You wouldn’t normally put Uber drivers, poultry growers, and the owners of fast-food franchises in the same economic category, but they actually operate under similar work arrangements. They are all subject to employment-like control by large corporations, but without the protections and rights an employee would have, such as being paid a minimum wage. In other words, they bear both the risks of owning a business and the burdens of having a job, but lack the benefits of either. Meanwhile, their bosses at Uber, Tyson Foods, and McDonald’s get to have their cake and eat it, too. They control people who work for their business empires without assuming the duties and responsibilities of being employers.
Such business models cast a long shadow in today’s economy, but their rapid growth was not inevitable. In the 1960s and 1970s, corporations waged a successful campaign of lobbying and litigation to change the interpretation of antitrust laws that then protected independent businesses from domination and control by large corporations. Change is possible now. The Biden administration, specifically the antitrust and labor agencies, should use its authority to rein in these one-sided arrangements, which run afoul of historical and popular understandings of independent work and entrepreneurship.
There are two closely related business models here. The first, exemplified by Uber, uses restrictive contracts to directly control workers while denying them employment rights by misclassifying them as independent contractors. The second, exemplified by McDonald’s, uses similar contracts to allow corporate headquarters to place a third-party middleman between itself and its workers. McDonald’s outsources the operation of most of its restaurants to “independent” franchisees operating under its tight control. While the workers who take your order and make your Big Mac are somebody’s employee, they have no employment rights under McDonald’s, the corporation that effectively controls their wages and working conditions.
The point of these franchise contracts is not to deny franchisees themselves from having employment rights (although they can have that effect). Instead, the aim is to distance large companies from responsibility for the wages and working conditions of frontline workers. In the cases of both Uber and McDonald’s, real control of the business rests with corporate headquarters, which minutely prescribes prices, routes, operating hours, and virtually all other meaningful aspects of the business through contracts, or “vertical restraints,” in the parlance of antitrust law.
Economist David Weil coined the term “the fissured workplace” to describe these business structures in which employment responsibility is fragmented away from the corporation that exercises effective control of wages and working conditions. Fissured work arrangements are so prevalent that Weil estimates they comprise at least 19 percent of the U.S. private workforce.
To take one example, Uber sets both passenger fares and driver take rates (the fraction of fares they receive as pay), denying drivers control over the key determinants of their income. Through sophisticated algorithms, Uber also limits a driver’s ability to choose their own customers; relevant location data is hidden from drivers. Claiming that each driver is the owner of an individual enterprise who can log on whenever they want, Uber and Lyft campaign for labor and employment law to treat drivers as independent contractors. Yet, by the same token, drivers are coaxed, through a variety of incentives, to work for one ride-hailing platform exclusively. These drivers lack the control over basic decisions that common sense associates with real entrepreneurship.
In another example, Amazon franchised “last mile” delivery to local independent trucking fleets in 2019 with its Delivery Service Partner program. Amazon touts its DSP program as creating opportunities for aspiring entrepreneurs, in particular people of color, to start an independent small business under its tutelage. The DSP program targets inexperienced entrepreneurs who have few preconceived ideas about how to run a trucking business and so can be trusted to follow Amazon’s guidance. While the small delivery companies under the DSP program are nominally independent businesses, they deliver packages exclusively for Amazon in Amazon-branded vehicles, and according to Amazon-prescribed routes, rates, and schedules.
Despite Amazon’s overarching control, the DSPs are not only the payroll employers of delivery drivers; they also bear ultimate liability for accidents or violations of workplace safety. Their contracts usually dictate flat delivery rates, restricting the wages the DSP can offer. Amazon is even able to block unionization of these drivers through a contractual mandate that they serve as at-will employees. If workers unionize, Amazon can terminate the contract and find a new DSP, which is much easier than fighting a union campaign.
Finally, poultry processors subcontract chicken farming to independent contractors who raise chickens under exclusive contracts for a single firm. The processors provide the chickens and feed, and prescribe detailed instructions. Instead of operating a truly independent business under their own control, farmers simply follow the processors’ instructions—yet they bear the full risk of business failure.
As we describe in a forthcoming essay in the Cornell Law Review Online, in the decades following World War II, administrative and judicial interpretations of the Sherman, Clayton, and Federal Trade Commission acts (the three principal federal antitrust laws) restricted these methods of contractual control. For instance, manufacturers could not dictate the prices at which retailers sold their goods. Procter & Gamble could not tell a small retailer to resell Tide at a certain price or order it to charge a higher or lower price for the laundry detergent. Similarly, a powerful manufacturer could not prevent its distributors from carrying the goods of competitors. A firm could not control independent contractors through contracts telling them what to do and how to do it. As one district court noted, an independent worker or businessperson had a broad right to exercise autonomy.
Preserving independence in the face of powerful corporations was an important theme in antitrust law at the time. In a 1964 decision, the Supreme Court stressed that freedom to set prices is fundamental to being an independent businessperson. A court of appeals in 1966 recognized the inequality at the heart of many economic relationships and accepted that small proprietors were typically in no position to resist terms presented to them by large corporations. It wrote, “A man operating a gas station is bound to be overawed by the great corporation that is his supplier, his banker, and his landlord.” In a 1967 report, the Federal Trade Commission was unambiguous about the stakes, writing that a gas station retailer being subject to contractual control by an oil company is akin to being in the position of “an economic serf rather than that of an independent businessman” and “has been coerced into making decisions concerning price and product that are other than his own.”
Franchisors like McDonald’s and Dunkin’ decades ago pioneered the legal mechanisms of gaining control over far-flung business empires without triggering legal employment relationships. During the initial franchising boom in the 1960s, many legislators and courts were hostile to the idea of large corporations dictating to independent small businesses how they must run their enterprises. As the chairman of the main franchisors’ lobbying group, the International Franchise Association, or IFA, lamented back then, “Easier for a camel to go through the eye of a needle than for a fat franchisor to comply with the antitrust laws when he seeks to control the franchisee.”
Presaging the “move fast and break things” ethos of gig employers, franchising firms of the era engaged in vertical conduct of dubious legality. When courts struck down these contracts, the IFA helped individual franchisors litigate to change the courts’ interpretation of the laws. In key cases, the IFA’s lawyers represented franchisors, and the IFA itself filed amicus briefs in support of franchisors.
The Supreme Court in the 1970s was ready to embrace the novel theories of the franchisors in its interpretations of the Sherman Act. Presidents Richard Nixon and Gerald Ford remade the court with the appointment of five conservative justices who were sympathetic to the pleas and economic theories in favor of big-business freedom. In a landmark 1977 decision called Continental TV v. GTE Sylvania, the Supreme Court ruled that, in general, a manufacturer could tell distributors where it could sell its goods. Following this decision, a maker of televisions could generally prohibit a retailer that purchased its TVs from selling them in certain locations (for example, yes to San Francisco stores, but no to Sacramento stores).
The court reasoned that these restrictions could promote the efficient distribution of goods. By restricting the distribution of goods, the manufacturer could prevent a discount retailer from selling its goods at cut prices and “free riding” off the product demonstration and other services provided by a higher-end rival. As Justice Byron White pointed out in a concurring opinion, the majority abandoned traditional antitrust protection of business autonomy with hardly any explanation. At the Supreme Court, dealer freedom was out and the efficient distribution of goods was in. While it is considered a watershed in antitrust jurisprudence today, only the IFA and two industry-specific franchisor groups filed amicus briefs.
In the 1980s, 1990s, and 2000s, the Supreme Court built on the Sylvania decision and lifted antitrust restrictions on contractual price restraints. As in Sylvania, the court cited the threat of free riding by discounting as the principal rationale. Whether this theory had real-world applicability or even internal coherence was not questioned by majorities on the court. It was enough to initiate and complete a quiet revolution in antitrust law, at least as far as the Sherman Act was concerned.
In a 1997 decision, a unanimous Supreme Court ruled that the firms can set maximum resale prices. In practice, Subway could now, with legal confidence, tell its franchisees to sell footlong sandwiches at no more than $5, even if that forced them to sustain losses or to cut workers’ wages; same story with McDonald’s and its Dollar Menu.
For decades, this landscape has allowed employers to control key aspects of their business while distancing themselves from the responsibilities they would have to employees—but the tide may be turning. In an encouraging sign, the FTC and the National Labor Relations Board have formed a partnership to address these types of issues where their jurisdiction overlaps. Until now, the agencies have worked in isolation from each other, allowing the role of vertical restraints in avoiding labor and employment laws to slip through the cracks. A memorandum of understanding states that the two agencies will cooperate on issues like misclassification and restrictive contracts that are central to the fissured workplace.
For its part, the FTC has the power to rein in business models dependent on contractual control. It can prohibit “unfair methods of competition” and is not restricted by court interpretations of the Sherman Act. In other words, the FTC is not bound to follow Supreme Court decisions such as Sylvania.
What should the FTC do? To establish effective autonomy for independent workers and businesses, the FTC should prohibit or restrict the use of an array of vertical restraints. For instance, lead firms should not be allowed to mandate 24 hours of operation for franchisees. The FTC should also prohibit franchisors from imposing maximum prices on franchisees, a contractual provision that forces franchisees to choose between making money or paying their workers a fair wage.
Gig firms like Uber, Lyft, and Instacart should not have carte blanche to dictate, for example, how drivers do their work or what they charge passengers. If they want such employment-like control, they should grant drivers the benefits and protections that come with employment. Meanwhile, fast-food franchisees should be either proprietors with genuine autonomy or employed managers with the associated rights. Employment and antitrust law should once again require corporations to choose whether they want to deal with truly independent entrepreneurs, or employees. They’ve have had it both ways for too long.
