How Not To Regulate Disruptive Business Models in California

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* Report: The California Challenge. How (not) to regulate disruptive business models. Stephen Hill. Friedrich Ebert Stiftung, 2016



„ The latest trend from Silicon Valley is known as the »sharing economy,« sometimes referred to as the »gig economy,« »on-demand,« »peer-to-peer« or »collaborativeconsumption« economy. Dozens of »disruptive« companies like Uber, Airbnb, Upwork, TaskRabbit, Lyft, Instacart and Postmates have proven to be attractive to consumers and those who would like to »monetize« their personal property (real estate, car) or find flexible, part-time work. In some ways, these new platforms have the potential to provide new opportunities. But they also display a number of troubling aspects.

„ Many of the CEOs of these new companies tend to follow an extreme philosophy of »economic libertarianism,« in which they resist regulation and try to evade paying taxes. Theirs is a new business model, in which companies are little more than a website and an app, with a small number of executives and regular employees who utilize technology to oversee a vast army of freelancers, contractors and part-timers.

„ Recent attempts by governments to regulate these companies provide examples of why poorly designed legislation that fails to comprehend the different nature of these companies will inevitably result in regulatory failure. In particular, the widely distributed workforce and anonymous nature of the commercial transactions that occur on these platforms make it all the more crucial that governments have access to the data of the commercial transactions that will make effective regulation possible. Rather than providing the data, these companies have plowed significant resources into sophisticated political and legal operations to resist regulatory attempts.

„ California and the US are several years ahead of Germany and Europe in these developments. It is becoming clear that changes in the workforce may be more advanced than traditional measurements are revealing."


Policy Recommendations

Stephen Hill:

Lesson One: data, data, data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Lesson Two: Freelance Nation: recognise that changes in the workforce may be more advanced than traditional measurements are revealing. . . . . . . . . . . . . . . . . . . . . . . . . . 12

Lesson Three: taxation of businesses in the digital age. . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Lesson Four: political influence of the digital companies. . . . . . . . . . . . . . . . . . . . . . . . . 12

Lesson Five: re-empowering workers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Lesson Six: Making labour protections, including a portable safety-net, for the digital age

The transatlantic economies are in a state of rapid evolution and the new digital technologies are a primary driver. Predictions about the »rise of the robots« replacing humans, the advent of self-driving vehicles, the merging of humans and machines via biotechnology (a phenomenon known as the »technological singularity«) and other fantastic horizons sound like the stuff of science fiction – yet experts tell us, with great certainty, that this will be the future.

Consequently, any lessons learned at the current time will likely be temporary as we adjust to a quickly changing landscape. Nevertheless, at this point we can draw several conclusions.

Lesson One: data, data, data

Whether tracking how people are working today, or tracking the commercial activities of digital companies and their vast army of anonymous contractors, or reining in the abuses of company surveillance of employees and misuse of employee data, or cracking down on corporate misuse of our personal data as we use the internet, new policies for the use of data in the digital age are badly needed. Without good data, the public, as well as regulators are like an airplane flying in the night sky without radar. »We the public« must regain control over the data that increasingly are being used as the currency of the digital age.

Tracking the commercial activities of digital companies just like any other enterprise Commercial data, withheld by companies such as Airbnb, Uber and others, are crucially needed to regulate these companies and make their services safe for consumers, workers and communities. Drawing from the US experience, it is clear that these companies will fight against these attempts as if their business models and very corporate existence depend on it. Government officials should not be swayed by frequently-used arguments from Airbnb, Uber and other digital companies that their hosts, drivers and other forms of contractors have a »right to privacy«, and so the companies »cannot« provide the data. That amounts to another rewriting of commercial law for hotels, taxis and other industries, and an attack on a city’s power to regulate the commercial sector by requiring a business license and registration for enterprises within its jurisdiction. Once you turn your home or automobile into a commercial enterprise, certain other legal requirements should be applied.

Government officials must thus be prepared to use all the legal, political and legislative tools at their disposal. Only if authorities have access to the relevant data will we will be able to monitor, track and regulate these digital platforms so that the positives of these technologies can be enjoyed without so many negative consequences.

Stop rampant workplace surveillance

Workers and freelancers must maintain control over their own employee data, which are being generated at workplaces and being used to spy on them. Workers should retain some degree of »workplace privacy« that overrides an employer’s desire to track and monitor employee performance using high-tech surveillance. Workers subjected to a ratings system should »own« their rating and be able to port their high rating to another platform, if they choose. In the digital era, new types of businesses and employment could easily end up infringing on civil and »personality rights«, so policies must be adopted that will protect against that.

Lesson Two: Freelance Nation: recognise

Government agencies need to become better at collecting the data needed to help us understand how millions of people are working today in the digital economy.

According to my interviews, on both sides of the Atlantic researchers – both government and private – do not seem to know whether workers are self-reporting inaccurately, or how many workers are contractors or freelancers, or are employed by online, foreign-based labour brokerages such as Upwork, or even how many are not covered by the social security system. Whether in the United States, Germany or many other places, the standard methodologies for gathering and analysing data still reflect the »good old days« of standard employment.

The increasing unreliability of this data feeds various myths about the virtues of these digital platforms and prevents us from understanding the urgency of the developing situation.

Lesson Three: taxation of businesses in the digital age

Whether at the national, state or local level, tax policies often lose out to the digital economy, as disruptive companies do everything they can to avoid taxation, as well as regulation. Governments must adjust their tax policies to this digital economy, otherwise the cat-and-mouse game between the regulators and the unregulated will undermine financing for the welfare state. Companies must be required by law to provide the data necessary to determine proper levels of taxation. Particularly if more workers come to be employed by online, foreign-based digital companies such as Upwork, tax officials at the national level have to figure out how to track these workers at the international level in a way that allows them to collect social security contributions from both workers and those who are hiring them.

Lesson Four: political influence of the digital companies

It is important to recognise that regulatory efforts have been greatly hindered by the growing political sophistication of Airbnb, Uber and other digital economy companies.

Part of these companies’ business model involves mobilising their substantial customer base into a potent political force. They have slickly combined this »citizen activism« with company lobbyists, lawyers and public relations gurus (some of them hired from the upper echelons of the Obama administration and the Democratic Party) who use all the tricks of their trade. These companies have proven to be very skilled at mounting political pressure capable of influencing politicians and resisting regulation and taxation.

Lesson Five: re-empowering workers

Workers must be allowed to advocate for themselves and to improve their situation collectively. The city of Seattle has shown leadership by passing a law in December 2015 that establishes a framework that allows Uber drivers to organise and to bargain for collective agreements on issues such as pay and working conditions. The law cleverly gets around federal law, which forbids independent contractors such as Uber and Lyft drivers from legally organising or joining a labour union, by allowing non-profit organisations to organise these workers, rather than trade unions. It is a legally bold strategy that, naturally enough, Uber and its allies are challenging. The law has not yet gone into effect, so it is not possible to evaluate its effectiveness, and so far, no other city has copied this strategy.

Lesson Six: Making labour protections, including a portable safety-net, for the digital age

With more workers employed individually as contractors, freelancers, temps, part-time or solo self-employed, workers must be able to benefit from job retraining, labour and safety protections, affordable access to highspeed internet and other supports. New forms of work, such as »crowd work«, require new regulations. Minimum standards for wages, health and safety, working hours and social security must be established to prevent this form of work from becoming exploitative and the jobs precarious.

In addition, all workers must be included in a new kind of portable and universal safety net, including solo self-employed persons and crowd workers, ensuring co-financing of their social security contributions by the businesses that hire them.

In my book Raw Deal: How the ›Uber Economy‹ and Runaway Capitalism Are Screwing American Workers, I propose a universal and portable safety net that would operate something like a system of »Künstlersozialkasse for all«, building upon the existing support in Germany for artists, musicians and journalists to foster a system that encompasses other occupations that currently fall through the cracks of the welfare system. Efforts in the United States to enact such a safety net support infrastructure have begun, particularly at the local level, but it will take many years to enact nationally.

While efforts to adapt the laws, regulations and labour protections for the digital economy are still in their infancy in the United States, there is a growing recognition that business, government and trade unions must adjust to these new realities by working together to forge a new social contract for all types of workers, occupations and industries. Germany and Europe will benefit from understanding the extent of regulatory efforts in the United States, especially the shortcomings and omissions. "