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The Legal Landscape of the Sharing Economy — From Municipalities to Capitol Hill

Tom Guthrie

Business Development Associate, FiscalNote

To employ a maid or a chauffeur was once a symbol of the elite — a welcome amenity that required money and status. Now, thanks to the rise of the sharing economy, such service is available to anyone with a smartphone and a little disposable income —no money clip required.

The most successful of the sharing economy companies have targeted basic human necessities — food, shelter, and transportation. However, the centrality of these necessities and the power of legacy industries that grew around them are the reasons why many of these new companies have run into legal challenges.

As companies like Uber, Lyft, and Airbnb have grown into multi-billion dollar empires with millions of users, city and state governments have been forced to reckon with what looks like a profound economic shift. The new economy has changed the way consumers order food, travel across cities, and book lodging while on vacation. However, it has also altered the way that many people work, access benefits such as health insurance, and insure cars and homes. Debates over the best response to these changes have taken center-stage in courtrooms, city halls, legislatures, and regulatory agencies across the country.

The 1099 vs. W-2 Debate

One of the most important discussions to emerge from the sharing economy is the debate over the classification and use of independent contractors versus traditional employees — a distinction that has led to expensive court battles and the collapse of at least one company. Much of the sharing economy has been powered by independent contractors, who do not have access to the perks of traditional employment like training and benefits, but can often access employment more easily and can set flexible hours.

The independent contractor versus employee debate (sometimes shortened to “1099 vs. W-2,” after the tax forms relevant to each type of worker) has played out across newspaper front pages, conference stages, and committee hearing rooms nationwide. Perhaps the most interesting exploration of the topic comes from Marcela Sapone, CEO and cofounder of personal butler startup Hello Alfred.

In her piece on Medium, Sapone explains her rationale for shifting her company’s workforce from 1099 to W-2 employees, citing a desire to train and retain her employees, align her employees’ success with the company’s success, and set an example for the industry. She outlines a framework for fellow founders to do the same and proposes a new classification for workers — drawing on discussions recorded in the The Hamilton Project, an economic policy initiative at the Brookings Institution.

Uber, Lyft, Handy, and Airbnb are just a few high-profile companies that have been pulled into courtroom battles over the distinction between 1099s and W-2s, sometimes with the very cores of their businesses at stake. Handy, the on-demand maid and handyman service company, has faced numerous lawsuits from disgruntled employees who allege that they are being misclassified as independent contractors. These lawsuits are not to be taken lightly — former Handy competitor Homejoy shut down on July 31, 2015 in large part because of four separate lawsuits it was fighting in court.

Only a few weeks ago, Lyft reached a $12.5 million settlement with its drivers in a California federal court that allows it to continue classifying its drivers as independent contractors rather than employees. Uber faces a similar case that is set to go to trial in June for a challenge that looks relatively more dangerous for Uber as a federal judge has already ruled that a contract clause prohibiting drivers from bringing a class action lawsuit against the company is unenforceable. The outcome of this case could have broad implications for worker classification and thus the entire sharing economy.

Municipal Policy Battles

Outside of the courtroom, much of the regulatory action in the sharing economy is happening at the municipal level. Taxis and hotels are two of the biggest economic and political forces in most major American cities. Unsurprisingly, the hotel lobby and taxi lobby have mounted a strong campaign against the expansion of companies like Airbnb, Homeaway, Uber, and Lyft. These two lobbies, led by the American Hotel and Lodging Association, major hotel chains, and taxi companies, respectively, often spend large sums to keep legislators and regulators friendly to their causes. For one quick example: in 2014, taxi companies contributed $3,500 to state lawmakers for every $1 that Uber, Lyft, and Sidecar contributed.

In response to some of these more aggressive challenges at the municipal level, companies have begun to activate their most valuable assets on their behalf  — their customers. Faced with regulation by New York authorities at various points over the last year, Uber, DraftKings, FanDuel, and Airbnb have all enlisted their large customer bases, asking them to contact their political representatives in support of the companies.

This is a new type of lobbying that likely requires a different ethical and legal approach but also levels the playing field against industry incumbents that have long-standing relationships with legislators and regulators. Ultimately, much of this type of lobbying is likely to continue to occur at the municipal level, where a few passionate customers or activists can have an outsized impact on policy, and citizens are more likely to feel connected to their representatives.

Active State Legislatures

While many of the battles over the sharing economy have centered on the municipal level, groups on either side of the issue have increasingly turned to state legislatures as a way to make faster gains than can occur when fighting these battles city by city. In 2016, multiple states have already begun acting on legislation related to transportation network companies. These bills address issues ranging from insurance requirements and wheelchair accessibility to inspections and the very definition of TNCs.

Similarly, companies like Airbnb and Homeaway have faced scrutiny on the state level, with bills typically referring to them as “short-term rentals.” Quite a few of these bills have been acted on already this year, with at least one bill emerging in California and at least two in New York — their existence presages increased regulatory scrutiny on Airbnb, Homeaway, and similar companies.

Asking Questions at the Federal Level

Congress has taken notice of the sharing economy, as well, and leaders on the federal level have begun to take up the issue. In an interview with Buzzfeed this fall, Senator Mark Warner of Virginia proposed a regulatory “time out” or “safe harbor” for the sharing economy, to give policymakers time to wrap their heads around the policy implications of this new model of work, and to give sharing economy companies time to mature and hopefully come up with solutions on their own. On Feb. 4, Rep. Hank Johnson of Georgia submitted a letter calling for a hearing on the sharing economy, saying that it “presents multiple novel and complex policy questions involving consumer safety, regulation, and competition policy.”

Federal regulatory agencies are taking notice, as well. Last June, the Federal Trade Commission hosted an all-day conference entitled “The ‘Sharing’ Economy: Issues Facing Platform, Participants, and Regulators.” Just a few weeks later, Administrator David Weil of the Department of Labor issued a letter stating that, “misclassification of employees as independent contractors is found in an increasing number of workplaces in the United States, in part reflecting larger restructuring of business organizations.”

The Future of the Sharing Economy

Though there does not seem to be any immediate progress on the creation of a comprehensive federal regulatory framework for the sharing economy, other parts of the legal system have been, and will likely continue to be, active in response to the changes wrought by the success of these new business models. Powerful incumbent industries are looking to the legal system as one way to fend off these new challengers.

It is telling, for instance, that food delivery startups like Seamless, Grubhub, Munchery, and Instacart have not faced much regulatory scrutiny. It’s likely because many of them partner with restaurants, rather than seek to replace their services, as is the case with many car-sharing and home-sharing companies. Although it seems unlikely that there is enough consumer demand to sustain dozens of distinct food delivery services, legislative and regulatory challenges are smaller for this sector than many other companies labeled as part of the sharing economy.

A key question that remains — will litigation, legislative, and regulatory developments at the municipal and state levels lead to a patchwork of regulations that inhibit progress and slow innovation? If D.C. does not move quickly enough, the U.S. could end up on the losing side of what Marc Andreesen has termed “regulatory arbitrage.”

While the complex and varied policy issues raised by the growth of the sharing economy certainly merit in-depth study and genuine debate, policymakers must move quickly to ensure that the gains emerging from these innovative businesses are distributed fairly between consumers and companies and that this new sharing economy develops responsibly.

Tom Guthrie

Business Development Associate, FiscalNote

Tom studied International Politics at Georgetown University. He co-founded Youth Voices, a non-profit that recruits and trains young people to run for office. He enjoys running ultramarathons.