The Future of Uber and Lyft Might Look a Lot Like FedEx
A new ‘franchise’ model could help the companies without necessarily improving working conditions
In 2009, the year Uber launched, FedEx made a change to its business model. The shipping firm had previously relied on independent contractors who owned their own trucks and were paid by the delivery or mile rather than the hour. For years, the company faced an onslaught of lawsuits arguing that the people who delivered mail in a FedEx branded truck and uniform should actually be classified as employees, rather than contractors, and protected by minimum wage and other labor laws.
To avoid treating workers as employees as a result of these lawsuits, FedEx pivoted instead to contracting with “independent providers” who managed multiple drivers, instead of independent individuals. The company argued that, in part, because these providers could negotiate their routes and rates, they met the definition of being independent and were not employees. That reasoning is still regularly challenged.
Uber and Lyft’s Business Model May Be Dead. Good.
The biggest startups in modern history were built on old-fashioned worker exploitation. Time for an upgrade.
Uber and Lyft — businesses that adopted a version of FedEx’s original independent contractor-field model — are now facing the same types of legal challenges the mail delivery giant battled a decade prior. Earlier this month, a California judge ordered the companies to adhere to a recently passed state employment law and treat their California drivers as employees, entitling them to a minimum wage, overtime pay, and other protections not granted to independent contractors. In response, both companies have threatened to shut down their operations in California, saying that it is impossible to change their business models quickly to comply with the law. They are also contemplating another move that comes straight out of the FedEx playbook, with the New York Times reporting that Uber and Lyft are considering moving to a franchise model for California drivers.
“This would be similar to how Uber Black operated a decade ago,” an Uber spokesperson told OneZero, referring to the company’s initial model of working with existing livery companies. He said that the new model might include both driver-owned or fleet-owned cars. In both cases, drivers would likely earn a predetermined hourly wage for their time working on the app. The spokesperson did not answer questions about what Uber’s financial arrangement with fleet operators might look like. A Lyft spokesperson did not answer questions about its plans for a franchise arrangement.
As FedEx and other franchises have already shown, the franchise model can serve a similar purpose to the independent contractor model. While there are legitimate uses for both models, says Benjamin Sachs, a professor of labor and industry at Harvard Law School, “they are also schemes to avoid taking responsibility for workers […] And if they offload their responsibility onto someone who can’t bear it, then the driver is left holding an empty bag.”
Furthermore, much like the independent contractor model, the franchise model can still be challenged when companies exert too much control over outlets.
In a typical franchising model, a franchise outlet pays the parent company a fee to use its brand as well as a portion of its ongoing revenues. The model is appealing to companies like McDonald’s because it allows the company to preserve its brand while the franchisees provide the startup capital to grow.
But franchise models can set up incentives that squeeze workers. As Brandeis University Heller School for Social Policy and Management professor and dean David Weil, PhD, explains in his 2014 book The Fissured Workplace, the setup introduces incentives that can be bad for employees: The franchise owner only makes money if its outlets can profit more than what they pay in fees to the parent company. Meanwhile, the parent company, which often sets standards such as prices, is solely focused on maximizing revenue. Sometimes a parent company’s fees and standards make it difficult for franchisees to make money without cutting corners — such as violating labor laws.
One analysis of labor conditions in franchise systems, published by Weil and MinWoong Ji in the Industrial Labor Relations Review, looked at the impact of franchise ownership on fast food restaurant’s compliance with federal minimum wage and overtime standards for the top 20 fast-food companies in the U.S. They found that the probability of a violation is about 24% higher among franchisee-owned outlets than among otherwise similar company-owned outlets.
Meanwhile, because the franchisor is not the direct employer of an outlet’s employees, it often claims it lacks knowledge and responsibility for these violations.
Workplace statutes and legal interpretations, Weil writes, “often hold the franchisor harmless for the actions of franchisees when it comes to employees, even as franchise and commercial law protect the franchisor’s right to impose standards on every other aspect of business decision. This creates the fundamental dilemma of the fissured workplace by allowing lead companies (in this case franchisors) to have it both ways: creating, monitoring, and enforcing standards central to business strategy while at the same time ducking responsibility for the social consequences of those policies when it comes to the workplace.”
Veena Dubal, PhD, a professor of law at the University of California, Hastings, recently examined how FedEx’s transition to a franchise model ultimately impacted drivers. In a forthcoming article for the Wisconsin Law Review about the impact of misclassification lawsuits on workers in the gig economy, she uses FedEx as a case study, writing, “Strikingly, the financial conditions of the ISP drivers [independent service providers] are more precarious than they were before the … litigation. As small business people, they are not properly remunerated for their work, nor are they able to provide secure employment for those who they hire.”
Dubal quotes from an interview she conducted with Beth Ross, the lead plaintiff’s attorney on one of the misclassification cases that inspired FedEx’s new business model, about how drivers fared after FedEx changed its business model to “independent providers:”
FedEx leaves them alone more than they used to, but they have a terrible financial problem. FedEx doesn’t pay them enough to really compensate the people who drive for them. A lot of them do not provide workers’ compensation or provide overtime. One plaintiff […] 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.
Uber provides its own example of the hazards of a franchise system. In Poland, the company has already introduced a franchise-like model in response to regulatory challenges that make employing freelancers a hassle. Instead, independent contractors sign up to work with intermediary companies instead of directly for Uber. As OneZero reported last year, with little oversight from Uber or regulators, some of those intermediary companies steal drivers’ pay or add unexpected fees.
And relabeling drivers as franchisees rather than “independent contractors” may not solve Uber and Lyft’s legal headaches. A franchisor can be deemed a “joint employer” and thus share liability for labor violations at an outlet.
“If what we care about at the end of the day is that the human beings driving for Uber have basic protections, we have to be skeptical of this arrangement just as we were skeptical of the independent contractor arrangement,” Sachs tells OneZero.
All of this is to say that if Uber and Lyft were to move to a franchise model, it would not necessarily put an end to its legal challenges when it comes to how it classifies its workers. And it would not necessarily make drivers’ lives better. It would move workers from one aspect of what Weil calls the “fissured workplace” to another.
Uber and Lyft are championing a ballot initiative in the November election that would exempt them from the law requiring them to reclassify drivers. They have threatened to stop service in California, their court-ordered deadline for making drivers employees if the court does not allow them to pause while they pursue a challenge to the decision. Lyft announced Thursday that it plans to follow through with suspending service starting on Friday. In a motion Uber filed with a California appellate court Wednesday evening that aims to pause its order to reclassify drivers, the company claimed that moving to an employee-based business model would increase its prices by 20% and reduce the number of quarterly drivers by 74%. It argued that it could not operate as quickly and cheaply, or provide quick part-time employment to as many people if forced to treat its drivers as employees.
As my colleague Brian Merchant argued in a OneZero op-ed earlier this week, perhaps they shouldn’t operate so quickly and cheaply if they can’t do it while paying drivers as employees.
Franchising may not be a satisfying answer, but there are plenty of other options. Apps like Flywheel allow hailing of licensed cabs via a smartphone app (though traditional models for licensed cabs and livery services have their own issues). And “platform cooperativism,” a theory championed by New School professor Trebor Scholz that posits digital tools can help enable COOPs, is now more than an idea, with apps such as London’s TaxiApp, Belgium’s Partago and Vancouver’s Modo, and Quebec’s Eva using the model for transportation services, including sharing vehicles instead of hailing them.
And maybe the most obvious solution: Uber and Lyft — or if not Uber and Lyft, another app — could simply comply with the spirit of California’s new independent contractor law and make its drivers employees.
Contrary to what these companies have claimed, operating a ride-hailing business with employees is possible. We know this because a Texas-based app called Alto has been doing it since 2018. The company’s CEO Will Coleman told CNBC that it will never be as fast as Uber or Lyft, but that hiring employees avoids an excess supply of drivers that results in driving down drivers’ pay and congesting city streets. In an email to OneZero, Coleman said drivers earn on average $15 per hour and have access to sponsored health benefits and paid time off.
And notably, the argument for Alto to use this business model isn’t only a moral one. The company offers other services, like a daily delivered lunch option for customers. “It would have been difficult, if not impossible, for us to launch [the daily lunch service] at our standard of service without the feedback and training of our drivers,” Coleman says.
Meanwhile, the company’s marketing emphasizes clean cars, reliable service, safe drivers, and high-quality service — all things that both could make its pitches for add-ons like dependable lunch or helping with kids pickups more appealing and are much easier to guarantee through an employment relationship.