01 Nov 2016
Back in the day, sitting next to Moses, I can still remember our Economics teacher droning on, incessantly interrupting my dreaming and causing me to momentarily listen to what he said. During one such visit to earth, I can recall “The Theory of the Firm” with great lucidity.
I learnt that it’s not just about making profit, asset strippers can do that (can’t they, Sir Shifty?). It’s about being in business next year, and the year after that, and so on. The arithmetic for this (”what I call”) viable sustainability, is easy.
As a minimum, a firm must earn an amount to cover all costs, and then some. To thrive and grow, it must also earn profits to pay for investment in the future, such as marketing and product development, and give their investors a return.
The difference between employment classifications
This is where this decision from the London Tribunal will have the biggest “so what” implication: the cost of running a business. Let’s look at why that is. There is a hierarchy of benefits, regulation and protection covering the categories of Employee, Worker, and Self-employed. Here are the key aspects, starting with the Self-employed.
Self-employed people have virtually no employment rights. They do not have protection from The Working Time Regulations (WTR), The National Living Wage (NLW), have no entitlement to Statutory Redundancy Pay (SRP), no unfair dismissal rights, and do not accrue length of service. However, for a genuinely self-employed person running a successful business, the sky’s the limit for earnings potential.
Worker's do have protection from WTR, NLW, and unlawful discrimination. Unlike the self-employed, that gives them the right to 5.6 weeks holidays, a minimum wage, and entitlement to breaks.
Every protection offered by UK employment law is there for employees. They get the same as workers, plus unfair dismissal rights, Statutory Sick Pay (SSP), SRP, TUPE, and are able to build length of service.
The Uber Drivers case
In the Uber case, the tribunal has deemed the Uber drivers as workers, instead of self-employed. Uber’s business model (and the business model of similar companies operating the same sort of labour arrangements) has, at a stroke, had its cost structure massively altered. Its workforce is now entitled to the National Living or National Minimum wage (dependent on age), and 5.6 weeks paid holiday.
Only Uber, and the drivers concerned, know the exact wage which has been paid, but there have been press reports that it has paid amounts equal to only half the £7.20 of the NLW. If that is the case, the wage bill would double as a result of NLW regulation, and then further increase by 12.07%, which amounts to the cost of 5.6 weeks holiday. That’s a total increase in labour costs of 56%.
The success and rapid growth of Uber clearly indicates that it operates in a market segment where the supply and demand curves are elastic (an economics term, which means that sales and price are closely linked, in that when the price falls, the sales rise, and vice versa). And why wouldn’t that be so? Faced with a choice of traveling in a black cab for £20, or a saloon car for £15, why choose the black cab? But the arithmetic is changing.
Unless Uber can triumph at appeal (and having read the tribunal decision, to me, seems unlikely), it will have to significantly raise the price of its service, (and all of the administration and contractual changes which follow). It’s difficult to see anything but a substantial reduction in their market penetration, with a corresponding resurgence in the black cab trade. There will be major cost implications for other companies operating a similar model of labour use, and each one will now be looking at their specific cost structures and resultant implications for their business.
Certain businesses will not face a challenge as great as Uber’s, there are many business sectors where the supply and demand curve is less elastic. If weekly grocery delivery costs were to ascend from £5 to £10, how many people would choose to travel to the supermarket instead and endure the queues, to save the difference?
Key Findings and Implications:
- Uber, and most of the “gig economy”, will see a significant increase in labour costs, both direct and administrative.
- Businesses operating in markets where the supply and demand curves are elastic will see a decline in their operation, with a commensurate decrease in labour utilised.*
- Those businesses operating in markets where the supply and demand curves are not elastic will see a much smaller decline in their operation (or even no decline).*
- Much of the labour force, currently classed as self-employed, will retain their “jobs” and enjoy increased pay, paid holidays and work breaks.
- The Exchequer will benefit from increased PAYE (income tax) and National Insurance revenue.
- Like the outrage that Commerce UK outpoured over the WTR, the NMW, the NLW, and the Agency worker Regs. 2010, things will settle down and it will be regarded as quite normal that a group of workers, formally the pseudo self-employed, have been brought into the fold as “workers” to enjoy the entitlement this decision bestows.
- There will be some job losses.
*As there are many new entrants in the "gig economy", they may, as early entrants in an immature sector, be making "super-normal profits". If that is the case, those organisations are more likely to surrender some profit in order to retain greater market presence. This will be by funding the on-costs from profit, thus releasing less labour than a similar sized organisation making "normal profits".
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