Asked and Answered

Sanjukta Paul on ride-sharing networks

By Steve Thorpe
Legal News

New Michigan laws regulating ride sharing networks like Uber and Lyft went into effect this spring. The bills were intended to bring some clarity to a murky area of state law on requirements for the companies and protection for customers. Sanjukta Paul starts as an Assistant Professor at Wayne State University Law School in August, where she will teach courses in employment and labor law, corporations law, and regulating the gig economy. She was previously a research and teaching fellow at UCLA School of Law, and also practiced law for more than a decade. A graduate of Yale Law School, she is currently working on a book on antitrust law and workers (forthcoming from Cambridge University Press in 2018).

Thorpe: Proponents of the legislation claimed that it “leveled the playing field” in terms of regulations for taxi companies. True?

Many scholars and policy analysts have argued that Uber’s and Lyft’s business models consist essentially in “regulatory arbitrage.” This concept is simple: complying with regulations often involves direct or indirect costs for a company, if the company would not otherwise take the action required by the regulation. For example, at least in the short-term, a business may incur a cost in order to make certain safety improvements to equipment, or to pay an overtime premium to workers. Now, many would argue that such investments, e.g., maintaining safe equipment and paying sustainable wages, actually result in savings and better functioning in the long-term, regardless of regulations. But if in the meanwhile such a company is subject to short-term price competition from other sellers that do not bear those same immediate costs, the company may not survive until that future arrives. Regulatory arbitrage means that a company is unjustifiably avoiding regulations that are applied to similarly situated companies, and is able to best those companies in price competition as a result. This is what taxicab and similar ride-services companies have been arguing that Uber, Lyft and similar companies are doing. Regulatory arbitrage tends to undermine the purposes of the laws in question, as well as undermining the existing businesses that comply with them.

I think that Uber and Lyft have clearly benefitted from regulatory arbitrage, particularly in their early years, but that this is not the only reason for their success. The app-based ride services model has also genuinely changed the physical and economic coordination of these services between sellers and buyers. Of course, as taxicabs increasingly adopt app-based coordination as well – perhaps we may even see other types of entities such as worker-owned cooperatives or municipalities adopt the mechanism to directly provide ride services – and if the rest of the regulatory playing field really is leveled, it will be interesting to see how competition will play out. I think that this new law certainly goes some of the way toward leveling the field, particularly with regard to internalizing insurance and safety costs.

However, I believe the elephant in the room is the industry’s avoidance of labor regulation when it comes to drivers. Even putting aside working conditions and low pay, I’m not sure that even the other regulatory costs can be addressed in a sustainable fashion, if the industry remains free to potentially push those costs onto the backs of drivers, in many cases. I do not see this as a path forward to a sustainable industry.

Thorpe: How will ride share drivers be affected?

In the first instance, of course drivers will have to comply with various aspects of the new law that relate to their personal conduct: submitting to criminal background checks, meeting minimum requirements with respect to driving history, and a no-tolerance policy with respect to drug and alcohol use. Depending upon whether the companies absorb the following costs or not (which the statute does not specify), drivers may also have to pay for the additional insurance requirements, and for meeting new vehicle safety requirements.
A less immediate aspect of the law that at least seeks to affect drivers is that the statute declares them to be independent contractors rather than employees, as long as certain rather minimal conditions are met (Section 257.2137). This is important because looming in the background of this regulation is the raging debate over whether Uber and Lyft drivers are “misclassified,” i.e., whether they are actually employees and not independent contractors as the companies claim, under state and federal employment & labor laws. Various groups of ride-services drivers across the country are attempting to exercise their rights to minimum and overtime wages, and to engage in collective action to better their pay and working conditions – both of which currently depend upon whether they are legally employees. The determination of whether a worker is an employee is made by applying the statute whose applicability is in question to the facts of the relationship between driver and company – not by legislative fiat. Particularly when it comes to federal employment and labor law, it is not clear that a state statute that seeks to accomplish that can really be given legal effect. But the provision certainly shows the legislature’s opinion on the misclassification debate in the ride services industry. (A handful of other states have done the same thing, in their new ride services industry statutes.)
It’s interesting because the law in many ways also creates conditions that would seem to strengthen the case for drivers’ employee status under the applicable legal tests – for example, requiring signage on the vehicle that identifies the ride services company for which the driver is currently working.
Thorpe: What restrictions and responsibilities are being placed on the ride share companies?
Paul: All the requirements placed upon drivers also affect the companies, insofar as they are responsible for carrying out background checks and other inspections, and for ensuring that any drivers with whom they contract meet the statute’s requirements. Also, some provisions that impose new costs, such as the significant new insurance regulation, do not specify whether the companies or the drivers will be the ones to carry out the obligation.

Thorpe: Proponents also said that customer safety would be enhanced. What provisions address that issue?

Numerous provisions address customer safety. Among them are minimum requirements based upon criminal history (and corresponding background checks); minimum requirements based upon driving history; detailed vehicle safety requirements; and insurance requirements.

Thorpe: The new law also mandates insurance requirements. Tell us about those.

This section of the law seems to be based upon some relatively new model statutory provisions that have been adopted in some other states as well, and which represent a compromise between the ride-services industry and the insurance industry. This section imposes detailed minimum insurance requirements (beyond what is required for personal car insurance policies) for all periods that a driver is logged onto the company’s digital network and able to accept rides, and it requires that such coverage cannot be dependent upon a driver’s personal policy first denying a claim.

It seems that insurance companies wanted coverage — and premiums — to reflect the new and increased uses and attendant risks to which personal vehicles have been put when used for app-based ride services, risks which personal automobile policies and premiums may not fully account for.

This section leaves open whether the company or the driver must carry the new policy -and pay the premium- although it does require the company to make certain disclosures to drivers in this regard.

Thorpe: How does this regulation compare with measures imposed by other states?

The trend among states is to bring Uber, Lyft, and other app-based ride services under some kind of regulation, whether on par with taxicabs and other ride-service providers, or under their own schema. California was the first state to do so in 2013, and an increasing number of states have followed suit since then. There is quite a bit of variation in the nature of the regulations, however.

On a broader level, this trend in new state legislation also must be understood in conjunction with what is happening in both federal and state courts with respect to existing laws. Again, I am referring to the debate about whether state and federal labor and employment laws should govern the relationship between companies and their drivers. Some states are currently considering laws that would effectively take a position on this question in one direction or another, as the new Michigan law and a handful of others do; other state regulation is silent on the matter.

In evaluating these issues, it is important to note that one of the primary concerns of critics of app-based ride services companies is that the business models as currently structured are inimical to sustainable or liveable pay for drivers – both taxi drivers and ride services drivers themselves – particularly once one accounts for the depreciation of drivers’ personal vehicles, and other business costs and risks. If drivers end up also assuming the new business costs created by this law, and if they continue to be barred from coordinating among each other to seek minimally acceptable pay or working conditions from companies, it is difficult to see how these concerns will be adequately addressed.


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