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The new gig-economy seems to struggle with the ancien world’s regulations. Uber lost a first judicial battle in the United Kingdom. The California-based firm has been ordered to change the legal nature of its relationships with its drivers who claim the right to be considered as workers rather than independent contractors.

This new legal definition is not harmless. If this decision is confirmed on appeal, it would lead Uber’s relations with its drivers to be settled according to British labor law rather than ordinary law. Labor law would imply the duty to implement the minimum wage, holiday pay regulations, and other kinds of special rules. It would therefore increase transaction costs on the market. Uber’s business model would be undermined.

Similar legal contests across various major countries can be observed. In France, the URSSAF, a network of organizations which belong to the social security system, has also brought a lawsuit against Uber which has been accused of practicing what can be translated as “hidden wage labor” or “disguised employment relationships.”

The French administration is seeking to change the legal nature of Uber’s relationships with its drivers to implement French labor laws, notably in order to collect “social contributions” — taxes on labor — which aims to finance public insurance schemes. Even in the US, Homejoy — a market place for housecleaning — has ceased its activities because of similar legal pressures. The gig-economy seems to suffer from legal uncertainties because of the tenuous distinction regularly made between workers and contractors.

What's the Difference Between an Employee and a Contractor?

According to legal theories found in western social democracies, workers generally differ from contractors by the fact the first ones are linked with their employers by a relationship of subordination. Employers are said to hold over their employees controlling and sanctioning power which justifies the implementation of special rules to protect the employees from the employers’ authority.

In practice however, this distinction is arbitrary and has no relevance when one uses the prism of economic analysis. Under a free competition system, every producer is subordinated to the desires of its customers which hold over him a control, direction, and sanction power which can be used simply by refusing to interact with him or buying someone else’s products. That is why the economist Ludwig von Mises described capitalism as the system of consumer sovereignty.

Of course, as Rothbard put forward, the use of the word “sovereignty” must be tempered since even production ultimately serves consumption ends. Customers don’t have an absolute power over producers. They too are subject to the eternal law of supply and demand and, therefore, cannot unilaterally dictate their prices and conditions. This explains for instance why people living in countries without legal minimum wages, like Switzerland, are not working for free.

The fact remains, however, that the arbitrary distinction between employees and independent contractors reveal the inconsistency of western labor laws. If they were consistent, labor laws would be implemented for every single commercial relationship. Transaction costs would be so high that the quality of division of labor would certainly be destroyed. The whole society would be substantially impoverished. Let’s also notice that labor laws, by granting special protections for some workers but not others, break the principle of equality before the law.

The Independent-Contractor Status As a Means of Lowering Barriers to Entry

Unblocking free trade in labor is precisely why the independent contractor status is beneficial. This status gives more contractual freedom and flexibility. Commercial relations are far less regulated.

But left wing parties see this as a “social dumping mechanism” frequently used to get around labor laws. But let us not be hypocritical. Yes, the independent contractor status is a means to get rid of toxic labor laws serving the interests of insiders. Clearly, some workers are better off if they are lucky enough to obtain the protected status of “employee.”

Nevertheless, the independent-contractor status reduces transaction costs, lowers barriers to entry, and notably allows a lot of low-qualification workers to compete in markets where they used to be excluded by restrictive legislation.

To take another French example, the Financial Times has shown in an article published in March 2016, how the “uberization” of the economy includes a huge promise of social mobility for many young people in the French banlieues, a promise governments have sacrificed on the altar of corporatism.

Governments facing high rates of unemployment should therefore particularly welcome these new jobs which are a solution to their inability to lead substantial labor market reforms.

This article is adapted from an earlier French-language version.

Ferghane Azihari is a law student in Paris at Université Paris-Est Créteil. He is currently an intern at the "Ecole de la Liberté" (School of Liberty), a French-speaking digital platform which promotes libertarianism. He is the local coordinator for European Students for Liberty and president of the Parisian group. Contact: twitter.