Uber, London: smart apps demand smart regulation

04Nov16

Congratulations to James Farrar and Yaseen Aslam (and 17 others) who won their employment tribunal case against Uber last week.

The case concerned whether Uber drivers in the UK are self-employed independent contractors or ‘workers’ for Uber. The tribunal ruled that drivers work for Uber, not the other way round and therefore they are entitled to national minimum wage and paid annual holiday. It has been hailed as a ground-breaking case for testing the boundaries of the app-enabled gig economy.

But are the implications of the case less-than-meets-the-eye? And what kind of regulations needed to protect Uber drivers (and others in the gig economy), while enabling disruptive innovation for sustainable development?

Technology enabled platforms offer hope that that  they can help solve the world’s big problems creating better marketplaces and radically more efficient and accessible services. McKinsey reckon that by 2025 app based talent platforms could add $2.7 trillion to global GDP, while creating millions of new jobs. Uber is just one example, from New York to Kampala, it is seeking to shake up stagnant and inefficient transport systems and provide a better service both to drivers and riders.

But United Private Hire Drivers (UPHD) a trade body co-founded by Farrar and Aslam, and Networked Rights say that Uber’s business model is not so innovative, but actually works through old-fashioned exploitation; pushing risks onto the least powerful players in the supply chain and forcing (or tricking) them to operate below-cost.

screen-shot-2016-11-04-at-15-35-31UBER’s strategy is to oversupply the market, so that riders can always be assured that a car is only minutes away. But drivers do not get paid for waiting time, only for driving. Having extra drivers logged onto the service, cruising the streets costs Uber nothing but makes its service more responsive. This means more unpaid time for drivers, as well as increasing congestion and pollution. Oversupply allows fares to be cut, and could undermine the viability of public transport in some places. According to UPHD many drivers are working 90 hours a week, risking their own health and safety and that of other road users. UPHD’s and ‘Networked Rights’ report on the ‘cruel regulation and sweatshop conditions of London’s booming minicab trade’ is a must read.

In this light, the most important part of the tribunal’s decision was its ruling that Uber drivers should be paid minimum wage by Uber (and accrue holiday) for all of the time that they are logged onto the app, not only for the time when they are driving.

This would solve the problem of Uber oversupplying the market, but could break its model of flexible drive-when-you-want work, since if the company has to pay every driver costs + minimum wage just for logging on, it leaves little room for incentivizing them to be at the right place and the right time to meet demand. The company would have to take a more command-and-control approach to where and when it allows drivers to log on.

The tribunal concluded that “The notion that Uber in London is a mosaic of 30,000 small businesses linked by a common ‘platform’ is to our minds faintly ridiculous” and ruled that Uber drivers are ‘workers’ rather than self-employed, on the basis that the company exerts significant control, for example:

  • it interviews and recruits drivers
  • it controls information such as the riders name and phone number
  • it punishes drivers who do not accept trips while logged on by logging them off for ten minutes
  • it fixes the fare
  • it imposes conditions such as on the type of vehicle

But as Den Howlett at Diginomica argues these kinds of conditions are not exclusive the Uber. Taxi-cab driving is quintessentially a self-employed role where drivers carry their own costs and are paid on the basis of fares (although other companies such as Addision Lee are also being challenged in Court over the degree over whether their drivers are really self employed).

Is the basic problem that drivers are just not paid enough?

Perhaps the basic problem is not worker status vs self-employment, but simply that the amount that Uber drivers (and mini-cab drivers in general) take home does not enable them to cover the real costs of the service they provide?

The tribunal panel argued that Uber uses ‘twisted language’, separating out the role of “Driver” (the person doing the driving), from that of “Transportation Company” (the person or company that owns or leases the vehicle), when they are usually one and the same. However in thinking about the economics of being an Uber driver, this distinction makes sense. On one hand drivers are acting as entrepreneurs – buying or leasing a vehicle or using an asset they already own, and paying for insurance and for registration. On the other hand they are workers; driving the vehicle and getting paid for their time.

Both driver and entrepreneur should be paid a fair amount:

  • The driver should be paid at least minimum wage for their time, by the entrepreneur.
  • The entrepreneur should (if they are a good manager and operating commercially) be able to cover their costs and risks and make a reasonable return on their capital.

Uber say their top drivers make £19 an hour gross, so for a 46 hour week, £875.90. James Farrar gives a breakdown of the costs.:

Uber commission at 25%                            £218.98

Prius PCO rental                                           £270.00

Fuel                                                                   £100.00

Uber devices and network fee                  £5.00

Car Wash                                                         £15.00

Mobile phone costs                                     £5.00

Total costs to be deducted                          £613.98

Net weekly income                                       £261.92 (£5.68 per hour)

Or to put it another way, if the Uber driver was being paid the minimum wage of £331.92, then the Uber entrepreneur is making a weekly loss of £70 (even before considering holiday pay) – although set against this, he does have a Prius to drive when it is not being used by the business.

This calculation changes somewhat, particularly depending on the cost of the car – you can rent a cheaper Uber-ready car for £220 a week, bringing the loss down to £20. Perhaps you could reduce costs further by buying a car, but this then involves greater risk, and the need to buy hire and reward insurance. You could share the car with another driver, or use a car that you already own.

Not all the Uber entrepreneurs will be profit maximizers, employing themselves as full time professional drivers to get the most out of their metal – a key feature of the app is flexibility. Uber says that the average driver in London works 28 hours a week, with 21% driving less than 10 hours, and 28% driving more than 40 hours.

As Abhijit Banerjee and Esther Duflo have pointed out, many owners of micro-scale businesses are not profit maximising moguls-in-the-making, but reluctant entrepreneurs who have invested in their business as a means of ‘buying a job’. Perhaps if people are willing to pay £20 or even £70 a week for a flexible job and a car then they are not being exploited, after all getting to work can cost that much. But these figures, as James Farrar points out, are the calculation for a ‘top driver’. If the average driver is grossing much less per hour, then they are effectively paying more for their job, and if this means that those seeking to make a living on Uber having to work 90 hours a week just to break-even then they clearly are being forced (or tricked?) by Uber into offering their services below cost.

An employment rights approach which required Uber to ensure that every Uber entrepreneur is able to cover their full-cost and clear the minimum wage would tend to lead them to push part-timers (whose fixed costs per hour are higher) out of the system, and reduce flexibility. This would not be a good outcome. However to avoid charges of exploitation Uber should be able to show that in general drivers working full-time are able to cover all reasonable costs and risks and pay themselves at least the minimum wage. It is impossible to tell without more data on the average full-time driver how far they are from this benchmark, but it certainly looks like they are not meeting it.

Is the problem that there are too many private hire vehicles on the streets?

Uber have several levers that could use to raise returns for Uber entrepreneur/drivers. They can raise fares, cut their commission rate, or use their purchasing power to negotiate discounted deals for car leasing, insurance and fuel. However the earnings of an Uber entrepreneur/drivers are a balance between hours driving and hours waiting. Raising fares would reduce demand, while anything that allows drivers to retain more of the fare will tend to attract more drivers into the system, increasing waiting time.

This brings us back to the age-old problem of tax-cab regulation and the core issue which UPHD highlights – how to control the number of vehicles to the level that is economically efficient and physically and environmentally sustainable?

Not enough supply can mean consumers priced out of flexible transport, while incumbents maintain high prices and employment is stifled. Too much supply means congestion, pollution, and undermining public transit systems while forcing drivers to work unsafe hours at exploitative rates.

Transport for London (TfL) have not set caps on driver or vehicle licensing. According to UPHD instead they have cracked down on individual drivers, penalizing them for parking or stopping in the wrong place, without putting in place infrastructure that would allow them to wait e.g. at airports. Written English tests are being brought in which may push immigrant drivers with perfectly adequate spoken English out of the trade.

Such enforcement is a cruel and Kafkaesque approach for controlling transport workers who provide a vital service to the city, and James Farrar and Yaseen Aslam are heroes for standing up and raising the issue that both Transport for London and Uber have could have, should have – and must – deal with better.

Uber and other ride-share apps have developed real innovations – opening up the industry to more flexible work, while improving the quality of the service. But it has also been able to arbitrage regulatory models which deal in concepts and definitions from a pen-and-paper age. Employment law seems like too blunt an instrument to deal with the need to internalize Uber’s costs. The most likely outcome of the case seems to be that the ruling will be overturned on appeal, or that Uber will tweak their operating practices and terms and conditions to bring them more firmly inside of the black letter boundaries of self-employment.

How could the environmental and social costs of flexible transport services be internalized? Perhaps new regulations are needed for mass self employment schemes that don’t fit neatly into employment, or even the hybrid ‘worker’ category.  At the very least Uber and others should be required to provide clear information on real earnings and likely costs for drivers across the spectrum (not just top drivers) so inexperienced entrepreneurs do not lock themselves into fixed costs of buying a car on the basis of exaggerated earning potential. Perhaps Uber, in line with its self-employment model could revert to being a peer-to-peer matching service and change from centrally controlling ‘surge pricing’ to giving drivers and riders a means to their own multiplier depending on demand and availability.  TfL should also allow on-off hire and reward insurance, so that drivers only pay for the additional cover they need during the time when the app is switched on.

Dan Hara argues that it is more efficient to regulate taxis numbers by setting annual fees high enough to deter excess entry, than to set caps on permits. Perhaps private hire licensing could be overhauled to provide a priced based control on numbers  which matches the flexibility of the new industry- so that the basic permit charge for a car or individual driver is low reflecting only administrative costs, but there is a charge  levied on a by-the-hour basis to transport network companies like Uber for the hours their drivers are logged on (with a higher rate in the congestion charge zone), which would then provide them an incentive to improve the balance of driving vs waiting time.

What is clear is that current written and case law around employment and transport regulation are too lumbering to address the opportunities and challenges of technology enabled services such as Uber. The corporate responsibility movement is also operating with yesterday’s models rather than stepping up to test new solutions; TfL’s ‘ethical sourcing’ policy for example does not go anywhere near helping them to deal with employment conditions of London’s private hire drivers.

Smarter services need smarter regulation which ensure that the power of connected data is also used to protect consumers, workers and the environment and to drive innovators to focus on real efficiencies which reduce risk and waste rather than shift costs onto the least powerful. Lack of these measures creates massive latent risk for businesses like Uber, which cannot succeed in its mission to make transport ‘as reliable as running water’ if it is falls into a trap of its own making and pushes cities into gridlock and drivers into misery.



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