Are gig economy disrupters finally running out of road?

A spate of legal action from workers urging stronger employment rights threatens to shake up business models

Deliveroo illustration
Pimlico Plumbers and Deliveroo are among companies who have used flexible labour models

A plumber who suffered a heart attack a decade ago was the first domino to fall. Gary Smith wanted to cut his working days following the illness but Pimlico Plumbers refused. Smith claims he was unfairly dismissed and entitled to other rights. Smith, perhaps unknowingly, was putting the booming gig economy on trial and his long-running legal battle went all the way to the Supreme Court.

The original case depended on whether Smith was self-employed or a worker for the firm, but his status was unclear. He wore a uniform and drove a branded van but was considered self-employed for tax purposes.

The Supreme Court ruled Smith was a worker but he later lost his claim for £74,000 when it went back down to the employment tribunal, a decision he is now appealing. It appears the jury on the gig economy is still out.

“It’s a great shame we don’t change the law; we are talking about a 100-year-old employment law for self-employed people today,” says Charlie Mullins, the founder of Pimlico Plumbers.

“One hundred years ago, you would be working there for 40 years; you’d get a watch after 25 and they’d probably pay for your funeral. Things have changed a lot now... we have just not changed the law accordingly.”

Britain’s highest court will take centre stage for another landmark gig work showdown – this time between Uber and its drivers. A five-year battle over the status and rights of the drivers is expected to be decided, with the potential to upend the gig economy’s model and reverse labour market shifts. Are Uber and the gig economy finally running out of road?

Gig workers are independent contractors that work on a task-by-task basis, such as a taxi ride or a food delivery.

This smartphone-driven boom allows flexibility for both the worker and company, with gig economy disrupters including Uber, Deliveroo, Lyft, Addison Lee and Just Eat.

But the relationship causes insecurity for the contractors that ripples through to the jobs market and upends industries. Gone are the days of dozens of takeaway menus stuffed into kitchen drawers and lines of taxis waiting near bars.

Workers have followed the money, with a rising number of Britons self-employed or on zero-hour contracts. The number of working age adults earning from online platforms at least once a week doubled to 9.6pc, or 4.7m, between 2016 and 2019, according to the University of Hertfordshire.

Almost a third of those made the bulk or all of their income from gig economy platforms, but those workers are now challenging their precariousness.

Charlie Thompson, an employment lawyer at Stewarts, says the “overwhelming direction of travel” in gig economy cases is in favour of the individuals. The Uber drivers argue they are entitled to workers’ rights but the ride hailing firm, which is appealing a 2016 employment tribunal decision, claims they are self-employed. The status of workers is in between employees and the self-employed in terms of rights.

“If the Uber decision goes the way it has gone every step of the way since the employment tribunal, what these drivers are getting is the right to the national living wage and paid holiday,” says Thompson. “They will not obtain stability in their job that a fully-fledged employee would get from unfair dismissal. The wider gig economy will no doubt sit up and take notice of it but they may be able to distinguish their specific arrangements.”

The pandemic has sent demand for some gig services surging but also revealed their vulnerability. While food delivery apps are riding a Covid boom, demand has disappeared for other gig workers. “They have been exposed as very, very vulnerable,” says Stephen Timms, chairman of the work and pensions committee and an employment minister under Labour.

“I think there will have to be some clarification and changes to this area. One of the interested parties in all this is the Treasury; they lose out.”

The UK is edging towards a resolution to the debate. A review into working practices led by Matthew Taylor, head of the RSA and a former top adviser to Tony Blair, was released in 2017.

The Taylor Review made a number of recommendations to improve the rights of gig workers and last December, the Government committed to an employment bill that vaguely promised to “build on existing employment law with measures that protect those in low-paid work and the gig economy”. No date for a second reading of the bill has been set and it has slipped down the agenda during the pandemic, leaving courts to decide the fate of workers for now.

“In many of the cases, we are talking about would it be more appropriate for these people to be classified as workers and we are seeing those debates all around the world,” says Taylor. He says the Government must address a system that provides “perverse incentives” for companies to portray people “who should really be getting workers’ rights, entitlements, holiday pay and sick pay” as self-employed.

“One of the reasons why companies like Uber or Deliveroo like to portray their contractors as self-employed is because they don’t have to pay national insurance.” This “anomaly” in the tax system should be tweaked, Taylor says.

Pimlico Plumbers founder Charlie Mullins says the law must change to reflect how people work today Credit: PA

Other countries are taking action before the UK. In 2019, the EU approved new rules to provide gig workers minimum rights within three years, including the right to receive compensation for late cancellation of shifts, a six-month limit to the worker’s probation period and a ban on work exclusivity clauses.

Meanwhile, California is taking on Uber and Lyft with a court ordering the firms to reclassify drivers as employees. Any action has been delayed until at least next month as their appeal is considered, after they threatened to suspend their apps in the state. This gathering momentum threatens to undermine the business model of the gig economy and prove a stumbling block on the path to profitability for these largely loss-making firms.

“If you look at how companies react to some of the measures, that tells you how important they think it is,” says Ian Whittaker, analyst and founder of Liberty Sky Advisors.

“Both in the US and UK, Uber has been pushing back aggressively.”

He says a gig economy clampdown would be “unwelcome” as their business model “relies on that variable cost basis”: “If you don’t have the rides, you don’t need the driver so your cost base flexes with the revenue.”

If drivers are judged to be workers, there is “a whole infrastructure that needs to be set up there and it becomes more of a fixed cost base”, Whittaker says.

“It not only increases the cost but also changes the dynamics of the revenue model and that is probably more the issue here for them… The model relies on flexibility.”

This could hinder the cutting-edge gig economy advantage firms have held over competitors, with costs passed on to consumers.

Clive Black, head of research at Shore Capital, says higher costs from labour would mean firms “become less price-competitive and/or incumbent, and new competitors take their market share”.

A sea change away from the reliance on this flexible and insecure work could also start to reverse big shifts in the labour market.

“In the UK, self-employment was an unusually significant part of the labour market recovery and it’s likely a chunk of those self-employed workers were working in the gig economy,” says Chris Hare, HSBC economist.

“In the UK, it’s less a legal thing and more of a business practice type of issue, where a lot of companies like retailers would move towards more flexible contracts, zero-hours contracts, lower-hours contracts.”

Experts warn this rise in insecure and flexible work may have created a monopsony in the gig economy – where the buyers of this labour, the firms, hold more power than the workers. Gig economy companies will counter that a clampdown on this type of work would hit employment, with Mullins warning it is “already a problem”.

Andy Haldane, the Bank of England’s chief economist, warned in 2018 of a “dark side of job flexibility”, saying the rise of insecure work had dampened wage growth.

“The precariousness of work is a function of the state of the labour market and presumably that won’t carry on forever,” says David Blanchflower, a former Bank rate setter.

He adds: “It turns out the unemployment rate no longer is a good indicator of what is happening in the labour market. Under-employment is really important.”

All eyes will be on the Supreme Court later this month for what promises to be a landmark moment as the Government stands on the sidelines. The jury is still out on the gig economy but Uber drivers and workers like them may be edging towards victory.