The gig economy model is exploitative and unsustainable

I took my first Lyft ride the other day. I am pleased to say that the technology worked great! I picked up my luggage at baggage claim at Bradley International near Hartford, opened my Lyft app and within two minutes a driver was flagging me down and I was on my way home. I arrived home forty-five minutes later and just $55 poorer, but compared with taking a taxi I doubtlessly saved a bundle. In addition, my driver turned out to work part time for United Technologies configuring cloud services on Microsoft Azure for their customers. So we had lots to chat about and the drive went quickly. He fills his free hours driving people mostly to and from the airport and seemed happy to be a Lyft driver.

Until recently my daughter depended on Lyft and Uber to get around. She gave up her car a few years ago, convinced she didn’t need one in Washington’s far suburbs. If she needed to go somewhere, she’d either walk or use one of these services. Nonetheless, she snapped up the free car I offered her: my old 2005 Honda Civic Hybrid (now replaced by a Toyota Prius Prime). That was my reason for flying: I drove the car to Virginia to give it to her and took a United Airlines flight back. While normally my wife would pick me up at the airport, she recently had a knee replacement and couldn’t do it. So I experimented with Lyft, which I heard was the less evil of the two services. More to the point, it didn’t look like taking a taxi at Bradley was an option anymore. I didn’t see any I could flag down in Arrivals.

So it was a great experience until I thought about the model of Lyft and Uber in general. A lot of their drivers have too and have figured out that they are being exploited. Lyft and Uber are hardly alone using this model. In our new gig economy, the trick seems to be to create companies that find unique ways to exploit workers by making them not realize they are being exploited. In the case of Lyft and Uber, the first thing to do it not to label them employees. They are “independent contractors” who set their own hours and get paid fixed rates. One advantage to being a Lyft or Uber driver compared with being a Supershuttle driver is that they don’t have to rent a van from the company and probably aren’t working sixteen hours a day to keep paying Supershuttle’s franchise and leasing fees.

But they are getting ripped off. In the case of Lyft, they recently reduced payments to their “independent contractors”, which did not make them happy but did probably help lessen Lyft’s losses. Lyft went IPO last week but it’s bleeding money. Nonetheless, they aren’t too worried. Amazon used this strategy very profitably until their competition was either destroyed or bought out. Lyft is hoping for the same sort of success at this game. Its new shareholders don’t seem convinced yet as you can buy Lyft shares well below the $72/share price set at their launch.

These new companies exploit shamelessly and fight dirty. Customers tend to look the other way, basically because they don’t understand what’s going on. If you can save 30% or more with a Lyft ride compared to taking a taxi, you see a good deal plus in many cases they are faster and more convenient than a taxi. It’s clear to me though that these savings come principally from these “independent contractors”.

Taxi drivers are often independent contractors too. They usually aren’t employees. But they are regulated. Taxi commissions typically oversee these services and set rates that allow taxi drivers to earn a decent wage. In some cases they own their taxi, in some cases the taxi company owns them. But it’s a model that’s been working quite well because cities and towns have decided to make it work for both drivers and passengers.

Uber and Lyft decided to be disruptive, which was to just ignore these taxi commissions and brand their services as something other than what it is: a taxi service. The big difference is that their cars aren’t painted with the taxi company’s colors. You hop into one of these cars and hope that your driver won’t drive sexually assault you.

Doing background investigations on “independent contractors” of course raises costs. Hopefully both Lyft and Uber are at least doing cursory background investigations before offering contracts to these “independent contractors”. It’s more convenient to ignore these issues until it becomes too big a problem, and then hope to manage them.

But the real ones being exploited are not customers, but drivers. Basically they become drivers to get some quick cash to pay a few bills. What’s harder to see is the costs on their vehicles and how it eventually affects their bottom line. A car that was driven 10,000 miles a year that is now driven 30,000 miles a year will wear out more quickly and require more frequent maintenance. Neither Lyft nor Uber will pay for these expenses. You are supposed to figure that out as part of your business model, along with other things like withholding money for taxes and social security and Medicare, including the employer’s share. All these expenses plus the quick depreciation and higher maintenance costs on your car means that for most drivers, your effective wage per hour is below the minimum wage and you get all the hassles and costs of maintaining your car and paying taxes too.

These companies are prominent examples of this trend but they are hardly alone. Employers basically don’t want to employ: it’s costly, limits their ability to move quickly to market conditions and requires a lot of hassle. Amazon reluctantly raised wages for its warehouse workers to $15/hour, but it still hires lots of “independent contractors” who work for much less. Even my driver’s erstwhile day employer, United Technologies, is trying him out at part time wages and substandard benefits. He works from home and has to wait two more months before he is allowed to actually come into the office.

I don’t think this gig economy is sustainable. It endures until these “independent contractors” say enough and demand a fairer deal, which is hard to do if you have no union hall. Hopefully they will get a decent deal, but that will raises costs overall and make their whole business model less profitable.

But maybe it won’t matter. Like Amazon they hope that they will have gotten rid of the competition by then by hanging on as long as possible. This success though depends on cutting competition off at the kneecaps and exploiting people as long as possible. In the case of Lyft and Uber, so far it’s been decimating taxi companies. If ultimately it doesn’t work, they go out of business, leaving of course their “independent contractors” hanging.

In the case of Uber and Lyft, it’s clear this will happen eventually anyhow. The plan is to introduce fleets of automated cars as soon as the technology matures. And these “independent contractors” will be left holding the bag with cars with high mileage, lots of costs and no job.

SuperShuttle: Have you no shame?

No, I suppose not. You are a business, after all, and businesses are all about making profits through all means fair and unfair. So this article should not have surprised me. Yet it made me, a mild manner person, so irate I wanted to throw a brick through the window of SuperShuttle’s corporate offices.

SuperShuttle of course is the ubiquitous blue van found in many U.S. cities. They exist principally to get travelers to and from the airport. I fly reasonably regularly, mostly for business, so I cannot help but be acquainted with SuperShuttle. Most often I am on a SuperShuttle going to and from Denver International Airport. Most recently I was on a SuperShuttle from Boulder to DIA on April 1st.

A couple of years back I was chatting with the driver (they tend to be quite loquacious with customers) and I learned that he was not an employee of SuperShuttle, but a franchisee. He was mentioning that he had to take some time off from work to finish his taxes, not a small thing if you run your own business. I remember finding his remarks curious but until today I had forgotten about them. But today’s Washington Post article resurfaced this memory, and the memory of the less than a handful of us passengers who made that trip from Boulder on April Fools Day on a blue SuperShuttle.

It’s clear where SuperShuttle is making its money, and it is principally off franchisees. Holy nickel and diming, Batman! They are more creative in adding fees for their franchisees than TicketMaster is at adding reservation fees, surcharges and Will Call fees. Only it’s not customers who are paying these fees. Shuttle rates tend to stay relatively static. Rather it’s the franchisee. As the Post reporter Emma Schwartz reports it:

Enajekpo doesn’t complain too much. Any money will help, especially this week when he already owes SuperShuttle $1,054.45. There’s a $197.59 fee to pay down his franchise purchase, $179.20 for his van lease, $144.31 to cover insurance and a weekly $500 system fee for using the SuperShuttle reservations and equipment. He also has $33.35 in fees that SuperShuttle charges him for customer discounts or additional booking fees from third-party Web sites.

On top of that, Enajekpo owes SuperShuttle $79 from last week. Plus, he’ll have to pay the company revenue sharing fees — 10 percent of fares for runs to the airport and 27.5 percent for runs from the airport, plus an airport fee.

SuperShuttle is hardly alone in its franchisee model. Fedex drivers are often franchisees, not to mention the guy at your local UPS store.  Many franchise opportunities are great. Others, like apparently SuperShuttle’s, are traps that screw many if not most who sign up on the hope of living the American dream.

Fees are just one way these drivers are screwed, but there are so many other ways to screw them. The most common way, which I witnessed during the two years as a commission salesman, is to saturate the market with salesmen. What it did was turn the sales floor into a dog eat dog world, where salesmen would literally race to be first to a customer entering their sales territory. But at least during my days doing retail, for the now defunct Montgomery Ward Corporation, I was an employee. (The Wards brand was purchased, but it is an online only retailer now.) Granted, my time as an employee would have been pretty limited if I could not earn in commissions more than they had to pay me in minimum wage. But I had certain rights and while I might in theory need to pay Wards back for wages I did not earn in commission, payment would come in the form of a kick in the ass out the door with my pink slip. A franchisee for SuperShuttle is not an employee, thus has no rights, but is legally obligated to pay for the privilege of driving a blue SuperShuttle van, plus those other fees, with no guarantee that he will have enough customers to make it all profitable.

Just as Wards loved to saturate the sales floor with extra salesmen, SuperShuttle has learned to saturate the market with franchisees. They say they don’t do this, but the article makes clear that many franchisees simply cannot make enough money to keep up with their fees, let alone earn minimum wage because they don’t have enough customers. The fees are owed regardless, but curiously there are no corporate guarantees that they will have sufficient customers to earn those fees. The predictable result is that many if not most of these drivers are caught up in a no-win cycle. They are unable to drop the franchise because they have payments to make on their vans for which they are legally liable, and no way to know if SuperShuttle will deliver them enough customers to earn enough money. The predictable results: a lot of bad feelings, angry franchisees and lots of long hours hoping to make up the revenue they need to keep their business afloat.

Some of these franchisees are wondering why they aren’t employees. SuperShuttle used to have employees driving their shuttles, and they had salaries and benefits. The bean counters apparently ran the numbers and determined the company would be more profitable if they were franchisees instead.  The predictable result: lots of franchisees feeling like they have been screwed. They have been. Money is essentially being pulled from their pockets to keep SuperShuttle profitable. It doesn’t appear that SuperShuttle plans to raise rates, or if they do, that they will share more of it with their franchisees. And why the hell would they? They have their franchisees right where they want them: by the scrotum. And why not saturate the market with new franchisees? After all, all those fees just adds to their bottom line.

Franchising has gone too far, but we may not yet have seen its logical end. If Fedex and SuperShuttle drivers can be franchised, then why not airline flights as well? I should probably hesitate to give airlines like United any ideas, but they could charge a franchisee $100,000 a week for the right to run an aircraft with their logo on it, and let them worry about aircraft maintenance, and hiring pilots and flight attendants. United would still control the fare, of course, but they wouldn’t need any stinking employees, in fact they could be in hock to them instead. What a win for United shareholders!

SuperShuttle in fact has gone too far. Apparently in Denver, SuperShuttle drivers have won the right to form a union, but Denver is the exception. Shuttle drivers perform a service, protect the reputation of SuperShuttle, and they will do a much better job of it if they become the employees they actually are, rather than the legal abstraction of a franchisee.

I must be a socialist, but I think there should be legislation tightly reigning rules for franchises. There is a large difference between owning a McDonalds restaurant franchise where you have a store parked at one location where the owner hires his own employees and a SuperShuttle franchise consisting of one guy or gal where you are constantly on the move and have no say about how many other SuperShuttle franchises you will be competing against. These employees-in-essence absolutely deserve the right to be real employees. Meanwhile, anyone thinking a SuperShuttle franchise is going to be his or her step to realizing the American dream should read this article and look elsewhere.

As for me, I discovered that the apparently socialist Denver Regional Transportation District has hourly buses between Boulder and DIA, even early on Sunday mornings when I need to leave, for a $13 fare, less than half of what SuperShuttle charges. They even load and unload your suitcases for you. Moreover, their drivers are employees who earn a living wage. I’ll be on the Route AB bus next time.

4/23/12: Corrected to show that Fedex drivers, not UPS drivers, are often contractors. Also found this video of conditions at LAX: