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Andrei Hagiu
August 21, 2015
Recently, a federal district judge in California began hearings in a case
aiming to determine whether Uber drivers should be legally considered employees
instead of independent contractors. Several other similar cases involving other
service marketplaces (e.g. Postmates, Lyft, Washio) are also under way.
Whether Uber s drivers and the workers for other service marketplaces fall on
one side or the other of the dividing line between independent contractors and
employees as currently construed by the law is for the courts to decide not
an easy task given that the U.S. Internal Revenue Service lists about 20
factors that should be taken into account.
However, the entire exercise of trying to fit today s marketplace businesses
into one of only two discrete categories is out of touch with reality and could
lead to the disappearance of more efficient, intermediate business models.
All marketplaces for products or services choose a position on a continuum
defined by how much control they exert over the interactions or transactions
they enable. At one end of the continuum are pure marketplaces, which exert
little control over the terms of the transactions between independent suppliers
or professionals and customers (e.g., eBay, Elance-oDesk, GrubHub-Seamless,
OpenTable, Poshmark, RelayRides). At the other end of the spectrum are
resellers that buy products from suppliers and resell or rent them on terms
they completely control to customers (e.g. iTunes, Netflix, Zappos, Zipcar) and
employers that hire professionals providing relevant services and entirely
control how those services are delivered to customers (e.g., Infosys,
McKinsey). Many firms have chosen to occupy intermediate positions along this
continuum (e.g., Amazon.com, Lyft, Postmates, Uber).
The notion of control over supplier-customer interactions has many dimensions:
price, equipment, how the relevant product or service is presented or
advertised, how the product or service is delivered or performed, work
schedule, and so on. What s more, the stringency of the rules governing each of
these dimensions can vary all over the map. As a result, there is a
fine-grained spectrum of intermediate business models between pure marketplace
and pure reseller or employer.
Marketplaces are driven to adjust the control dials for the various elements of
their business model by a number of different factors: buyer or customer
preferences for consistency across many sellers or suppliers, complementarities
across products or services, seller or supplier heterogeneity, and so on. In
particular, there may be very good efficiency reasons for choosing different
levels of control across various elements (for details, see my recent work with
Julian Wright here, here, and here). For example, Postmates has full control
over the delivery price charged to customers, but its couriers can choose to
use any vehicle they wish for performing their deliveries (including bicycles,
cars, and trucks) as well as their work schedules.
More control comes (as it should) with a higher cost structure. The precise
shape of the increasing relationship between control and cost is determined in
each industry by economic and legal factors and should, in principle, allow
marketplaces to choose the position on the control continuum that maximizes the
difference between the benefits of control and the costs associated with it.
Here s where the Uber case comes back into play. Service marketplaces today are
forced to make a binary choice due to the nature of the cost-versus-control
relationship they face. Their workers can either be independent contractors or
employees: The latter option gives the firms full control over all relevant
decisions but carries a 25% to 40% cost increase.
W150818_HAGIU_TODAYSMARKETPLACE
This is inefficient for two reasons. First, given the multiple dimensions of
control described above, any attempt to draw a single bright line between
independent contractors and employees seems arbitrary and impossible to do in a
consistent way. This will inevitably lead to different and subjective
interpretations from one industry to the next.
The second and more serious problem is that only allowing for two categories
induces firms to run for the corners (pure marketplace or pure employer) in
order to avoid getting caught in the uncertain middle. There is evidence that
this trend is already underway: In the past two months, several firms (e.g.,
Luxe, Shyp, Sprig) have announced that they are converting all their workers
from independent contractors into employees. This will likely eliminate many
intermediate business models, which might be more efficient.
In an ideal world, firms would be able to choose among all possible
intermediate steps between pure marketplace and pure employer subject to the
constraint that their costs will increase relative to some aggregate measure of
the control exerted.
W150818_HAGIU_THEIDEAL
Needless to say, this is not practically feasible: There are just too many
possible intermediate configurations, and it would be prohibitively complex to
assign a different legal status to each of them. But it is not too much to ask
for the introduction of at least one intermediate step such as dependent
contractors for whom firms would cover some costs (e.g., expenses) but not
others (e.g., social security).
W150818_HAGIU_ANINTERMEDIATE
Yes, there would still be the problem of drawing the boundaries between this
status and the other two. Nevertheless, this would be a big step forward in
terms of freeing firms to explore a variety of intermediate business models and
arrangements with their workers.
Andrei Hagiu is an associate professor in the strategy group at Harvard
Business School.