A Worrisome Tech Trend

on October 10, 2014
Reading Time: 4 minutes

I had the chance to use Uber for the first time when I was in Seattle recently. Unfortunately, my first experience with this service was not great. The driver had trouble finding me at the hotel I was at and, even worse, had trouble following the navigation app on her iPhone while ferrying me from one part of town to another. In the end, I had to pull out my iPad and a mapping app to actually get us to the location I needed to be and got there with only minutes to spare. She admitted she was a new driver and, knowing that, I cut her a lot of slack and even tipped her well. However, as I started thinking more about this driver specifically and Uber in general, I knew something was troubling about this experience, although at the time I could not put my finger on it.

After a few days of pondering, I realized the thing bugging me is that she was just a contract driver for Uber with little training and yet I had entrusted my life into her hands. As I understand the business model, Uber drivers are contract employees who get 80% of the amount paid them and Uber gets about 20%. These drivers have no benefits and in many ways they have most of the risk. Now I know I also put my life into the hands of cab drivers and limo drivers too but they are pretty much professional drivers and, while some may also be contractors, many are actually hired by the company they work for. In the case of the limo drivers I have used, they have full company benefits.

I recently ran across an article that highlighted what I see as a problem with this idea but was having trouble articulating myself. Kevin Rouse, writing in NY Magazine a piece entitled, “Does Silicon Valley have a Contract  Worker Problem?” stated the following:

“With Uber valued at $18 billion, Airbnb valued at $10 billion, and new imitators popping up daily, Silicon Valley is clearly infatuated with the middleman model. A recent study by venture-capital firm SherpaVentures, which has invested in start-ups like Washio (Uber for laundry), BloomThat (Uber for flowers), and Shyp (Uber for packages), estimated that venture capitalists invested $1.6 billion in so-called “on-demand” start-ups in 2013 alone. SherpaVentures predicts that so-called “freelance marketplace” or “managed-service” labor models used by these companies are poised to transform industries like law, health care, and investment banking, and that fewer people have traditional full-time or part-time jobs as a result. This, in the firm’s mind, is a good thing.

“Perpetual, hourly employment is often deeply inefficient for all parties involved,” the report reads.

But increasingly, critics argue the freelance model is being abused, with workers being treated as if they were on payroll without getting any of the benefits afforded payroll employees. Some Silicon Valley insiders are beginning to worry that start-ups’ over-reliance on contract workers could come back to haunt them if they run afoul of longstanding labor rules. If that happens, these high-flying disruptors could be facing serious disruption themselves.”

We are already seeing this with Uber constantly coming up against local ordinances and regulations in place to monitor and license similar services in each community. You can imagine labor boards across the US will start taking a closer look at these business models and weighing in with their own concerns in the future. The role of contract workers is known as the 1099 economy and is by no means new. We have had contract workers probably since the beginning of time in one form or another. I also believe there is a place for them given the right circumstances. Most contract workers are self employed and fall under the various rules and regulations that guide self employment today.

The role of these contract workers in this Silicon Valley Uber model seems on the surface to be just another contractor working for an employer. However, it is a new twist on the idea and one that is concerning to many. Uber, and the other VC backed companies who use this model, give these folks minimal training, and as far as I can tell, none of these contractors are bonded. Uber and some others carry insurance related to their services but it is unclear how much of that insurance covers them vs their contractors. The recent case involving an Uber Driver attacking a passenger with a hammer underscore this issue. Although Uber touts its safety focus, if you read the small print in their terms, it clearly puts a lot of the risk on the consumer and tries to absolve themselves from as much responsibility as possible.

I know we are early in this business model’s life and much has to be fleshed out about how they work, train, pay, insure, and deploy these contract employees. After all Uber, Washio, Shyp and other similar tech companies are really logistic companies that mostly serve as a dispatcher for their workers to meet a specific need of their customers. However, they will increasingly come under governmental regulatory scrutiny and labor board investigations before we see if they will make it in the long run.

I admit I am highly conflicted on this issue. The Uber driver I had in Seattle was happy with her new job and I think she was only doing it part time to help pay for college. Many other Uber drivers and similar contract employees tied to these digital logistics services are full time and, like most contractors, are willing to carry the cost of being a contractor for the chance of making a living doing these jobs. Just the fact it brings more people into the job market is a good thing.

However, I think companies like Uber, Washio and others like them will eventually have to confront their responsibilities to their workers and their customers in better ways than they do today. How they treat these contract workers and protect their customers will determine if these types of companies stay around and thrive in the future.