Photo illustration of a Lyft car in front of a Walmart
Photo illustration of a Lyft car in front of a Walmart

Request an invitation to Next:Economy, our event aiming to shed light on the transformation in the nature of work now being driven by algorithms, big data, robotics, and the on-demand economy.

Our future workplaces are increasingly managed by apps and algorithms. Is technology empowering workers, or making them ever more helpless cogs in a corporate profit machine?

When we talk about the “on-demand economy,” we are really talking about two things: the ability of a consumer to summon a vehicle, their lunch, or their groceries with the touch of an app or a few words to Siri, Cortana, or Google Now; and the lives of the workers who respond to those summons. Instant on-demand consumer services mean workers must also be available on demand.

As Logan Green of Lyft noted, his company provides “transportation as a service.” Perhaps the more general point is that it provides labor as a service. At least for now, the car comes with a driver.

Companies such as Lyft, Uber, TaskRabbit, Postmates, Upwork (and too many other new startups to count) all depend on a large pool of workers who make no set work commitments, who are bound to no schedule, but simply turn on an app when they want to work, and compete with other workers for whatever jobs are available.

These apps have gotten a lot of attention. But focusing that attention merely on “Next Economy companies” misses many of the deeper changes in the labor economy.

Traditional companies have also always had a need to manage uneven labor demand. In the past, they did this by retaining a stable core of full time workers to meet base demand, and an expanded group of part time contingent workers or subcontractors to meet peak demand.

But in today’s world, this has given way to a kind of continuous partial employment for most low wage workers at large companies, where sophisticated workplace scheduling software lets companies build larger-than-needed on-demand labor pools to meet peak demand, and then parcel out the work in short shifts and in such a way that no one gets full time hours.

As Esther Kaplan of The Investigative Fund, one of our speakers at the Next: Economy Summit, points out in her Harpers article “The Spy Who Fired Me,” this design pattern has become the dominant strategy for managing low-wage workers in America.

Both traditional companies and Next Economy companies use apps and algorithms to manage workers. But there’s an important difference. Companies using the top-down scheduling approach adopted by traditional low-wage employers demonstrate the wrong way to use technology to manage variable workloads: pervasive workplace monitoring, algorithmic shift assignment with minimal affordances for worker input, and programmed limits on hours that limit employees to part-time work to avoid triggering expensive health benefits.

By contrast, I think there’s a lot to learn from the Next Economy strategy of exposing data to the workers, not just the managers, letting them know about the timing and location of demand, and letting them choose when and how much they want to work. This gives the worker agency, and uses market mechanisms to get more workers available at periods of peak demand or at times or places where capacity is not normally available.

There are two different approaches to using technology to manage labor. One provides data and control solely to managers, disempowering workers and minimizing their costs to improve company profits; the other offers data to both managers and workers, giving workers agency, the freedom to work when and how much they want.

There have been many arguments that workers for Next Economy on-demand companies should be treated as employees, not as independent contractors. I won’t speak to the complex labor regulations used to make these determinations, but I do want to ask a question that should concern anyone who wants to actually improve the lives of workers rather than simply make sure that regulations are enforced.

Which of these scenarios sounds better to you?

Our workers are employees. We used to hire them for eight hour shifts. But we are now much smarter, and are able to lower our labor costs by keeping a large pool of part time workers, predicting peak demand in 15 minute increments, and scheduling workers in short shifts. Because demand fluctuates, we keep workers on call, and only pay them if they are actually needed. What’s more, our smart scheduling software makes it possible to make sure that no worker gets more than 29 hours, to avoid triggering the need for expensive full time benefits.

Or:

Our workers are independent contractors. We provide them tools to understand when and where there is demand for their services, and when there aren’t enough of them to meet demand, we pay them more (and charge customers more) until supply and demand are in balance. They can work as much or as little as they want until they meet their income goals. They are competing with other workers, but we do as much as possible to maximize the size of the market for their services.

The first of these scenarios summarizes what it’s like to work for an employer like Walmart, McDonalds, The Gap, or even a progressive low-wage employer like Starbucks. Complaints from workers include lack of control over schedule even in case of emergencies, short notice of when they are expected to work, unreasonable schedules known as “clopens” (e.g. the same worker being required to close the store at 11 pm, and open it again at 4 am the next day—a practice that Starbucks banned in mid-2014), “not enough hours”, and a host of other labor woes.

The second scenario summarizes the labor practices of Uber, the largest and most controversial of the new breed of “on demand” companies coming out of Silicon Valley. Talk to many drivers, as I have, and they tell you that they love the freedom the job provides to set their own schedule, and to work as little or as much as they want. (This is borne out by a study of Uber drivers by economists Alan Kruger of Princeton and Jonathan Hall (now chief economist at Uber). 51% of Uber drivers work less than 15 hours a week, to generate supplemental income. Others report working until they reach their target income. 73% say they would rather have “a job where you choose your own schedule and be your own boss” than “a steady 9-to-5 job with some benefits and a set salary.”)

If “the algorithm is the new shift boss,” the business rules driving the algorithm, and whether it increases or decreases the opportunities offered to workers, make a huge difference!

We need to recognize that yes, these are contingent jobs, without a safety net, and that while these platforms may be great for part time workers looking for supplemental or transitional income, they provide something very far from the kind of long term stability that constitute what we would call “a good job.” And yes, there are Uber drivers who want a greater voice to set rates and rules. Right now they don’t have any way to bargain over the conditions of their services.

But we also need to recognize that traditional jobs today have much the same problem.

In his recent interview with Lauren Smiley, Secretary of Labor Tom Perez acknowledged the risks, and highlighted that the real issue is whether or not workers make a living wage:

When I hear about “the gig economy,” implicit in that for some is a sense that this is the first time people work from gig to gig. That’s just not right. You look at homecare workers and domestic workers and so many other low wage workers who have been surviving, oftentimes barely … people have been working from gig to gig for quite some time. We need to make sure people working gig to gig can make a living.

However, there are many (including, in ambiguous guidance, the US Department of Labor) who urge that on-demand companies be required to treat their workers as employees, not independent contractors.

There are many reasons why this is not the right answer to the fundamental goal that Secretary Perez set forth.

On first blush, it would seem that being an employee has many benefits. In the US, the largest are that you are eligible for unemployment benefits, and that you have half your social security and Medicare tax paid for by the employer—a full 7.65% of your pay. You may have paid holidays and paid vacation. And if you injure yourself on the job, worker’s compensation insurance can make the difference between being on the street and continuing to get by.

But there are some big issues that no one seems to talk about. There is a huge gulf between the benefits often provided to full time employees and part time employees. And that has led to what I call “the 29 hour loophole.” Unscrupulous managers can set the business rules for the automated scheduling software used by most large low-wage employers to make sure that no worker gets more than 29 hours in a given week. Because employment law allows different classes of benefits for part time and full time workers, this allows core staff at the company to be given generous benefits, while the low wage contingent workers get the bare-bones version.

Once you realize this, you understand the potentially damaging effect of the Department of Labor guidance not just for new Silicon Valley companies but also for their workers. Turn on-demand workers from 1099 contractors into W2 employees, and the most likely outcome is that the workers go from having the opportunity to work as much as they like for a platform like Uber or TaskRabbit to one in which they are kept from working more than 29 hours a week! This was in fact exactly what happened when Instacart converted its on-demand workers to employees. They became part-time employees.

(Even before the advent of computerized shift scheduling software, companies played shell games with employee pay and benefits. I remember student protests at Harvard in 2000 focused on the unfair treatment of janitors and other maintenance personnel. “You’re not a full time employee,” janitors were told. “You don’t work 40 hours for Harvard University. You work 20 hours for Harvard College, and 20 hours for the Harvard Law School.”)

Perhaps as pernicious as the fact that companies limit workers to 29 hours a week, the capricious nature of many of the schedules that are provided by traditional low wage employers and the lack of visibility into future working hours means that workers can’t effectively schedule hours for a second job. They can’t plan their lives, their child care, a short vacation, or even know if they will be able to be present for their children’s birthdays.

By contrast, independent contractors for on-demand services can work as many hours as they like—many report working until they reach their desired income for the week, rather than some set number of hours—and equally importantly, they work when they want. Many report that the flexibility to take time off to deal with childcare, or health issues, or legal issues, are the most important part of what they like about the job. (That being said, if you are an on-demand worker, not all hours are equal. Schedules that allow workers to maximize their income are, to a large extent, still driven by marketplace demands.)

In the case of Uber, Lyft, and other transportation services, the call for workers to be treated as employees is particularly lacking in context.

Eighty-eight percent of taxi drivers in the US are independent contractors; most pay a rental fee of up to $125/day to the taxi owner, and only start to make money once they have paid off that fee each day. That is a far larger amount than the cost of car payments and insurance that most Uber and Lyft drivers pay. The taxi owner is usually responsible for maintenance of the vehicle, but the driver is responsible for daily expenses like gas. Why don’t taxi drivers desert their current employers in droves? While most medallions (the city- or county-granted right to operate a taxi) are owned by companies, there are individual drivers who have worked for years to amass the capital to buy their own medallion. But as is so often the case in low-wage jobs, so many are forced to pay higher costs because they lack the capital to pay less.

This isn’t to say that there aren’t serious problems with the independent contractor model for low wage workers. Independent contractors are responsible for their own tax payments, and many, being unsophisticated, think of their weekly check from Uber, Lyft, or TaskRabbit as being theirs to spend. They don’t make quarterly tax payments, and many of them find themselves unable to pay their taxes due when April 15 rolls around.

However, there are some offsetting benefits. As independent contractors (small businesses), they are allowed to deduct 57.5 cents per mile driven in their own vehicle. Intuit even provides an app, integrated with the Uber app, to help a driver track personal miles driven versus miles driven on the job. For a driver putting on hundreds of miles per week, this may shelter a large part of his or her income from taxes.

Even the notion that being an employee results in benefits such as paid holiday and vacation isn’t quite what it appears. When an employee “accrues vacation, holiday, or sick days” this isn’t a gift from the employer. It is fundamentally an escrow of the employee’s own wages. This is easiest to see for salaried workers. Let’s imagine, for the sake of convenience, that I’m paying a salary of $26,000/year, $500/week, or $12.50/hour. Forty hours a week for 52 weeks amounts to 2,040 hours. Take out two weeks of vacation, two weeks of sick pay, and two weeks of holidays, and you’re down to 1,800 hours of actual expected work, or $14.44/hour. Now add in the benefit of 7.5% of wages being paid in for the employer’s half of social security taxes: $1,950/year, or an additional $1.08 per hour. That means that an independent contractor making $15.52/hour but with none of these benefits has functionally equivalent wages to an employee with these benefits making $12.50/hour. And in fact, much of the time, independent contractors receive a pay premium roughly equivalent to that differential in wages. (Low wage workers may not receive the same wage premium as higher-skilled contractors, but they also may not receive the same benefits as employees.)

Solutions

There is clearly a Medusa’s Nest of problems in low wage employment in America. Let’s start, though, by acknowledging that virtually all low wage workers in America are on-demand workers. This acknowledgement lets us enumerate a set of solvable problems:

  1. Algorithms used to schedule on-demand workers must be designed to optimize for the needs of workers as well as employers. They should honor workers’ schedule preferences, and let them opt-out of assigned schedules without risk of losing their jobs. Companies like Managed By Q have built easy to use scheduling software for their janitorial employees that gives those workers substantial control over their schedules. Companies like ADP, Oracle, Kronos, Reflexis, and SAP, the workplace scheduling giants whose software is used by companies like McDonalds, Starbucks, and many others, must also make their software easier to use. But this is primarily an employer policy and compliance problem, not a software problem.
  2. Said algorithms must also give employees predictable schedules, so that they can make time for other life events, and in the event that they are not given enough hours, so that they can schedule shifts with another employer. This may also mean that employers must cooperate with each other in giving shared shift visibility, and relaxing restrictions against workers taking employment from competitors. The Schedules That Work Act is an attempt to address that problem.
  3. Employees must be paid for “on call shifts,” where the employee is expected to be available, but may not actually be assigned paid work. The recent investigation by the New York Attorney General has begun to drive reforms at many large retailers.
  4. There needs to be what Carrie Gleason of the Fair Workweek Initiative calls “a path to accountability.” Scheduling software should be auditable by top management and labor leaders alike to ensure that fair workplace practices are being carried out. Gleason wrote, in comments on a draft of this piece, “Susan Lambert and I have been pushing for software to actually monitor and track whether this actually happens and for managers who build schedules aligned with worker preferences to be rewarded.” It’s important to realize that the scheduling software provided by companies such as ADP or Kronos, like the algorithms used by Uber and Lyft, is a tool. How that tool is deployed and implemented is up to those who use it. As Gleason and Lambert write in their paper Uncertainty by the Hour, “Employers have chosen to use these powerful tools to treat their workers as a cost to be minimized, if not eliminated, instead of using these tools to capture the predictability and stability in labor demand that already exists and deliver it to workers through more predictable and stable hours.”
  5. Rather than being allowed to assign unreasonable shifts like “Clopens” (when an employee is required to close a store at 11 pm or midnight, and reopen it at 6 am), low wage employers might be required to use free market mechanisms to fill those shifts, paying more if there are workers unwilling to take them at the standard wage. (Currently, workers are compelled to take those shifts by fear of losing their jobs if they don’t.) McDonalds or Starbucks or Walmart might not like paying more for these undesirable shifts, but they should not be allowed to compel workers to take them. It could well be that a market-based approach would bring in enough workers to fill these shifts without higher wages, but at least we’d know that. Uber’s “surge pricing” should be seen by policy makers as a labor-friendly workplace innovation! (I’ll write more about surge pricing later this week.)
  6. Next Economy on-demand companies using 1099 workers should provide tax guidance to those employees as part of the app. The work that Uber has done with Intuit could easily be extended to estimate overall tax liability so that workers aren’t surprised at tax time.
  7. We have to close the 29 hour loophole!

Professor Andrei Hagiu, writing in Harvard Business Review, and venture capitalist Simon Rothman, writing here on Medium, both argue that we need to develop a new classification for workers besides traditional employees (people who, in the US, have their income reported to the IRS on a W2 form) and contractors (who have their income reported on a 1099 form.) They call them “dependent contractors.” This new classification might allow some of the freedoms of independent contractors, while adding some of the protections afforded to employees. (After her recent interview with Secretary of Labor Tom Perez and DOL Administrator David Weil, Lauren Smiley kicked off a discussion about that topic on Medium. You can weigh in yourself with your ideas here.)

Chart: Marketplaces face a trade-off between employee cost and control, by  Andre Hagiu,  Harvard Business Review
“Companies need an option between employee and contractor.” Andre Hagiu, Harvard Business Review

Nick Hanauer and David Rolf (both speakers at the Next: Economy event) go further, arguing that just as technology allows us to deploy workers without the overhead of traditional command and control employment techniques, it also gives us the ability to provide traditional benefits to part time workers, They call this a “Shared Security Account” in conscious echo of the safety net of a Social Security account.

A similar policy proposal for portable benefits comes from Steven Hill at New America. Hanauer, Rolf, and Hill all suggest that we decouple benefits like worker’s compensation, employer contribution to Social Security and Medicare taxes, as well as holiday, sick, and vacation pay, from employers and instead associate them with the employee, erasing much of the distinction between 1099 independent contractor and W2 employee. Given today’s on-demand technology, this is a solvable problem. It is possible to allocate benefits across multiple employers. It shouldn’t matter if I work 29 hours for McDonalds and 11 for Burger King, if both are required to contribute pro-rata to my benefits.

This would obviously require some changes to management infrastructure, and data sharing between employers. But given that most scheduling is handled by standard software platforms, and payroll is also handled by large outsourcers, many of whom provide services for competing employers, this seems like an intriguingly solvable problem.

Robert Reich’s proposal might be the easiest to implement: “We should aim instead for simplicity: Whatever party—contractor, client, customer, agent, or intermediary—pays more than half of someone’s income, or provides more than half their working hours, should be responsible for all the labor protections and insurance an employee is entitled to.”

However, none of these proposals have solved the deeper dynamics that drive the 29 hour loophole. It isn’t the basic payroll taxes that drive companies to want to have two classes of workers. It is healthcare to start with (a single payer system would solve that problem, as well as many others), but also other “Cadillac” benefits that companies wish to lavish on their most prized workers but not on everyone. Ultimately, the segregation of workers into privileged and unprivileged classes, and the moral and financial calculus that drives that segregation, has to stop!

It will take much deeper thinking to come up with the right incentives for companies to understand the value of taking care of all their workers on an equal footing. Zeynep Ton’s Good Jobs Strategy is a good place to start. As Harvard Business School lecturer and former CEO of Stop & Shop José Alvarez wrote, “Using years of research and analysis, Zeynep Ton has proven what great leaders know instinctively—an engaged, well-paid workforce that is treated with dignity and respect creates outsized returns for investors. She demonstrates that the race to the bottom in retail employment doesn’t have to be the only game being played.”

Join the discussion on Medium. Should we be pushing on-demand companies back towards the W2 model, or adding protections to the 1099 model? How do we get the benefits of marketplace businesses while also making sure workers don’t get the short end of the stick? The best responses will be attached to the Medium version of this article as part of an ongoing conversation.

Editor’s note: this post was first published on Medium. It is republished here with permission.

Article image: Photo illustration of a Lyft car in front of a Walmart