Common Cents & Gigs on August 21, 2020

August 21, 2020, by John Norris

How many of us have ever paid ‘cash’ to have someone perform a task, work, or job of some sort? Perhaps it was for a babysitter or the kid down the street to occasionally mow the yard. Maybe you had a person swing by the house every so often to tidy up, do the ironing, wash the baseboards, change the sheets, run carpool, take care of the pets, or just knock out those pesky chores that build up during the workweek.  Being something of a gambler, I would be willing to bet just about everything I own, and my co-worker Jim’s stuff too, more than one of you have.

Did you check their identification papers? Run their Social Security number? Have them fill out a W-4? Pay half their FICA for them? Offer health and dental insurance? Accidental death & dismemberment? A 401K? Give them paid time off? Make sure they got a W-2 for their taxes? You know, basically treat them like an employee? At the very least, you made sure they got a 1099-MISC, right?

I could be wrong; however, I doubt many (if any) of you did any of that stuff for the neighborhood teenager who babysat your kids every other Friday night for years. Before we shake on it, please understand the capital structure of my wagers: you can think of me as senior secured debt and Jim as equity. I get paid first.

If you read the business news this week, you probably saw something about the brouhaha between the two largest rideshare companies, Uber and Lyft, and the State of California. Last September, that state’s legislature passed something known colloquially as AB 5. This is a statute put the burden of proof on an employer to show a worker is an independent contractor (and thus not eligible for company benefits, etc.) and not an employee (which are eligible for benefits). The 3-pronged test is as follows (from Wikipedia’s synopsis of California Labor Code 2750.3(a)):

  • the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact.
  • the worker performs work that is outside the usual course of the hiring entity’s business.
  • the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

Seems innocuous enough doesn’t it? However, it pretty much kills, or has the potential to do so, what has become known as the ‘gig economy,’ particularly one which makes use of an app-based platform. No, it isn’t going to stop folks from calling ‘Sally’ from down the street to babysit the brats on occasion. However, Uber? Lyft? Shipt? Amazon Flex? DoorDash? Rover? Hmm. I suppose that depends on the government’s willingness to enforce its law, and the corporate attorneys’ ability to confuse the issue and delay the inevitable.

But just what is the gig economy? Why does California care so much? Investopedia.com’s definition and key takeaways of the gig economy are:

 

What Is the Gig Economy?

In a gig economy, temporary, flexible jobs are commonplace and companies tend toward hiring independent contractors and freelancers instead of full-time employees. A gig economy undermines the traditional economy of full-time workers who rarely change positions and instead focus on a lifetime career.

Key Takeaways:

  • The gig economy is based on flexible, temporary, or freelance jobs, often involving connecting with clients or customers through an online platform.
  • The gig economy can benefit workers, businesses, and consumers by making work more adaptable to the needs of the moment and demand for flexible lifestyles.
  • At the same time, the gig economy can have downsides due to the erosion of traditional economic relationships between workers, businesses, and clients

 

Fair enough. The gig economy has advantages and disadvantages. What doesn’t? For someone trying to earn a little extra money on the side, a gig job can be ideal. For someone trying to support the proverbial family of 4? Maybe not so much. I suppose that is what the politicians are trying to address: providing some kind of safety net for people who derive their living from working in the gig economy. As with most things in life, including well-intentioned legislation, the devil is in the details.

Picking on ridesharing, what happens when a rideshare company has to make the drivers who use their app employees? Intuitively, their costs just went up. Offering benefits and paying payroll taxes isn’t free, and money doesn’t on trees (although it is made of paper which is made from wood which comes from trees, but I digress). As any CFO will tell you, people can be very expensive, no matter how little they cost.

However, that isn’t really the biggest problem, in my opinion. When that so-called ‘independent contractor’ becomes an employee, they lose their freedom. The company ultimately gets to decide their hours and where they will work. Here is a potential scenario:

 

Employee:          I am not going to be able to work tomorrow.

Employer:           I think otherwise.

Employee:          If I have to work, I can only do so from 3-5:00 pm, and I really need to stay in and around the 35209-zip code if possible.

Employer:           I am sorry. We need you from 7-10:00 am down in 35203 and then again from 12-2:00 pm out in 35244. Someone else is already working 35209 in the late afternoon.

Employee:          I don’t think I will be able to make that happen.

Employer:           Okay, we will find someone who can.  

 

That isn’t terribly far-fetched. When you work for yourself, you can set your own hours and do as much or as little as you would like. When you work for someone else, they tell you what to do, when to do it, how to do it, and how much money you need to generate when doing it. While I wouldn’t bet my life on my calculations, some chicken-scratch I did using Uber’s most recent annual report suggests drivers would have to generate between $75-80/hour in fares in order for the company to pay $15/hour plus benefits (assuming they average 20% of the cash wage). That is just for the company to cover overheard, R&D, sales & marketing costs, etc., and break even…which is hasn’t managed to do. To turn a reasonable profit, that number gets pretty close to $90/hour. This is certainly doable, and plenty of drivers undoubtedly exceed that amount depending on time of day, city, and ride distance. However, having to pay every driver no less than $15/hour plus benefits when they are on the clock? Forget it.

To get from my house to my favorite restaurant here in Birmingham, Chez Fonfon by the way, takes about 20 minutes and costs, on average, around $17 per trip prior to tip (I went through my ride history). Of course, I normally have to wait, say, 5 minutes for the rider. So, that works to be, what around $34/hour (17/25*60)? In order to get to $90, the fare would have to spike to $37.50 (90/34*17), each way. Obviously, that is $75 to be carted a total of 14 miles or so. Throw a modest tip on there, and you are looking at adding $85 to the evening. Hmm. Perhaps I will skip that last glass of wine, you think?

Of course, it also assumes the rider goes straight from $37.50 fare to $37.50 to 37.50 fare, etc.  Or since, they are getting $15/hour without busting their hump, why wouldn’t they just not worry about it? Make one of those fares an hour? Yeah, they lose out on, what, a $5 tip each hour? For doing half the work? That is a no-brainer.

That is THE problem with a lot of the gig economy: much of it is highly elastic. Further, like ridesharing, it doesn’t require any special skill. Can you bathe, drive a car, keep it reasonably clean, and follow directions on a phone? Have I got a job for you! Can you drive to the store, read a list, and push a cart? Oh boy. Can you drive to a restaurant, pick up an order, and leave it on a doorstep? We have just the thing! Can you put an animal on a leash, take it on a walk around the block, and deposit its little ‘present’ in a waste receptacle? Why don’t you come work for us? You look like you are in pretty good shape. What do you think about moving some furniture around? Finally, I need you to come down to distribution center and pick up this box. Then, and this is where it gets tricky, I need you to deliver it to the address on the label. You think you can swing that?

Listen, I am not trying to disparage these jobs as much as it may seem. After all, who hasn’t done those things at some point? However, how much are you willing to pay someone else to do them for you? While the answer will be different for different people, there is eventually a limit…which is undoubtedly less than $187,500/year ($90*40*52). Perhaps some folks on the Upper East Side might be willing to pay that amount, but they probably already have folks on the payroll to do that sort of work.

Winding things down, to be sure, there are people who are trying to support families doing gig work, driving for both Lyft and Uber, delivering meals for DoorDash and GrubHub, etc. Busting their hump doing odd jobs and taxiing people around for what works out to be $15/hour, the hard way. However, from what I have read on the subject, these are more the exceptions than the rules (particularly prior to COVID-19).  While some of the studies are a little dated, it seems the majority (55%) of Uber drivers (uberX) drove between 1-15 hours per week. Conversely, only 15% drove what would ordinarily be considered ‘full-time’ hours, 35 or higher. This is typical of what I found going to the FAQ sections of other gig work websites.

https://time.com/wp-content/uploads/2015/01/uber_driver-partners_hall_kreuger_2015.pdf

After going through a fair amount of data and articles, something becomes pretty apparent. None of these companies really designed their business models around having full-time employees looking to make a career out of delivering groceries or taking folks home from the bar. This is Gen X and Gen Z’s way of making a little extra scratch to help pay off student debt and maybe pay for some of their ridiculously priced coffee. Make a couple hundred bucks in their spare time instead of gaming or otherwise wasting time. That is important: their spare time, when they want to work, and how they want to work. Take a look at Uber’s website to see what it is selling to potential drivers: Drive when you want. Earn what you need. “Earn anytime, anywhere. You can drive when you want, where you want, and how you want. And you can choose how and when you want to get paid. Set your own schedule. Only drive when it works for you. There’s no office and no boss. That means you’ll always start and stop on your time – because with Uber, you’re in charge.” The pitch is pretty much the same elsewhere.

https://www.uber.com/a/us/

https://www.doordash.com/dasher/signup/ge/5761dc

In the end, forcing these companies to turn all of the drivers, delivery people, dog walkers, etc., into actual employees will negatively impact the way the gig economy works. It will drive up costs in these areas where there is high elasticity of demand. While perhaps pitiable there are those trying turn gig jobs into careers, they are the minority. Upsetting the entire industry to provide safety nets of them will upset the majority’s ability to have a side hustle, to make a little extra in their spare time. It will also eventually reduce the availability of gig services most of us kind of enjoy having.

As I said earlier, the devil is in the details.

Have a great weekend.

John Norris

Chief Economist

 

 

As always, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee, are subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the reset of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.