Questions and answers about coronavirus and the UK economy
Questions and answers about coronavirus and the UK economy

How might Uber drivers’ new status as workers affect the gig economy?

The Supreme Court has ruled that the tens of thousands of Uber drivers in the UK should be treated as workers rather than as being self-employed. The decision may force the company and other platform-based services to make big changes in how they operate.

On 19 February 2021, the UK’s Supreme Court ruled that Uber drivers must be treated as workers rather than as being self-employed. This was the latest move in what has been a five-year legal battle between the ride-hailing app and its workforce.

Uber drivers were previously a part of the so-called ‘gig economy’, within which individuals provide a service on demand and are paid for each individual ‘gig’ completed, instead of receiving a regular wage.

Uber could change the terms of employment to make its drivers genuinely self-employed with more control over their work. But if it doesn’t, the decision to classify its drivers as workers means that 70,000 UK Uber drivers are now entitled to hourly pay, the minimum wage and holiday pay. They would also be covered by pension auto-enrolment.

As workers rather than ‘full employees’, drivers do not have full employment rights and cannot claim unfair dismissal or redundancy. But as workers, from the moment they log on to the Uber app until they log off, drivers will be paid an hourly wage for their time.

Previously, they were paid for each lift they successfully completed and were not covered by minimum wage legislation. Since the ruling, Uber has announced that its drivers will earn at least the National Living Wage, which increased by 2.2% to £8.91 on 1 April 2021.

What does the evidence tell us?

Price increases and labour demand

In the past decade, the gig economy has enjoyed a competitive advantage as rising minimum wages and pension auto-enrolment have been applied to workers and employees. This competitive advantage has now gone. Uber has so far insisted that their fare prices will not rise, but analysts have warned that the company increased prices in California after a similar ruling and that prices are likely to increase in the UK too.

The company also said in 2019 that if drivers were classified as workers this would ‘incur significant additional expenses’ – from having to pay drivers the minimum wage among other things (SEC Report, 2019). This increase in costs could result in a rise in fares and reduced demand, resulting in Uber employing fewer drivers.

Research points to an increase in the proportion of self-employment during and after a recession. This ‘recession-push’ self-employment ­is caused by a lack of standard employment opportunities (Conregado et al, 2011). There is also anecdotal evidence that competition for gigs on some platforms is increasing, as people who have lost other jobs turn to gig economy work (Fairwork Foundation, 2020). If Uber drivers are no longer self-employed, the gig economy will be less able to absorb displaced workers.

Uber executives also now have economic incentives not to oversupply the market with too many drivers, as they will have to pay drivers for the time between individual lifts. This could lead to a limit on the number of drivers who can log in at the same time, in order to reduce the time drivers spend idle between rides.

Labour supply

Most gig economy workers are supplementing their income, with only around 40% using it as their main source of income (Balaram et al, 2017). Gig workers are also in general younger, work fewer hours and earn less per hour than other types of worker. Granting worker status provides greater financial security, which could lead to an increase in the proportion of drivers working for Uber as a full-time job, as well as a rise in their average age.

Such an outcome would not necessarily be positive for all current drivers, as many who choose this kind of gig work do so because they value the flexibilty that the job provides. The increase in full-time drivers working for the company could force some individuals to find the flexible work they seek elsewhere.

Financial security is particularly important in the context of the Covid-19 pandemic. In the second quarter of 2020, bookings fell by 73% compared with the same period in 2019. As a result, Uber drivers saw a significant reduction in their incomes.

This was worsened by an increase in the number of drivers competing for a lower number of rides. According to James Farr – one of the former drivers who spearheaded the legal battle to get worker status for Uber drivers – many drivers reported earning £30 a day during this period (BBC, 2021).

Worker productivity

There is evidence that moving from paying an hourly wage to paying workers for each individual good or service they provide results in higher average productivity (Lazear, 1996). This means that there could be a fall in drivers’ productivity due to a diminished economic incentive to complete as many lifts as possible. This could manifest as drivers taking longer to get customers to their destinations and leaving more time in between rides.

Uber’s ability to monitor drivers’ performance easily and accurately through their app provides a rare advantage in combatting this potential productivity fall. Clauses could be included in future contracts specifying the number of lifts that drivers must complete in order to avoid contract termination. If the ruling does lead to a higher proportion of drivers working for Uber full-time, there could be stronger incentives for Uber to invest more in driver training, thereby raising productivity.

What else do we need to know?

The full impact of the Supreme Court’s ruling is difficult to assess for two reasons.

The first is that the post-pandemic recovery is uncharted territory. There is a possibility that demand could recover quickly with the end of lockdown and social distancing. But decreased tourism and people continuing to work from home could mean consumer demand for rides will take longer to recover. With Uber drivers now classed as workers, more of the risk associated with the uncertain economic situation is now borne by the employer. The number of drivers that Uber will want to allow to work at any given time depends on expected demand, which is as yet unknown.

The second question is whether the Supreme Court ruling will have a wider effect on the gig economy. So far, the ruling applies only to Uber workers. But the benefits that come with worker status are attractive and other ride-hailing apps may soon be forced to follow Uber’s example to attract and retain workers.

The ruling could also have a significant impact outside the gig economy, affecting any other workers who do not have full control over their working patterns – such as those on zero hours contracts and the ‘solo self-employed’. A recent report estimates that roughly a quarter of the UK workforce could be affected by this ruling. Obtaining a more accurate estimate will require information on the number of people under contingent employment arrangements (Bennett Institute for Public Policy, 2021).

Recent evidence suggests than when a big firm like Amazon, Target or Walmart voluntarily chooses to raise the minimum wage they offer, other firms in the area respond (Derenoncourt et al, 2021). The threat of subsequent legal cases being brought against them only adds further pressure to other gig economy firms to follow suit. For example, since the ruling, the food delivery firm Just Eat has offered to change their couriers’ zero hours contracts, providing them with an hourly wage. Other firms may follow.

Finally, it should be recognised that the potential effects outlined here will only occur if the Supreme Court’s ruling – as well as existing labour laws – are properly enforced.

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Author: Simeon Richards
Photo by Dan Gold on Unsplash
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