Better to employ?

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Taxi, better to employ?Some weeks ago the California Labor Commission deemed that without the drivers, Uber would not have a business. It decided Uber drivers (in the US) are employees.

Now the Uber saga has moved across the Atlantic to Uber’s operations in London.

The GMB union is representing some drivers and will challenge the company’s claim that its workers are partners rather than employees. Partners are self-employed.

The union claims Uber should consider the drivers to be under a contract of employment.

The GMB argues that Uber should pay salary, holidays, pensions and other benefits of employment. If they win a future tribunal claim, Uber could owe its partners-come-employees significant payments for unpaid benefits.

Uber says that drivers would lose the flexibility that most drivers enjoy if they were to be employed.

But how does one determine what is really best for workers and what’s best for the firm? Is it better to employ workers or have them self-employed?

Analysis

The answer needs detailed analysis. There are two parts to this analysis.

Firstly one must consider the operation concerned. This analysis will show that context is everything. The benefits of employment and self-employment depend on the nature of the business – there can be no generalisation. The way in which work arrives at Uber and then on to the driver determines the nature of the contract, whether employed or self-employed.

Secondly, one must look at a total cost model starting from the price charged to the customer. This analysis allows argument to be made in favour of either the employee or self-employed option. But there are two significant points that emerge – that Uber’s profits will potentially rise if drivers become employees, first because profits will only be taken once, by Uber, and second because it’s likely that economies of scale mean that Uber can manage the work more efficiently than disparate self-employed drivers.

Incoming Work

Customers call taxis. Demand for taxis and hence the number of calls vary at different times of day. Demand is greatest perhaps in early morning , mid-afternoon and in early evening. Then if it rains, demand goes through the roof. The only real way to understand the demand profile is statistically.

Data from the London Travel Demand Survey is shown below illustrating the profile of journeys in London across a 24-hour period during the working week. Journey by taxi forms a small part of the overall travel picture.

London Travel Demand Survey

From the London Travel Demand Survey (LTDS) accessed from Transport for London at https://tfl.gov.uk/cdn/static/cms/documents/london-travel-demand-survey-report.pdf

Self-employed drivers sense this demand and make themselves available to maximise their gains. With modern communications systems, drivers ‘clock on’ electronically. Drivers work when they’ll get the most fares and the system of work allocation is effective because the drivers know their market.

As employees, the job of sensing of the market could remain with the drivers (using zero-hours contracts for example) or could transfer to Uber, possibly being implemented within some computer system.

Use of zero-hours contracts could leave the driver clocking on when he or she wants to work, and only getting paid when there are fares to service.

Conversely, he could be employed for set hours, using a computer system to schedule work to drivers, attempting perfect scheduling of work. Neither approach is perfect and some inefficiency is inevitable.

Both the drivers and Uber will act to maximise their gains. Both will seek allocative efficiency. So there’s no advantage either way, particularly if the firm employs drivers under zero-hours contracts.

The market must be satisfied. There’s a fixed demand. It’s a question of how best to sense and satisfy that demand. If the drivers can sense the market better than the firm and turn up to work at the right time, they’ll gain. If Uber can sense the market better than the drivers, they’ll gain. Further analysis is needed to be more conclusive.

Cost Analysis

We can assume that the price a customer is prepared to pay for a fare is fixed. It doesn’t matter to the customer whether the driver is an employee or self-employed. A cost analysis helps us understand what’s best for both parties.

The following analysis refers to the diagram below. In this, costs are proportional to the size of the rectangles.Cost analysis of employed and self-employed taxi drivers

This is a market and industry that enjoys normal profits – around 10% net profit on sales is usual in this case. The diagram shows the costs that make up the price charged. And the driver’s costs are shown at the top of two diagrams and Uber’s are shown at the bottom.

The left side of the diagram illustrates the self-employed scenario and the employment scenario is on the right.

The self-employed scenario shows Uber with low operating costs and low overheads, realising normal profits. They pay a high fee to the drivers who cover their own salary and benefits and Employer’s National Insurance.

Drivers pay their wives and others to do their accounts and support them, they fund their car purchase and servicing and put petrol in the tank. Their overheads are high.

Drivers too make normal profits. And they take salary. It’s in the form of drawings or dividend. But the monetary value is enough to make the job worth doing when compared to all other professions the driver might enter. There is therefore a market price for this work illustrating balance in the labour market for the job of taxi driver.

The employed scenario shows Uber to have high overheads and high operating costs to manage the business and the army of drivers. Uber will pay a salary (including benefits and Employer’s NI) and arguably that salary will be the same market price that is paid when the driver is self-employed.

But the key point is that profit is taken once only – by Uber. Given a fixed price paid by the customer, conceivably there’s more profit for Uber! After all, this follows Ronald Coase’s Theory of the Firm. This is the motivation for forming an employing firm. If it wasn’t economically beneficial, entrepreneurs the World over would not employ anyone.

Whilst self-employed drivers will have higher costs, they may feel they are better off than if they were employed. These costs can be moved over to the firm in the event that drivers becomes employed, but that firm can likely manage the business more efficiently than the individual drivers. Costs will reduce and profits in Uber will rise.

This cost-based argument concludes that by being self-employed the drivers are likely to be slightly better off in real terms – by their normal profit. But there’s significant scope for Uber to benefit. But it all needs detailed modelling with real figures to reach an Uber-specific conclusion.

Discussion

The GMB are making an argument for Uber drivers to be judged employees. Whilst employment laws are different in the US, a judgement has been made there in favour of the employment view. And running a quick scenario using the UK HMRC’s criteria might suggest that Uber drivers are indeed employees.

It seems possible that when the case is considered by an employment tribunal, the judgement will be that Uber drivers will be construed as employees.Contact us: +44 0(01444 810454, +44 (0)203 700 3014

Over four million people in the UK work for themselves, invoicing companies for work done rather than drawing a wage. They handle their own costs. It’s effective and sometimes it may even be efficient. Certainly, when demand drops at times during the day and week, many self-employed enjoy a few rounds of golf while employees work 9-5, Monday to Friday. Those self-employed sense the market, achieving demand-supply equilibrium.

A decision on what’s best for both parties is not simple. It needs understanding and modelling of both the market and how that market is satisfied as well as the costs and benefits enjoyed by each party under various scenarios.

The law’s one thing. What’s best for business and workers may be something quite different!

 

 

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