The Future of Employment Relationships in the On-Demand Economy

8 February 2016
ABOUT THIS Perspective

There is an urgent need to reconsider the definition of "employment" without adversely affecting the growth of jobs in this dynamic sector or risking the dilution of workers' rights across industries.

Even as on-demand services and aggregators offering them are becoming increasingly ubiquitous, we remain unable to classify workers in the on-demand economy using existing legal frameworks. There is an urgent need to reconsider the definition of “employment” without adversely affecting the growth of jobs in this dynamic sector or risking the dilution of workers’ rights across industries.

The classification of a worker as an employee or an independent contractor has important implications for what benefits the worker receives and what her employer’s obligations are. So the persistent question is: Are workers in the on-demand economy employees or independent contractors? To answer this question, let’s consider some common conditions of on-demand work.

In most cases, a worker providing services through digital platforms does not have control over the prices they can charge their customers. In addition, most platforms seek feedback from customers on the services provided and use this information to reward or penalize workers based on their performance. Moreover, the technology platforms offer monetary incentives to those who work more – almost like overtime pay. These characteristics of on-demand work bear striking similarity to the traditional employment relationship.

On the other hand, workers using these platforms have full control over their working hours and the jobs they want to take on. They also have the option to list their services with two competing aggregators and accept jobs from both. Clearly these workers do not fit into either of the traditional categories; they are neither employees nor independent contractors in a strict sense.

The need for a regulatory response, therefore, is imperative. While there are no reliable estimates of how many on-demand workers there are, most analysts agree that the number will rise significantly in the near future. Tech giant Intuit estimates that by 2020, 40 percent of U.S. workers will be part of the “contingent workforce,” with 11 percent of those working through on-demand apps.

One option might be for policymakers to create a new category of workers – something between an employee and an independent contractor – whom aggregators would provide some employment benefits without having the responsibility of making them full-time employees. However, the regulations governing such a category would need to be specific and stringent enough to avoid a situation where companies start exploiting it.  The controversy over a non-employee, non-contractor category of worker has been driven by this concern.

Another alternative is to overhaul the system of employment benefits altogether, separate employment benefits from the employment contract, and structure benefits on the basis of the number of hours worked. One such proposal has been put forth in France, where each worker would have an “individual activity account” tracking hours worked and the nature of work performed, with benefits paid proportionally by the companies for which they work. But such an extensive overhaul would require a lot of time, not to mention political will.

The rapid growth of employment in the on-demand economy has thrown up a new regulatory challenge. It needs to be tackled in a manner that balances the need for a dynamic, job-creating economy with the need to ensure fair practices and worker welfare. Creating an additional category of employment to accommodate on-demand workers can at best be a stopgap until a more flexible model of social security and employment benefits is adopted.