"Sharing economy" businesses like Uber need to share the responsibilities too

September 4, 2015

Most business commentators have nothing but praise for the sharing economy, whose poster children include Uber and Airbnb. A growing number of tech start-ups are facilitating peer-to-peer exchanges to connect clients seeking all manner of services with people who can provide them. These for-profit businesses are touted as the economic innovators of our digital age, delivering services at lower costs, empowering consumers, and offering workers the chance to be their own bosses. However, the serious effects of these new service providers on workers and wider society are only beginning to be understood.

 A large part of the cost savings and flexibility these companies leverage is due to the status of the workers who actually provide the services.  A majority of the larger firms, including Uber, classify their workers as “independent contractors,” rather than employees.  Estimates are that this strategy reduces labour costs by at least 20 per cent.  While the workers are not bound to a fixed work schedule and may be able to control their income, the long-term social consequences of the shift from employment to contractor status are profound.

Much of our social safety net, to say nothing of taxation, is tied to an employment relationship.  Employers deduct personal income taxes and remit them to the government.  Members of the Canada Pension Plan typically enroll through their employers—and the parties share the cost of the plan. Likewise with Employment Insurance. Employers also pay into the workers’ compensation insurance fund, which provides injured workers with wage replacement and medical treatment in case of a workplace injury or disease, and are responsible for workplace safety.  Traditionally, employers provide training to their employees to enable them to progress in their careers and become more productive.

Classifying workers as independent contractors severs most of these links to the social safety net.  Contractors are obligated to declare their incomes to the Canada Revenue Agency, but can deduct many expenses that would arise from employment, thus reducing government revenues from that source.  , There are strong disincentives to contribute to the Canada Pension Plan, beginning with the cost of the plan to individuals – upwards of 10 per cent of their income.  Similarly,  accident insurance from WorkSafeBC is not required for most individuals and is unusual for unincorporated contractors. When contractors are unable to find work, Employment Insurance is not available to them.  Finally, the contracting firms provide little or no training to their workers.  Since there are no expectations of a long-term relationship, management has no incentive to increase the productivity of its workers.

In the United States, regulatory agencies have attempted to classify workers in these contracting arrangements as employees, thereby bringing them into the normal system of social benefits.  The “sharing” companies have resisted these intrusions vigorously. Canadian agencies have not yet tackled this problem. The results of efforts to re-classify contractors are uncertain.   In both countries, the definition of employee under various statues is not uniform and frequently very technical. 

What is clear is that this business model, relying on contractors to provide services, undermines the social safety net that should protect all Canadians.  Workers who contribute less to their Canada Pension will need extra public support in their old age.  While working, they will rely on Medicare to provide treatment and rehabilitation for job-related injuries, instead of the employer-funded workers’ compensation plan.  When contractors cannot find work, they must turn to social assistance rather than the Employment Insurance fund, into which both employers and employees contribute.  Finally, there are no incentives to raise workers’ productivity by improving their skills.

None of these consequences is desirable for society as a whole. An estimated 1.8 million Canadians are independent contractors. If their numbers continue to increase, policy makers can follow the US example and classify them as employees, or  consider a new category of worker. "Dependent contractors” already exist in the BC labour and employment law..  Currently, these workers must be closely tied to a single company.  They are entitled to notice of termination, but not required to contribute to social programs.  Expanding the concept could prevent additional burdens on Canadian taxpayers.

Mark Thompson is a Professor Emeritus in UBC’s Sauder School of Business, and a research associate with the CCPA-BC.