The Uber Problem

The so-called “ride sharing” service Uber has grown dramatically over the last few years. The company’s business model is actually quite simple: its smartphone-based app connects drivers offering rides and passengers seeking them, passengers pay mileage-based fees through credit cards that the company keeps on file, and Uber then takes a percentage of each fare and gives the rest to drivers.

At least part of the company’s success relies on its dramatic reduction of search costs and exploitation of network effects among users and drivers. Because Uber drivers are linked more-or-less instantly to riders, they may have paid passengers a greater proportion of the time than traditional cabs. But the company also tends to violate taxi regulations wherever it opens up shop, leading to significant tensions with taxi drivers who have lost business as a result.

In two recent essays—one in a symposium for the University of Chicago Law Review, another forthcoming in the Harvard Law & Policy Review—I considered the costs and benefits of Uber’s rise. I argue that many common criticisms of Uber aren’t clearly grounded in fact, and that others beg important questions about what sorts of regulations are appropriate. But I also argue that the company ought to be held to basic employment law duties.

Of course, I don’t think much of the criticism of Uber is really based on safety anyway. Rather, it is based on the company’s impact on taxi drivers’ and its own drivers’ ability to make a living. That is a serious and legitimate concern, and one that markets tend to exacerbate rather than solve.

The question of whether Uber should be legalized in Philadelphia illustrates these questions well. In January, the Pennsylvania Public Utility Commission granted the company a two-year provisional license. But that grant carved out Philadelphia, where the Parking Authority (PPA) regulates taxis and limousines and holds that UberX, the company’s low-cost and most popular service, is illegal. By its own account, the PPA has impounded “dozens” of UberX drivers’ cars, and recently filed suit seeking at least $300,000 in damages. As PPA Executive Director Vince Fenerty stated, “Unlike the 1,600 licensed medallion cabs in the city, there is no guarantee these cars are clean, safe, inspected or insured. The drivers have no training and have not gone through extensive driving or criminal background checks.”

There are sound reasons to regulate Uber, but Fenerty’s criticisms miss the mark. For example, do Uber drivers really cause more accidents than taxis? I have seen no data on this question, nor do I expect it exists given the company’s relative youth. The Uber accidents that do occur probably get greater attention than comparable accidents by taxis since Uber remains a novelty, and its critics have incentives to highlight its missteps. Uber also requires its drivers to use relatively new vehicles, and newer cars tend to be safer. Regarding both accidents and vehicle safety, moreover, why do we think that inspections by an admittedly underfunded state agency are the best means of ensuring compliance? This is the sort of problem for which insurance markets tend to work, especially since Uber riders will likely abandon the service if a slew of accident victims go uncompensated.

Criminal background checks also raise difficult issues. Of course, the rate of passenger assaults by drivers would ideally be zero. But how to get there? As the EEOC has and various courts have noted, stringent criminal background checks tend to screen out racial minorities at a disproportionate rate. In a leading case, the Third Circuit held that under Title VII, SEPTA could only use criminal background checks that “accurately distinguish between applicants [who] pose an unacceptable level of risk and those [who] do not.” Simply screening out everyone with a criminal conviction would undermine drivers’ interests in equal treatment.

Of course, I don’t think much of the criticism of Uber is really based on safety anyway. Rather, it is based on the company’s impact on taxi drivers’ and its own drivers’ ability to make a living. That is a serious and legitimate concern, and one that markets tend to exacerbate rather than solve.

Regarding taxi drivers, the company’s entry into their markets is unfair insofar as it does not follow the same regulations, leaving taxi drivers with substantially higher operating costs. Regarding its own drivers, the company is now defending various lawsuits in which drivers allege that it misclassified them as “independent contractors” rather than employees to avoid duties including minimum wage and maximum hour protections and work-related reimbursements. Employment status might also entitle workers to workers compensation and unemployment insurance, and potentially even collective bargaining rights.

Unfortunately, litigation won’t resolve these questions anytime soon, because the existing tests for employment don’t clearly contemplate companies like Uber. As a federal judge stated in a recent case against Lyft, another “ride-sharing” company with the same basic business model, the jury will be “handed a square peg and asked to choose between two round holes.” Such drivers are not classic independent contractors since they are actually at the core of the company’s business, often work for it for years, and must follow detailed specifications for their work. Yet they are not classic employees either. “We generally understand an employee to be someone who works under the direction of a supervisor,” he wrote, “for an extended or indefinite period of time, with fairly regular hours, receiving most or all of his income from that employer.”

This suggests a basic tradeoff: the state legislature could legalize Uber statewide, but in the process define Uber drivers as the company’s employees under state law. That would go a long way toward ensuring decent treatment for Uber’s drivers and eliminating unfair competition against taxi drivers. The legislature might also update taxi regulations at the same time to eliminate those that add unnecessary costs, and to better enable taxis to compete against Uber. This would also help set a template for regulation of Uber going forward: the right to operate under a more modern regulatory apparatus, in exchange for commitments to decent pay and working conditions.

5 thoughts on “The Uber Problem”

  1. Hello Professor,

    Thank you for your work on this.

    I’m curious and perhaps you know – are taxi drivers generally considered employees under the law in most jurisdictions?

    I ask in part because I have interviewed a number of Uber, Lyft and Taxi drivers (as someone interested in the business models and what the drivers think of them) and I find that 1) they are often the same people and 2) the taxi drivers report that they essentially rent their cars for the day and earn the difference between the aggregate fares they collect, less gasoline and car rent. I haven’t had any of the taxi drivers tell me they get (what I think of) as common benefits of employment such as paid time off for vacation or illness, opportunities to participation in a retirement savings account, or being provided at no cost the tools of the work to be performed – office, computer, uniform, etc.

    All the best,

    Jerry McLaughlin (Temple Law ’93)

  2. Hi Jerry,

    This is an important question, and the answer varies a bit by jurisdiction and by subject matter. The test for employment under most labor/employment law statutes is a version of the “right to control” test from agency law. That test gives workers and companies substantial flexibility in how they structure their work relationship, and insofar as cab drivers are renting cabs they are more likely to be classified as independent contractors rather than employees. As a result, they tend not to have rights to basic employment law protections.

    But there are exceptions. A prominent California case held that cab drivers are employees for purposes of workers compensation, where the test for employment is somewhat broader. Yellow Cab Coop. Inc. v. Worker’s Comp. Appeals Bd., 226 Cal. Appl. 3d 1288 (1991). In a very important recent case, the Ninth Circuit held that FedEx drivers were employees. Alexander vb. FedEx Ground Package Sys., Inc., 765 F.3d 981 (9th. Cir. 2014). Both will be important precedents for the Uber case in California.

    I consider these issues in a bit more depth in the Harvard Law & Policy Review piece linked above.

    Happy to talk more, either here or via email.


  3. FYI… The PPA taxi budget is just above $6 million for a mere 60 UNIONIZED employees who reap most of their revenue from taxi cab drivers. They have increased all operating costs and fares since their introducton in 2005; therefore, it is almost impossible to reduce the average operating cost for a cab driver which is around $10 per hour without eliminating the PPA as a regulatory body for taxis.

    The real UBER problem has very little to do with taxis. Taxis are only the cannery in the coal mine. Here is a list:

    Surge manipulation (Both the driver and UBER are guilty of this. Also, surging will become more frequent as there are fewer taxis in operation since Uber’s introducton.)

    Driver turnover (roughly 90% quit within a year… Primarily due to a decline driver rating or false accusation by the passenger to obtain a free ride)

    UBER x vehicles have NO individual commercial insurance policies as mandated by state law (this will lead to ambiguity and confusion when an incident occurs.)

    Car rental business will decline (cheaper to UBER x it to where you are going)

    Automobile industry will decline over the long run (owning a vehicle becomes to expensive when compared to non surging fares.

    Parking industry will decline ( no car ownership means no parking or valets)

    Cities will become more congested with an uncapped number of uber x vehicles.

    Governments will lose tax revenue from the decline of the above mentioned industries, which means, the public will subsidize UBER through other taxes (UBER x drivers now avoid paying city wage taxes by nondeclaration and most federal and state taxes through the standard mileage deduction)

    Now, most of these problems are unavoidable as this “Walmart” of a taxi service gains majority market share. It is up to us to have a through discussion on the matter to truly see if the costs outweight the benefits of UBER.

  4. If Uber really was so bad, the taxi companies wouldn’t have to resort to impuning it’s character. The truth is that, like horses and buggies, the taxi system is losing out to a better idea.

    • Care to elaborate on your given analogy and how that relates to UBER and its impact on society, which is the subject matter at hand as stated in this article?

      Furthermore, cab companies do not have to impune Uber’s character ( if it even has one) Uber’s upper management has already done that …. just Google UBER problem and enlighten yourself.


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