companies will choose to classify their workers as employees: for instance,
Instacart, a grocery-delivery service, has invited some of its freelancers to become part-time
employees, in the belief that this will make it easier to train and supervise them. But other
firms should be free to decide otherwise. Ubers drivers, and their peers at on-demand firms,
would get expenses and other benefits if they were declared employeesbut they would
have less flexibility over working hours and, more important, the increased cost of employing
them might mean fewer jobs.

America needs to update its employment law to take into account the fact that FDR is no
longer president. This will involve some careful balancing. Policymakers need to recognise
that people want to work more flexible hours and that technology has made it possible to
create spot markets in surplus labour and idle assets. But they must also recognise the
states need to raise taxes to pay for public services and benefits. Given the dysfunctional
nature of Americas politics, such updating will take a good deal of time and will probably
involve many false starts. Until then judges should leave open as many options as possible.
The last thing the country needs is for over-strict interpretations of outdated laws to kill
exciting new businesses and sabotage jobs. Do that and you end up like France.

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