Last week Uber and Lyft threatened to shut down in California if they were forced to comply with a law that would require them to classify their freelance drivers as employees. An appeals court granted the companies a temporary reprieve on Thursday, allowing them to operate with independent contractors while they fight the court order. However, the companies are already preparing for the day of reckoning should they lose their legal battle and reportedly considering switching to a franchise model. Under the plan, the companies would license their brand names and technology to owners of traditional taxi fleets. The fleet owners would employ the drivers, allowing Uber and Lyft to continue to avoid the costs associated with employment.
Should they go through with the plan, it would actually represent a return to the roots of the gig economy, which began with older business models like franchising. It would also emphasize that addressing misclassification issues is not enough. The problem of large corporations using legal strategies to skirt laws protecting workers goes far beyond misclassification and the so-called gig economy. The essence of the gig economy is control without responsibility: Uber and Lyft use electronic surveillance and algorithmic carrots and sticks to coordinate the activity of drivers, without triggering the legal responsibilities and costs that go with employment. Gig companies argue that despite being subject to this algorithmic control, each driver is not an employee but rather an entrepreneur running an independent business.
Uber and Lyft can pull this off because they are following in the footsteps of franchisors like McDonald’s and Jiffy Lube, which decades ago pioneered the legal mechanisms of gaining control over far-flung business empires without triggering legal employment relationships. These mechanisms, known in antitrust law as vertical restraints, are contract terms that minutely prescribe the product offerings, hours of operation, and even the precise way cashiers greet the customer for each unit in a franchised chain. Vertical restraints are why every McDonald’s looks the same, even though most of them are owned by independent franchisees. 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 businesses. As a congressional staffer put it to a franchisor during a 1965 hearing, “if [a franchisee] is told what product he has to buy, what prices he has to charge, what operation he has to operate in, then he is no longer independent, is he?” As is happening now with Uber and Lyft, the ensuing congressional hearings, Federal Trade Commission investigations, and court cases debated whether franchising would become a viable business model. In 1977, a landmark court case between a television manufacturer and its franchisee, Continental TV v. GTE Sylvania, decided the issue of vertical restraints in favor of franchisors. Henceforth, franchisors would have wide latitude to impose contractual controls on nominally independent businesses. Uber and Lyft would follow in their footsteps.
The problem of corporations using legal mechanisms to avoid responsibilities to workers is much larger than the gig economy. Franchising is just one example of what David Weil, dean of the Heller School for Social Policy and Management at Brandeis University, calls “fissured workplaces,” in which “lead” firms replace direct employment of workers with outside contractors such as temp agencies, subcontractors, and franchisees. The lead firm controls how the work is done through vertical restraints and similar legal mechanisms but without having responsibilities to the workers doing the work. Workplace fissuring reduces wages by blocking workers from access to higher wages, career ladders, and workplace protections such as union rights with the lead firm. Importantly, solving misclassification issues will not help workers in fissured industries, since they are legal employees of some company, just not the company that controls their working conditions. While the Bureau of Labor Statistics estimates that there are 10.6 million independent contractors in the U.S., Weil estimates the size of the fissured workplace to be more than double that amount.
So how would switching to a franchise model affect Uber and Lyft drivers? Law scholar Veena Dubal of the University of California–Hastings (who was recently targeted on social media by an advocacy group funded by Lyft and Uber) points to a similar 2014 case where a court ordered FedEx to stop misclassifying its drivers. FedEx responded with a franchiselike model in which it outsourced delivery routes to “independent service providers” (ISPs) who hired individual drivers as employees. The result was hardship for both ISPs and their employees. As the lead plaintiff’s attorney in the misclassification case against FedEx, Beth Ross, put it:
FedEx doesn’t pay [the ISPs] enough to really compensate the people who drive for them. A lot of them do not provide workers’ compensation or provide overtime. One plaintiff from [the misclassification case], for example, has nine drivers and four of them are on public benefits. And not because he doesn’t pay them every penny he can. He does not even have health insurance for himself and his family.
Similarly, when McDonald’s franchisees complained that franchisor control over their prices squeezed their profits, a franchisee reported that McDonald’s told her to “just pay your employees less.” The essence of workplace fissuring is control without responsibility. Because under a franchise model Uber could still impose vertical restraints to severely limit the prices, territories, and other options available to fleet owners to make profits, it is unlikely Uber and Lyft’s franchisees would be in a position to raise wages for drivers.
This is not an argument against AB5, the California law that would make Lyft and Uber reclassify their drivers as employees. Ending misclassification is an important first step. But to solve the problem of corporations avoiding responsibilities to workers, we need additional policies. Large corporations must be forced to choose: Do you want control with responsibility to workers, or are you willing to relinquish control to truly independent entrepreneurs? Small business owners deserve to have freedom from excessive control by corporate masters through excessive vertical restraints. Workers, meanwhile, need expanded “joint employer” rules against lead firms in fissured workplaces, which would make lead firms jointly responsible, along with their contractors and franchisees, for the wages and working conditions of workers.
Uber and Lyft have long maintained that they are a not taxi companies, but tech platforms matching buyers and sellers of taxi services. The problem, however, is that the algorithms do more than match buyers and sellers. They set the prices customers pay, determine the wages drivers receive, and discipline underperforming workers. Like postwar franchisors before them, Uber and Lyft are betting that using new techniques to control a business empire will allow them to pioneer a new frontier unburdened by old regulations. The early enthusiasm over tech’s disruption of existing industries is starting to wane. The future of many industries now depends on how courts and legislators answer this question: Is this innovation, or regulatory arbitrage?