The Feds Side Against Alt-Labor

November 16, 2017

Last week, the Federal Trade Commission voted 2-0 to join the Justice Department’s Antitrust Division in an amicus brief to the 9th Circuit Court of Appeals, siding with the Chamber of Commerce against the City of Seattle’s grant of collective bargaining rights to “independent contractors” working as drivers for Uber, Lyft, taxis, and other ride-sharing companies.

Under the guise of limiting spurious exemptions from antitrust law—in this case, for “state action”—the brief is a signal example of letting legal formalism get in the way of sound policy, and it harks back to disturbing misreadings of antitrust law from early in its history. Indeed, this misguided advocacy underscores the need to discard the consumer welfare model of antitrust and adopt a framework that expressly considers a broader range of concerns, including the well-being of workers and other producers.

The situation is this: In 2015, the city of Seattle granted collective bargaining rights to drivers for ridesharing and taxi companies classified as independent contractors. The employment classification of rideshare drivers has been a matter of controversy since Uber started entering major metropolitan markets around the country. Its business model relies on the contractor classification, and in many jurisdictions, drivers and state authorities sued to force Uber to reclassify drivers as employees, based on longstanding statutory tests for whether a business’s control over workers creates an employment relationship. Classification matters, because the premise of labor law is that with control comes responsibility. In exchange for the control associated with an employment relationship, employers must abide by labor standards (minimum wage and maximum hours, for example) and provide benefits, like health insurance and workers compensation. They must also recognize workers’ right to have their voice heard on the job.

Those classification suits have largely settled in Uber’s favor—the company has been able to retain the independent contractor classification for its drivers, in exchange for small concessions and settlements. In the aftermath, drivers have sought some of the rights and benefits historically associated with employment even in their current situation as contractors—including the right to negotiate collectively with their employer outside the process of formal unionization enshrined in federal law in the National Labor Relations Act. That federally unprotected status, so-called “alt labor,” is what the Seattle ordinance aims to carve out for rideshare drivers.

Alongside the legal right to collective bargaining and a voice on the job comes an exemption from federal antitrust laws, which outlaw collusion in the interest of promoting competition throughout the economy. In the first 10 years after the Sherman Act was passed in 1890, it was often deployed against workers organizing against their bosses, rather than against the monopolies for whom it was intended. In response, the Clayton Act bestowed an exemption from antitrust law on labor unions in 1914. When federal labor policy was regularized in the 1930s, collective bargaining rights became one of the many emoluments of statutory employment. That means that both collective bargaining and the antitrust exemption for it are among the labor rights workers no longer have access to in the era of the Fissured Workplace and what Lawrence Katz and Alan Krueger have called “alternative work arrangements.” In March, I predicted that the artillery of antitrust law would increasingly be deployed against alt labor, and with this amicus brief, that prediction is coming true.

In their brief, the FTC and DOJ claim that “we take no position on whether or not the drivers covered by the challenged statutes are employees or independent contractors or how federal labor law may apply to this matter.” But that is disingenuous: The agencies contend that collective bargaining by independent contractors (as opposed to workers classified as employees) is not immune from antitrust challenge, which would relegate it to a “per se” violation of the Sherman Act—illegal conduct on its face, regardless of its impact on the economy. The per se standard applies where there is no reasonable circumstance under which conduct would be pro-competitive; below, I argue that this is not the case for collective bargaining by independent ridesharing contractors. By claiming that collective bargaining by non-employees is illegal on its face and by writing this amicus brief in this case, the agencies implicitly contend that each and every Uber driver is an independent business rather than an employee in economic terms—siding with Uber in its labor law claims, despite the agencies’ declarations to the contrary.

The stated aim of the brief is to restrict the application of the “state action” antitrust exemption—an entirely different exemption from federal antitrust law than the one for labor unions found in the Clayton Act and the non-statutory labor exemption that applies to activity deriving from exempted collective bargaining. The idea of the state action exemption is that states (and their municipalities, as in this case) can choose to consciously restrict competition in service to some other public interest, for example consumer protection. A recent paper by Randy Stutz of the American Antitrust Institute explains in detail how the state action exemption has been overused to protect anti-competitive conduct by quasi-official bodies, a subject about which the FTC recently won a Supreme Court case. With this brief, the federal agencies are saying that the grant of regulatory authority made to the Seattle municipal government extends only to the consumer-facing side of the taxi and ridesharing business, not to the relationship between those companies and their drivers. As such, the drivers are exposed to full antitrust liability for bargaining collectively.

The ironies here abound. One of them is that Uber itself fixes prices for its consumers, and since the drivers are independent businesses, according to both Uber and—I contend, despite their protest to the contrary—the federal competition authorities, that conduct is also per se illegal collusion among competitors under the Sherman Act (if it is a “hub-and-spoke” conspiracy, as was the case in the DOJ’s successful suit against Apple ebooks). A lawsuit alleging exactly that was headed to trial in New York, until Uber managed to use the company’s “mandatory arbitration clause” to all but end the case—at the moment it’s hanging by a thread. Unlike consumers and workers, the competition authorities are not bound by any such mandatory arbitration clause—they have full authority to go after the companies for the flagrant violation of antitrust law that are core to its business model. The choice to use it against the drivers, and not against Uber, is simply a policy choice that the greater threat to competition comes from drivers negotiating collectively with powerful companies and not from those powerful companies exercising their power, either in the market for their drivers or with respect to consumers, among whom they price-discriminate.

Another irony is that in its defense against allegations of employment misclassification, Uber claims not to be an employer in the market for drivers—directly at odds with the competition authorities’ intervention on its behalf in this case. The FTC-DOJ brief says, “The State of Washington’s for-hire transportation laws do not clearly show that the State intended to displace competition in the driver services market [italics in original]. State law permits municipalities to regulate transportation services provided to consumers… Although it authorized displacement of competition in the provision of transportation service, the State has not acted ‘in [the] particular field’ at issue here… The State did not ‘affirmatively contemplate anticompetitive conduct’ in the market for driver services, which is distinct from the consumer service market.”

This language makes it clear that the DOJ and FTC believe that Washington state law acts to displace competition in the consumer-facing side of ridesharing and taxi services, but not on the driver-facing side. Unfortunately for that argument, in its defense against employment misclassification, Uber itself contends that it does not operate at all on the consumer-facing side of the ride-sharing market. Instead, Uber’s presentation of its business model is that it is a software company that licenses an app to drivers that enables them to provide ridesharing services to customers. If that is the case, then according to Uber, the state’s grant of regulatory authority over ridesharing to the City of Seattle shields driver collective bargaining from antitrust scrutiny, since everything drivers do in the ridesharing market is consumer-facing. At the very least, it is incoherent to argue that Uber drivers are independent contractors (as the DOJ and FTC do, by claiming that their collective bargaining violates the Sherman Act) and that their collective bargaining is not protected by the state action exemption, given Washington’s statute.

The market structure the DOJ and FTC contemplate is that Uber is a platform: It provides ridesharing services to customers, and it purchases labor from drivers. Given that, the brief does not make sense unless Uber drivers are employees—in which case the entire ordinance is unnecessary, and collective bargaining by those employees is shielded by the labor exemption.

What this illustrates is simply that Uber, and many other powerful tech companies, have a chameleon-like quality that they use to avoid all types of regulation: labor, antitrust, anti-discrimination, communications, public safety, you name it. Their real business model isn’t any one of the alternative configurations they opportunistically adopt for propaganda and legal purposes, but rather the regulatory arbitrage that those alternative configurations represent. Figuring out how not to be bound by regulations that your competitors must abide by isn’t innovation, and yet, it appears to be the core contribution of the tech sector to the U.S. economy.

Finally, to return to the economic question at the core of this: Is it actually true that collective bargaining by rideshare drivers is, on net, anti-competitive given the reality of how that labor market works? In other words, is it possible that even a blatant attempt to fix wages through a collectively-bargained labor contract might actually be pro-competitive? Antitrust jurisprudence, as currently constituted, mostly assumes that labor markets are inherently competitive, so restrictions on competition like collective bargaining would “distort” them to the benefit of workers.

In fact, increasing economic evidence shows that labor markets are monopsonized—by powerful companies like Uber. When employers have discretion over wage-setting, they restrict demand below the competitive level to lower wages and increase their profits. And under those circumstances, empowering workers on the other side of the market likely raises wages and increases employment. Thus, underlying the questionable legal reasoning in the DOJ-FTC brief is a questionable economic theory. If the authorities are really interested in making the economy more competitive, they should be taking action to reduce monopsony—not undermining the countervailing power of workers. Even assuming that employers and workers should be treated alike by the antitrust agencies, whether the drivers’ countervailing power is pro-competitive is an empirical question that should be analyzed under the “Rule of Reason,” not a per se violation of the Sherman Act, as alleged by the competition authorities in their brief. If the case is remanded for trial to the district court, as the federal agencies seek, then the defendant (the City of Seattle) might ultimately try to defend itself on that basis.

Weakening per se prohibitions on anticompetitive conduct is not necessarily a win for strong federal competition policy, but the authorities ought to have been more judicious in selecting on which case to make their views known on overuse of the state action exemption, and further, they should seek to understand the ways that the Fissured Workplace implicates antitrust law and principles of sound competition policy, rather than deploy their considerable firepower against the least empowered agents in the economy. In particular, the anti-competitive behavior in both product and labor markets is on the part of the powerful tech platforms, and not their contingent workforce.

In our era of high corporate profits, low investment, high markups, stagnant wages, low growth, and enormous corporate payouts to shareholders, the idea that collective bargaining by ridesharing drivers is a grave threat to competition is, quite frankly, mind-boggling. There are many other more questionable applications of the state action exemption for the authorities to challenge besides this Seattle ordinance—especially as the conduct in question in this case is likely to be pro-competitive. Rather than dredging up the worst legacy of antitrust enforcement from the Gilded Age, it’s time to rediscover antitrust’s far more successful legacy.