Employee or Contractor? On the Employment Status of Drivers and Compensation Design by Ridesharing Platforms: An Abstract

Abstract

Ridesharing platforms like Uber and Lyft have recently come under public scrutiny regarding the “independent contractor” vs “employee” status of their drivers in the State of California and the Biden-Harris administration. Proponents of employee status argue that it establishes a safety net for the drivers like the protection from federal minimum-wage and overtime laws. Opponents argue that it removes working flexibility in participation valued by many drivers and adds labor costs to the sharing economy.To address whether or under what circumstances, the platform, the drivers and consumers are better off under the “employee” or under the “independent contractor” status, we derive the optimal compensation design and pricing strategy under each of these two statuses. We show how the profitability and welfare comparisons for the platform, drivers and consumers across the two statuses depend on key market characteristics, such as difference in demand between rush hour and non-rush hour periods, number of total drivers and the degree of heterogeneity in the outside options of drivers.Our paper provides support for the concerns in the public arena by highlighting potential regions of conflict where the platform’s preferred choice of the contractor status can leave drivers worse off. At the same time, we show that there are also scenarios where the drivers and the platform are aligned in their preference for the contractor status, and any regulatory intervention forcing a switch to an employee status may leave drivers worse off. It happens when the degree of heterogeneity in the outside options of drivers is relatively high and surge demand in rush hour period is relatively low. In addition, we highlight areas where such intervention can improve drivers’ welfare but hurt consumers in the process, as well as areas where the intervention can benefit both drivers and consumers. Our results have significant managerial implications to ridesharing platforms and other gig economy like food-delivery companies and grocery-delivery companies.KeywordsTheoretical modelingPlatformsCompensation schemesEmployeeIndependent contractor