Gig Economy and Attempts at Regulation
[Sameer Hegde is an articled trainee who has worked at a Big 4 auditing firm and a reputed medium sized auditing firm, and is a student of Chartered Accountancy.]
Not a day goes by when one does not hear about the complaints of Uber and Ola drivers, among other stakeholders in the gig economy. These complaints have become as ubiquitous as the cabs themselves. With surge pricing a constant state of affairs, customers are bearing the brunt of hefty fares and long wait times. Drivers, too, have to work ridiculous and unsafe hours not only to service their incentive programmes but also finance their cars. The problem is not typical of the cab-hailing aggregators alone; stresses are building up in other services areas such as food delivery and task running as well.
Built on business models that focussed on hooking a customer, and then increasing dependence (measured as retention) on the service, these companies have been burning investor funds at unimaginable rates. Service aggregators have been seeing fundamentally unsound valuations, with a few boasting the unicorn status. Add to that Uber’s lacklustre IPO, and the cracks in the business model is showing.
The world is moving towards what is known as the 'gig economy'. Employees are no longer on the payroll of companies; rather, they are independent contractors hired on demand. According to a survey conducted by EY, one in two organisations indicated that they had increased their use of gig workers in the last five years.
At the source of increased strikes by drivers, delivery executives, and task runners, lies a disagreement over a seemingly simple definition – independent contracting. In March 2019, Uber, in California and Massachusetts, settled a lawsuit for $20 million and refused to reclassify drivers as employees from their current status as independent contractors. So why does a simple classification find itself to be the source of all troubles for drivers and service providers? Simply put, it is to avoid the overhead costs of employee benefits such as overtime pay, minimum wages, insurance, parental leave, the right to unionise, among others.
It would be apt to take early lessons from international developments and assess the preparedness of the Indian regulatory ecosystem to tackle with analogous problems. This article analyses the concerns raised by and the verdict delivered by the Supreme Court of California in its landmark ruling in the case of Dynamex Operations West Inc. v The Superior Court of Los Angeles County.
The analogous case and its facts
Dynamex is a nation-wide (USA), on demand same-day pickup and delivery service. The independent contractors are to provide their own vehicles and bear related expenses and insurance. The customers would use Dynamex App and pay the rates set by the said application. While the contractors are free to choose their own schedules and make deliveries on their own account, they were not allowed to direct Dynamex business to any other delivery service.
All the above conditions sound quite like the business models of Swiggy, Zomato, Uber, Ola and Dunzo, among others.
The Dynamex case was soon followed by California’s Assembly Bill 5, which is aimed at creating a legislature based on the rulings in this case. The visible trend only indicates towards more states following suit.
The risks of mis-classification
The court in Dynamex took cognisance of the fact that companies have a slew of incentives to actively mis-classify employees. "Such incentives include the unfair competitive advantage the business may obtain over competitors that properly classify similar workers as employees and that thereby assume the fiscal and other responsibilities and burdens that an employer owes to its employees."
The biggest source for an unfair advantage in the Indian context would be the advantage cab aggregators have gained over their regulated, unionised peers - auto rickshaw unions and taxi unions. These unions previously controlled aspects such as minimum fares, areas to serve (rather under-serve, as was seen in practice) etc. Ever since the arrival of for-hire aggregators, they have been able to set up highly competitive rates for trips, ensure service during peak hours (and bleak hours) and for under-served areas.
How exactly do some of the risks materialise in a gig economy?
Applicability of existing social welfare laws pertaining to insurance, provident fund, and pension, are establishment based. Gig workers are unlikely to work out of an identifiable location, factory or establishment.
Most gig workers are not restricted from undertaking work on their own account or from competing aggregators. Thus, the concepts of continual employment do not arise, making bonus, and gratuity responsibilities that can be contested by any of the aggregators.
Since most gig workers use their own tools and vehicles, their service conditions are extremely individualised and in part self-directed, and no single employer can be responsible for pay and work conditions in case of various gigs for various companies.
CEOs and founders of Uber and Lyft are aware of the concerns and specific demands against their business models. “Ride-share drivers’ worries may concern earnings stability, protections on the job, and the ability to have a meaningful voice in the companies whose apps they use. These challenges are part of a long-term trend affecting all workers, particularly those at the lower end of the economic ladder. We understand this reality and understand that independent contractors face unique challenges.”
They also do highlight the positive impact of their businesses. “Very few jobs allow you to start or stop working whenever, wherever, as often as you want. Beyond the more than $80 billion directly earned to date by people driving with Uber and Lyft, research shows the flexibility this new type of work affords has created real, quantifiable value for drivers and the economy”.
Standards to identify employee-employer relationships
For establishing a common law employment relationship, the court placed reliance on a “simpler” and “structured” test – the ABC test.
This rigorous test requires the hiring business to demonstrate that workers satisfy each of the three conditions to be classified as an independent contractor:
Test (A) would mean classifying, as employee, a worker who either by contract or in practice, is subject to the type and degree of control a business typically exercises over its employees.
Test (B) would mean classifying, as employee, a worker who would ordinarily be viewed by others as working in the nature of an employee for the hiring organisation, rather than in the worker’s own capacity.
Test (C) would mean treating, as independent, a worker who has independently decided to take up a venture and takes steps to promote his business by way of inter alia incorporation, advertisements and offerings to potential customers.
The Supreme Court of California found sufficient merit to uphold the trial court’s decision of classifying, as employees, the workers of Dynamex, by the application of test (B).
In the Indian context, the aggregating apps do control the wages, and set the rate of pay even if individually, for the various works assigned.
Trends and outlook – Code on Social Security 2019
Technology-based service aggregators have not only organised a pre-existing market but, over time, taken up the roles of being market makers. Their ability to dictate prices and reimbursements at both ends of the transaction has permeated into the reasonable expectations of society. As the court rightly observed, “If the wage order’s obligations could be avoided for workers who provide services in a role comparable to employees but who are willing to forgo the wage order’s protections, other workers who provide similar services and are intended to be protected under the suffer or permit to work standard would frequently find themselves displaced by those willing to decline such coverage”.
Attempts at defining the contours of the gig-economy have begun. The Code on Social Security Bill 2019, introduced in the Lok Sabha, has placed a charge on the government (in Chapter IX) to notify schemes for gig workers and workers who offer their services on online platforms. The benefits range from life and disability cover to maternity benefits, provident funds and funeral assistance.
Invariably, reforms shall come in waves of legislative efforts. The bill also defines 'gig worker' as a person who earns from an arrangement outside of a traditional employer-employee relationship, eliminating the scope for legal chicanery that aggregators have employed in other jurisdictions so far.
Policies of behavioural and economic nudges, mega laws for the harmonisation of laborious compliances with labour laws, establishment of a social safety net for the Indian populace etc. are necessary protections to save India’s demographic dividend.
Indian start-ups will have to proactively build on the threat of pending legislations and tweak their models smartly, as they cannot afford making digital economies a zero-sum game.
 A unicorn is a term used in the venture capital industry to describe a startup company with a value of over $1 billion. (Investopedia).