Uber and Instacart don’t represent Silicon Valley. Why we’re voting “No” on Prop 22

Hi readers,

Today, I’m publishing a letter that I penned with Nate D’Anna, co-founder and co-CEO of Dumpling, about Prop 22 and the status of gig workers. Prop 22 is the California ballot proposition that would exempt app-based transportation and delivery companies from having to provide employee benefits (such as minimum wage, paid time off, and sick leave) to gig workers. We originally wrote this for submission to various news outlets, but wanted to re-publish it here.

We acknowledge that the views in this letter may be controversial, especially among our peers in Silicon Valley. But we felt a need to put a stake in the ground that we believe all workers deserve to be treated with dignity and to have a minimum level of benefits and protections. Nate and I share the view that we want to live in a society in which there isn’t a permanent underclass of workers who are treated poorly because of their lack of political or financial leverage, which Prop 22 would create. We are motivated by a desire to maximize societal welfare in addition to investor returns—an aim that isn’t advanced through unbridled capitalism, but through thoughtful policies and market design.

It’s clear that Uber, Lyft, Postmates, etc. have led to tremendous value creation, but that value has disproportionately accrued to executives, employees, and investors of those companies, rather than to the workers that enable these services to operate on a daily basis. We’re interested in how technology can not only lead to more productivity gains, but how those gains can flow to those doing the work, not just to those with bargaining power and leverage.

We welcome dialogue and conversations about this topic. You can join the discussion below, or hit reply to your email.

Best,

Li

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The gig economy is broken, and Prop 22 ensures it stays that way

By Nate D’Anna and Li Jin

During the 19th century, as the American economy underwent a profound shift from agricultural production to manufacturing and industrialization, the working class toiled under horrendous conditions. It was common to work 14- to 16-hour days for meager wages and for children as young as 5 or 6 to work alongside adults in mills, factories, and mines. After decades of protests and organized labor strikes, the Fair Labor Standards Act was passed in 1938, giving workers the right to an 8-hour workday, 40-hour work week, overtime pay, minimum wage, among other protections. Then-president Franklin D. Roosevelt characterized the law as “the most far-reaching, far-sighted program for the benefit of workers ever adopted in this or any other country.”

But today, worker protections are once again at risk. A modern version of the tension between low-skill workers and plutocratic companies is unfolding as platform-mediated work continues to expand in the US. In 2017, the BLS estimated that 1.6 million workers were engaged in “electronically mediated work” from platforms like Uber, Instacart, and Doordash—a figure that has undoubtedly grown, especially during the pandemic. While the gig model delivers real benefits to customers in terms of convenience and low prices, the paradigm exists in a legal gray area in terms of worker classification, depriving workers of minimum wage protection, workers’ compensation, health insurance, retirement plans, and paid time off.

We’re concerned that the gig model is reliant on the misclassification of workers, and fear for the future of work in this country should the model continue to gain steam without significant updates. Just as unrestrained capitalism during the Industrial Revolution led to negative social welfare consequences, we believe the exemption of gig companies from providing employee benefits would result in suboptimal social welfare. Through our collective experiences studying the future of work from various angles—as participants, builders, and investors in the category—we’ve come to believe that the gig economy is broken, and Prop 22 ensures it stays that way.

Here are the reasons why:

1. Prop 22 doesn’t compensate workers for all working hours, only “engaged time”—so workers would earn far less than the minimum wage

Prop 22 stipulates that companies must pay workers 120% of the minimum wage. But there’s a significant detail: the earnings minimum only applies to “engaged time,” or time spent completing a ride or en route to a ride. The dirty secret of the industry is that workers are unpaid for their “personal time sitting in their cars, waiting to pick up a ride,” wrote an Uber engineer in a recent op-ed. “Workers are subsidizing the product with their free labor.” When factoring in the actual time working, Prop 22 sets an estimated wage floor of $5.64 per hour, well below California’s average minimum wage of $13 per hour.

There is a significant gap between “engaged time” and how much time workers actually spend to earn income from these apps: to fulfill the promise of on-demand, companies need to ensure that enough workers are waiting and ready to respond to requests. The average gig driver spends 35% of their time waiting—time that wouldn’t be recognized or compensated under Prop 22. In some cities, idle time is as high as 70%.

Why should we care what drivers earn? By allowing gig companies to classify their workers as independent contractors who earn less than the minimum wage, there are negative externalities to all taxpayers—who foot the bill for government assistance programs like Medicaid. As taxpayers, we are in effect subsidizing the profitability of gig companies that have large independent contractor workforces.

Uber has written on its blog that if Prop 22 fails, there would be “pressure on Uber to consolidate working hours across fewer workers in order to manage costs that are fixed per employee.” It’s a fear-based argument that has been made since the beginning of labor law. In 1933, FDR said, “No business which depends for existence on paying less than living wages to its workers has any right to continue in this country. By living wages, I mean more than a bare subsistence level—I mean the wages of decent living.”

2. Under the legal definition of “employee,” gig workers are misclassified as independent contractors

The federal government and many states use the ABC test to determine how workers are classified. To be classified as an independent contractor, the employer must prove all three of the following conditions: (A) the worker is free from the control and direction of the company, (B) the work is outside the usual course of the company’s business, and (C) the worker is customarily engaged in an independently established trade occupation or business. The government assumes that workers are classified as employees unless proven otherwise.

Gig work generally involves controlling the behavioral and financial details of each task. For example, a recent misclassification lawsuit says, “In practice, Instacart controlled the 'when,' 'where,' and 'how' of [shoppers’] jobs. The work performed by [shoppers] was within the usual course of Instacart’s business of grocery delivery and [shoppers] were completely dependent on the Instacart platform to perform grocery delivery work. […] Under the applicable test for employment under the federal Fair Labor Standards Act and the Illinois Minimum Wage Law, shoppers are presumptive employees entitled to labor law protections such as minimum wage guarantees, overtime compensation, workers’ compensation insurance coverage, payroll tax contributions, and other employee benefits.”

3. Labor laws should reflect the changing nature of work, but Prop 22 is effectively permanent and immutable

Our workforce has changed dramatically over the past few decades, catalyzed by globalization, the internet, smartphones, and countless new work platforms that help people get connected to flexible opportunities. Union participation has plummeted from as high as 35% in 1954 to less than 11% today, reflecting the changing composition of jobs in the US. Today, more than one-third of Americans are working in something other than full-time, permanent jobs. This represents tens of millions of people who are ill-served by systems and protections designed mainly for full-time employees.

Prop 22 tries to roll back laws designed to protect workers, to fit their own narrative of work. This, by the way, is nothing new: when the Fair Labor Standards Act was passed in 1938, the National Association of Manufacturers decried it as “a step in the direction of communism, bolshevism, fascism, and Nazism.”

And importantly, though the nature of work is constantly evolving, Prop 22 requires a seven-eighths supermajority of the California legislature to amend, making it next to impossible to change the law in the future.

We’re excited about other novel solutions that help provide financial security to workers, for instance, portable benefits that are tied to individuals rather than to employers. Prop 22 is a nearly-permanent set of policies carving out exemptions for a narrow segment of the non-traditional workforce, written by a set of companies with vested interests in preserving the status quo. But beyond app-based drivers, there’s a growing and massive contingent of the population involved in freelance, temporary, and on-demand work, who can all benefit from a more holistic and comprehensive approach to workplace benefits.

4. The proposition takes advantage of the segment of the population in the most economically perilous position

A common argument used in favor of Prop 22 is that gig workers should have free choice in whether to work for these companies or not—and thus must find the status quo acceptable. But in mid-March with COVID looming, as 7 counties in the San Francisco Bay Area issued “shelter-in-place” orders and unemployment peaked above 14%, it is unlikely that drivers and grocery shoppers who continued to give rides and shop in the ensuing weeks and months were truly free to choose whether they worked or not.

These workers risked their health as well as those of their families in order to continue accepting jobs on those apps—signaling a keen financial need. Why does this matter? The classical idea in economics that competitive-equilibrium pricing maximizes social welfare relies on the assumption that every participant in the market has the same welfare weight—but that’s not the case in markets where there is significant inequality. “When sellers are sufficiently poor relative to buyers, the social welfare value of a transfer from consumer surplus to producer surplus can be more than the allocative loss,” explained economists Piotr Dworczak, Scott Kominers, and Mohammad Akbarpour in a paper forthcoming in the journal Econometrica. In other words, the social welfare-maximizing price is actually higher than the market-clearing price when sellers are much poorer than buyers, which is the case on most gig platforms.

It should also be noted that these app-based workers aren’t capable of mustering a tremendous amount of political clout relative to the apps’ executives or investors. There is another, better option than taking advantage of this segment of the population.

5. Fundamentally, Prop 22 represents a loophole in our democracy

Through Prop 22, the gig companies are writing their own legislation and funding a massive campaign to make sure it passes. Lyft, Uber, DoorDash, Instacart, and Postmates have contributed over $180 million to the campaign, setting a record for the most expensive initiative campaign in US history. In contrast, the opposition, mostly labor organizations, has raised about $4.8 million. Unfortunately, the influx of special interest money has led to poor behavior with fake mailers and the harassment of critics.

As the 6 most expensive ballot measures in the past 20 years have all gone in favor of the bigger spender, it seems like Uber et. al. have a good chance of winning. But is this the kind of country we want to live in, one in which special interest groups are re-writing and buying their own employment law?

So what’s the solution?

The future of the gig economy is bright, and even more so when its participants flourish. Voting “NO” on Prop 22 is the first step. Beyond that, we’re excited to build and invest in companies that are creating a more sustainable, meaningful, and fulfilling future of work. We call this the passion economy, and see companies embracing these common principles in order to help realize that vision:

• Control. New platforms give participants control over the work they do. Workers are free to decide on the specific products/services to offer, determine the most efficient ways to work, set their own prices, select which clients to serve, reach those customers directly, and choose when and how often to work.

• Ownership. Workers benefit directly from the work that they do, including having upside when they build customer loyalty, expand their customer base, and offer a superior product. New models focus on wealth creation for participants, not just hourly payments or one-time transactions.

• Differentiation. Providers highlight their uniqueness to customers—including their specific capabilities, knowledge, and backgrounds—allowing them to differentiate, cultivate loyalty, and build their own brands.

• Scale. Value creation is not limited to linearly increasing the hours worked. Providers can scale by expanding their customer base, offering a differentiated service or product, and growing their teams.

The economy is undergoing a profound shift to platform-mediated work, and the conditions around labor are rapidly changing. While the rules of the future of work are currently being debated and litigated, let’s not forget that in centuries past, people died for what we have today: the 8-hour workday, minimum wage, and the prohibition of child labor. Worker protections and good labor practices don’t just happen, they are hard-fought and won. This November and from here on out, let’s stand with workers.

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Nate D’Anna is the co-CEO and co-founder of Dumpling, a platform that helps micro-entrepreneurs start, run, and grow their own grocery delivery businesses. He previously worked on gig platforms Instacart and Lyft, experiences that informed the founding of Dumpling.

Li Jin is the founder of Atelier, a new venture firm supporting startups in the passion economy: platforms that broaden access to income and democratize the means of creation and distribution. Previously, she spent 4 years on the investing team at Andreessen Horowitz.