Corporations Startups

Could the Franchise Model Save the Gig Economy

A landmark case against Uber and Lyft is playing out in California courts that could fundamentally challenge their business model. Proposition AB5 would require companies like Lyft and Uber to reclassify their drivers from independent contractors, as they are today, to employees. As a result, both companies have threatened to pull out of California altogether as they simply cannot comply with the ruling. Their business model isn’t built for that structure. The economics of ride hailing don’t contemplate having W2 employees. If this was the case, fare’s would rise substantially across the board, and demand would likely fall. That said, they are already prepping to lose this fight and this will require a radically different approach to how their business functions moving forward. It’s been surmised that they will pivot to a franchise model whereby independent franchisees will license the ride hailing companies software as well as brand IP while making drivers now regular employees. If you think this is a step backwards, you’re right. Under this model, you’ll end up with potentially thousands of black car and taxi companies using the software. This is exactly how the model existed before the Uber’s of the world came around and, I’m afraid, won’t even address the larger issue. 

Corporations have long used the franchise model to avoid triggering legal employment relationships. By incorporating strict contract terms, known as vertical constraints, they essentially are dictating the hours the business should run, how the employees should act, the product, etc.  Many fast food restaurants, Jiffy Lube, even most hotels are often run by franchisees under this structure.  

Switching to a franchise model will not help improve conditions for Uber or Lyft drivers. This has been proven out before. In 2014, FedEx had to adopt a franchise model in some markets where a court determined they were miss-classifying drivers. So they outsourced their delivery network to independent service providers (ISP’s) who hired independent drivers as employees. Many of these employees, however, did not get paid any more money or receive benefits. The ISP’s simply couldn’t pay them more because FedEx wasn’t paying enough.  This is what will happen here if AB5 moves forward as currently outlined. This model just further shifts the blame game further down the line. 

We need to fix the franchise model. We need to reduce some of the vertical constraints that have long existed, possibly by relinquishing some pricing control. I believe since Uber and Lyft control pricing this has been one of the biggest reasons why independent contractors feel they should be employees. Why can’t the app be built to allow more input from drivers? For example, if I’m a driver I would see general origin and destination on an inbound request and be able to respond with a fare that I would accept. This is different from how it works today where Uber sets the price and the driver doesn’t have visibility. 

None of these scenarios are ideal and I’m afraid there isn’t a fix that would satisfy all parties. Bigger picture, the unit economics of ride hailing just don’t work. 

Share this: