Uber has over 327,000 active drivers. That is a ton of people.
If you consider those 327,000 people to be employees (which they are not) you would be looking at a company comparable in size to General Electric, the Home Depot, and UPS.
Obviously Uber is humongous regardless of how their drivers are categorized. What makes Uber and other “gig economy” companies compelling is that their workforce’s are entirely comprised of independent contractors. Uber, Handy, Postmates and others have found hundreds of thousands of able and willing individuals to contract for them. That is amazing.
The trade-offs that come from contract labor are under reported. Making money from Uber has its perks, but you can’t seriously consider making a career out of it, can you?
Investors seem to think differently. Venture capital has flooded the “gig economy” scene, and startup companies have billion dollar bets riding on them. Uber is a fundamental social service, but lacks legitimacy at a valuation of $50 billion.
What is holding Uber and other similar companies back?
Financial security.
Job seekers want three things from a potential career.
- A good salary and benefits
- A certain level of freedom and authority
- A guarantee that there job will be there every single day
Uber does a fantastic job providing two of the three. Drivers have a great sense of authority – they choose the hours they work. Drivers also know that when they wake up on any given day they will be able to turn on their Uber app and start making money. In this sense, Uber has greatly empowered its contractors.
Yet, Uber falls short on the most important career consideration – salary and benefits. Do you think Uber’s corporate employees get paid hourly? Do you think corporate employees have no retirement benefits? No, and no. So how can Uber provide this to contractors without being forced to call them “employees”?
They can’t, and that creates a problem.
Third Party Retirement Benefits
Uber will never be able to pay their drivers salaries. If they did, they would no longer be independent contractors, and if drivers are no longer contractors then the whole gig economy comes to an abrupt end.
Uber will also never be able to provide 401k retirement opportunities to their drivers. Again, if they did drivers would become employees, and, just like above, that would really mess things up.
But, in order for Uber to gain legitimacy they will need to provide some services to help make up for the fact that they legally cannot provide these benefits to their contractors. Either that, or the federal government will create a new type of employment status. The latter option seems unlikely.
How can an independent third party company come in and save the day? By simply reapplying the fundamentals of insurance companies. Bare with me here.
Insurance companies collect premiums from their members. From these premiums insurance companies make money in one of two ways.
- Underwriting income: the difference between premiums collected on insurance policies by the insurer, and expenses incurred and claims paid out
- Investment income: interest payments, dividends, capital gains collected upon the sale of a security or other assets, and any other profit that is made through an investment vehicle of any kind
Insurance companies tend to actually lose money on underwriting and generate their profits from investment income. Take a look at publicly traded insurance companies stock prices. When the market crashed in 2008 insurance companies were hit especially hard. Look at historical stock price charts to see what I mean.
The principle here is that a company (in this case an insurer) collects a large amount of cash up-front and has a long time horizon to pay it back. In the mean-time, that company can generate investment income that offsets expenses.
A similar company could do the same thing to help alleviate the strain currently being felt in the sharing economy.
Imagine a company, let’s call it S Capital.
S Capital provides retirement matching for independent contractors. For every dollar an independent contractor puts in their individual retirement account, S Capital will match it up to 3%.
S Capital only offers their matching service for contractors who’s parent company has partnered with S Capital. S Capital receives annual premiums from companies like Uber, Handy, and Postmates to provide this service to their contracting workforce.
S Capital will generate revenue by investing premiums from parent companies, and also investing on behalf of the independent contractor. A vesting schedule will be in place for contractors to retain their matched contributions, and S Capital will have multiple years to generate income from every dollar it brings in.
After the vesting schedule has completed the contractor can access their matched funds. The contractor get’s to enjoy the benefits of compounding interest, and S Capital makes a profit from generating more income from investing the initial premium. Everyone wins.
I have written about this idea before. I actually submitted a similar idea for Ycombinator Fellowship. and posted my application on my blog.
I don’t have the knowledge or experience to take on a problem as large as this one, that is why I am sharing it here. I really do think 3-5 years from now there will be a company that is doing something very similar to this. It seems almost inevitable.