Covid’s Corporate Welfare Kings
Used to be that gig workers were those cool cats blowing a mean sax into the wee hours. After the show they’d be sipping Canadian Club with the quartet until sunrise. Now even the tone deaf can get a gig. All you need is a car and the willingness to shop for someone else’s groceries, deliver carryout, or chauffeur random strangers.
Only it’s not so groovy anymore. “The gig economy is a euphemism for people who are unemployed hustling to pay their rent,” says Bloomberg analyst and Wall Street denizen Barry Ritholtz. “It’s described in terms of independent contractors using their own time and assets, but that’s not what it is,” he told me by phone. “You’re still working for the man. You just don’t get health care and unemployment benefits.”
Instead, these benefits, for both gig workers and regular employees, come from the government in the form of subsidized health insurance, food stamps, and other benefits. The standard fault line in American politics runs between those who want to expand benefits to workers and those who expect people to “pull themselves up by their own bootstraps.” But from an economist’s point of view, worker pay and government benefits that flow to workers are both wages. Both have a monetary value that goes toward the worker’s bottom line.
The political question then is simply who should pay what share of those wages. Should companies be required to pay some minimum “living wage,” or should government supplement the earnings of the “working poor.” (Benefits for those unable to work fall into another category.) In the days of strong labor unions, large employers were held to account for paying a living wage. But unionism went into a secular decline in the 1980s, epitomized by the rise of Walmart. As founder Sam Walton used to say, according to the labor historian Nelson Lichtenstein, “We’re going to be successful, but the basis is a very low-wage, low-benefit model of employment.”
In 2005 a number of studies examining state health benefits and welfare rolls came to light. In state after state, Walmart headed the list of companies with workers or their children on Medicaid and other public insurance programs. Arizona’s Department of Economic Security published data showing that taxpayers funded insurance for nearly 10 percent of Walmart employees in the state. Dunkin’ Donuts topped the list in Massachusetts with 1,923 employees on the public rolls.
The issue got some traction in 2013, when an audio recording of a call to McDonald’s McResources help line went viral. A McAgent was heard helpfully telling Nancy, a full-time employee of ten years, that she should consider food banks and could apply for food stamps and Medicaid to support her family.
The pro-labor group Low Pay is Not OK publicized the story. But even centrists like Ritholtz were appalled. “The two biggest welfare queens in America today are Walmart and McDonald’s,” he wrote for Bloomberg Opinion in 2013.
Since then, Amazon has taken the lead. A study released in 2018 found that one in ten Amazon employees in Ohio received SNAP (Supplemental Nutrition Assistance Program) benefits and an incredible one in three Arizona Amazonians used food stamps.
This new, futuristic form of labor lets anyone be cigarette-smoking, studio-musician cool. Fusty old labor laws and regulations just don’t apply.
The push for a national $15 minimum wage now commands the headlines. But Senator Bernie Sanders hasn’t given up. In 2018, he introduced the cheekily named Stop Bad Employers By Zeroing Out Subsidies—or “Stop BEZOS”—Act, for which his aides might win a Pulitzer in acronym writing. The logic is simple: for every dollar of public welfare payments workers at large employers draw, the employer will be taxed a dollar.
Casey Mulligan doesn’t like these government handouts either. Mulligan is an economics professor at the University of Chicago and most decidedly an adherent of the Chicago School of economic thought. He also served as the chief economist for Trump’s Council of Economic Advisers. When I asked him about what Ritholtz called a bailout and Sanders called corporate welfare, he invoked Karl Marx. He certainly agreed that government handouts were bad policy, but only because they disrupted the invisible hand of supply and demand. In his 2012 book The Redistribution Recession, he argued that government monkeying with the labor market through public assistance extended and deepened the Great Recession.
As for the McResources support line, Mulligan considered workers lucky to have such assistance from the likes of Walmart and McDonald’s. “Government systems are complicated and some employers are better at getting through them than others,” he told me. “Say you immigrated from Mexico nine years ago. If you didn’t have [the employer’s help], you’d have nothing.” He pointed out quite rightly that educated people have an advantage in a bureaucracy. “The alternative is the uneducated, paperwork-intimidated folks are going to be the ones who suffer,” he argued. “You’d think the solution would be to have less bureaucracy not to send big employers the bill, but whatever.”
This time is different, say gig companies—of which Uber and Lyft are by far the largest. According to Harry Campbell, widely known as The Rideshare Guy, about 2 million people in the United States drive for the companies. Whatever agreement workers, corporations, and the government negotiated in the past doesn’t apply anymore. They’re not in the old-fashioned business of building factories to make stuff or operating stores to sell stuff. They’re not even in the taxi or limousine business, they say. This new, futuristic form of labor lets anyone be cigarette-smoking, studio-musician cool. Fusty old labor laws and regulations just don’t apply.
Until the pandemic hit, the struggle around employment status focused mostly on wages and job protections for drivers. Studies show that many ridesharing drivers make less than the minimum wage after expenses. They can’t unionize or get paid sick leave. When unemployment was below four percent, their inability to access benefits mattered less.
But the pandemic brought unemployment issues into sharp relief. Ridesharing demand fell by at least half in areas affected by the shutdowns. Had drivers been classified as employees, the companies (and the drivers themselves) would have been paying into state and federal Unemployment Insurance trust funds all along. Those payments would have flowed back to the drivers when the market collapsed.
In some other universe governed by morals not money, the companies might have stepped in and provided financial support nevertheless. Uber reported that it had $9 billion in cash on hand at the end of the first quarter and Lyft had a nearly $3 billion cushion. The ride-hailing giants have spent some of that cash on bottles of Purell. Uber also announced that it would give fourteen days of unspecified “financial assistance” to anyone who had an active case of Covid-19 or had been officially directed to quarantine. There’s a catch though: as soon as a driver applies, they get kicked off the app for two weeks. Meanwhile, the company can accept, reject, or ignore the claim.
These meager and dubious benefits are offered not out of generosity or out of their deep sense of commitment to their drivers. They are a PR gambit intended to convince the public that drivers don’t need unemployment benefits. We’re taking care of our independent contractors, they want us to believe.
Treating drivers as employees in California would extend Uber’s losses by about $125 million a year and Lyft’s losses by $73 million.
The gambit isn’t working. Plumbers who come to fix your sink and IT experts who do business as “The WiFi Wizard” are independent contractors. They file 1099 forms with the IRS every April and take advantage of business deductions. Already Massachusetts, New Jersey, New York, and especially California have made clear that ridesharing drivers don’t fit the description. They are W-2 employees (another IRS designation) with all the responsibilities and rights that such status confers.
New York, for example, classified drivers as employees eligible for unemployment benefits over a year ago. But the state’s Department of Labor has struggled to pay those benefits in a timely manner because Uber and Lyft have been withholding wage data. The driver then needs to apply again, proving earnings. Worse still, the companies then drag out the process further by appealing the ruling. Knowing they won’t prevail, they then drop most of those appeals. The legal maneuvers further delay payments. Some drivers have been waiting months to receive the benefits owed them.
In May, drivers filed a lawsuit alleging the state was illegally failing to pay them benefits in a timely manner. On July 28, the drivers won an injunction that will force the companies to report earnings so that the state can at last send out checks. Federal Judge LaShann DeArcy Hall ordered the state to clear its backlog of driver claims within forty-five days. Most important, the court’s injunction provides blanket relief: Uber and Lyft’s lawyers will no longer be able to drag out each individual decision.
During the months drivers were waiting for the state benefits owed them, they were at least receiving a weekly $600 from the federal government in the form of Pandemic Unemployment Assistance for drivers driven out of work by Covid-19.
The government didn’t have much choice. Without those payments, many more workers would have had trouble putting food on the table or keeping a roof over their heads. Not only would that have added to the human suffering, it would have sent the economy into an even deeper depression. The benefits expired at the end of July, although it’s possible Congress will approve a new benefit and make it retroactive. As of this writing, Republicans want to cut that benefit to $200 a week.
As humane and economically justifiable as that benefit expansion has been, it was necessitated by allowing the ridesharing companies to pocket billions in unpaid unemployment insurance over the years. Meanwhile, taxpayers are picking up the tab, again letting Uber and Lyft off the hook. They have privatized the profits and socialized the costs. (Both companies actually lose billions through their operations, but paring the losses has benefited early investors and stockholders.)
A Crisis Opportunity
The pandemic-induced crisis may prove a turning point in the social compact among workers, management, and government, although which way things turn remains to be seen. Workers may emerge with a stronger case for W-2 status and see their lot improve. But Uber and Lyft hope to use the crisis to reverse worker gains and convince everyone to let the companies write their own labor laws.
“I think that the crisis we’re in now has opened a lot of people’s eyes to the injustice that is happening with the way gig workers have been treated in particular,” labor lawyer Shannon Liss-Riordan told me. Liss-Riordan has been a savvy fighter for gig workers for at least a decade. Her first big win came when she convinced a court in Massachusetts that exotic dancers should be treated as regular employees. She campaigned briefly for the U.S. Senate on a platform of worker rights, dropping out only when Joe Kennedy got into the race because, well, this is Massachusetts and he’s a Kennedy. Marketwatch called her “the lawyer looking to kill the ‘gig economy.’”
Her firm has taken a leading role in representing drivers in California. They have won victories before the courts, although judges have also found in favor of the companies on some issues of forced arbitration and class action status.
California also passed AB5, which went into effect on January 1. Its legislative intent and language clearly define ridesharing drivers as employees and not independent contractors. That means that Uber and Lyft, whatever their own claims about the status of their drivers, should have been paying into California’s UI trust fund at least since the beginning of the year, if not earlier.
But the companies have simply refused to comply with the law. Instead, they’ve gone to court. In case legal maneuvers fail, Uber and Lyft, along with other platforms, have invested north of $100 million in a ballot initiative to replace AB5 with a set of rules they themselves devised.
You don’t have to be a Marxist to believe that companies should not be able to write a new set of labor laws to suit their needs.
Uber CEO Dara Khosrowshahi has no qualms about using the pandemic crisis to convince Washington to support his fox-writing-the-henhouse-rules scheme. In March he sent a letter to the White House and congressional leaders. “My goal in writing to you is not to ask for a bailout for Uber,” he said, “but rather for support for the independent workers on our platform, and, once we move past the immediate crisis . . . to legally provide them with a real safety net going forward (emphasis mine).” That “real safety net” clearly already exists, of course, in the form of labor laws and regulations on the books.
It’s no wonder that they are fighting so hard. According to a report by the investment bank Barclays, treating drivers as employees in California would extend Uber’s losses by about $125 million a year and Lyft’s losses by $73 million. Including Medicaid and Social Security taxes brings the figures to $500 million and $290 million, respectively.
Casey Mulligan doesn’t like expanding unemployment benefits any more than he did during the “redistribution recession,” that hit with the banking collapse of 2009. “Back then, for example, they had a $25 a week bonus for people unemployed, now its a $600—twenty times more,” he complained.
I asked him about reports that business owners were having to raise wages to compete with the expanded unemployment benefits. “The Democrats like that because the employer who only pays his cook $600 a week, he’s part of the problem in their view. Six hundred dollars is not a living wage or whatever they want to call it so the fact that he has to raise wages, they kind of like it because he’s kind of evil for not paying enough. I consider it kind of a Marxist outlook.”
Come to think of it, Mulligan brought up Marx an awful lot during our conversation. “Karl Marx has a very compelling story,” he told me, “it’s a wrong story, but it’s very compelling.” No one else I spoke with mentioned Marx—or Adam Smith for that matter.
But you don’t have to be a Marxist to believe that companies should not be able to write a new set of labor laws to suit their needs. “The gig employers want to force drivers, who can’t have unions, to negotiate each protection and right separately,” Shannon Liss-Riordan says. “Why should they have to start from the ground up when we have a system of what rights employees get in our country?”