12 November 2021

Using Employee Stock Ownership Plans to Democratize Labour-Based Platforms

Tej Gonza and David Ellerman contribute to our commentary series on the platform economy

Platform technologies are taking the central stage in the last decades as predominant marketplaces for ideas, transportation, food delivery, accommodation, finance, and even dating. Platforms are good example of technological disruption, where innovation benefits an exclusive group where the social costs of innovation are externalized. Studies of the past years are consistently discovering negative effects of platform economy like economic and social insecurity, material deprivation, deepening economic, gender, and racial inequalities, detrimental effects on mental health and more. It is not surprising that national governments and activists are trying to search for regulating strategies, which would more evenly distribute the benefit created by platforms and limit the social costs of these new technologies. 

When analysing platform economy and proposing regulative strategies, we should bear in mind the relevant differences among these platforms. Our focus here is on labour-based platform (LBP), which are defined by a few characteristics. Firstly, providers on LBP offer labour services, which excludes platforms that offer commodities, finance, or relationships. Secondly, the business model of LBP depends as much on the underlying technology as the lower operating costs; LBP gain competitive advantage because they avoid the labour regulation associated with traditional forms of employment. Platforms lower labour costs by hiring providers as independent contractors, pushing capital depreciation costs, social and pension contributions, and income taxes on labour providers, avoiding minimum wage legislation, dismissing overtime and sick leave payments and so forth. Thirdly, LBP are usually natural monopolies, since they rely on so-called network effects to gain competitive advantage over other platforms. The network effect implies a feedback loop where more users of a platform imply more providers of a service, and more providers of the service bring in more users. The result of this is that the LBP markets are dominated by a few large players. 

The examples of LBP are taxi platforms (e.g., Uber and Lyft), food delivery platforms (e.g., Wolt and Glovo), and task platforms (e.g., Task Rabbit and Mechanical Turk). While the majority of labour providers on these platforms are only gig workers who are trying to make some extra money, while the platforms are gaining on market share against the conventional companies more and more workers are forced to become dependent on work on these platforms. Since platform work is gradually crowding out the conventional employment with all the labour rights attached, it is becoming increasingly important to explore alternative complementary strategies to regulate platform work. Generally, prevalent two strategies, are (i) government regulation by redefining platform work as conventional employment and (ii) grassroot cooperative organization of platform technologies. While these strategies are very important in addressing the problems underlying platform work, they face certain limitations. We propose a third, complementary strategy, which is not yet seriously explored in the literature on platform work regulation. 

The platform cooperatives approach

This alternative is based on the co-operative organization of labour-based platforms, which implies “co-development and co-ownership of software applications for online matching platforms” (Manan 2020: 1). Despite the increasing regulation of the platform economy, however, platform cooperatives do not seem to be gaining the market share. 

It is hardly a novel observation that start-up platform cooperatives will have a tough time displacing existing platform due to all the industry characteristics of network effects and first-mover advantages. Yet there is little or no literature on mechanisms to convert existing platforms to more cooperative and democratic forms—even though some have at least broached the idea: “Don’t just build—convert.” (Martin 2016: 190). In the anthology of articles on platform cooperativism (Scholz and Schneider 2016), one - and only one article mentioned Employee Stock Ownership Plans (ESOPs) and ended with the suggestion that “more widespread provider stock ownership programs may well be a natural response, and perhaps the most pragmatic prospect for sharing the wealth of the sharing economy.” (Sundararajan 2016: 144). 

Using a Coop-ESOP as a conversion model

It is our present purpose to suggest a Coop-ESOP model (or, mutatis mutandis, an ESOP model) that could be used to make conversions of labour-based platform companies to being partially or wholly employee-owned over a period of years. Our focus is also outside the United States since there is already existing legislation and a widespread practice of setting up ESOPs in the US. Outside the US, there is at present no legislation for ESOPs that have the characteristic features of the company paying for employee shares (not individual worker assets or payroll deductions), including all (long-term) employees, and locating the employee shares in a single ownership vehicle to maximize their collective voice. Moreover, in the model suggested here, the US ESOP trust is replaced by a special type of worker cooperative, an employee ownership cooperative, that fosters democratic worker voice over the voting of all the employee shares as a block to secure “a seat at the table” even when the ESOP starts off with a relatively small percent of the ownership. Ultimately, as with many US ESOPs, the percentage of employee ownership may eventually reach 100 percent and then there is the option of folding the operating company into the cooperative to become a Mondragon-style worker cooperative.

First, a number of issues need to be clarified. Existing platform companies already have a host of legally recognized employees so they, like any ordinary company, could set up a Coop-ESOP. But our focus here is on those labour-based platform companies which also have another category of workers who are considered as outside the company and are legally classified as “independent contractors” — Uber and Lyft being the best-known examples. In addition to Uber and Lyft, other examples would include platforms where workers provide cleaning, homecare, catering, delivery, or shopping services for customers.

One goal of setting up a Coop-ESOP is to create a “company of owners”—not a company divided between owners and long-term full-time workers, some classified as employees and some as independent contractors. We emphasize “long-term full-time workers” since the point is to bring into ownership all those workers who are committed to the business as a business in which they will make their living—which excludes those who voluntarily want only a gig. As Yochai Benkler wisely put it, this involves a “strong core of moral values, [and] avoidance of an ethic of ‘I’m just here for the extra few bucks,’” (Benkler 2016: 95). Both Uber and Lyft themselves singled out essentially full-time drivers for stock options in their initial public offerings. If regulatory changes make full-time service-providers (de facto employees) into de jure employees, that is perfectly compatible with this ESOP approach.

In the short run, many of the platforms are living off of regulatory arbitrage (e.g., not paying payroll taxes on gig-workers, part-time or full-time), low prices that depend on time taken to readjust to the new situation (e.g., cities figuring out how to regulate and tax Airbnb), and the deluge of venture capital money that keeps platform companies afloat while they try to capture as much market as possible—even without earning a profit. As a supplement to city or national governments changing regulations, the possibility of an ESOP buyout of a significant part of the local or national platform subsidiary company puts a new instrument in the hands of the governments to structurally change the platform companies.

Moreover, having a company of service-provider/owners gives a platform company a competitive advantage both for users and for other service-providers. Users will prefer to be served by owners as opposed to people who only want to pick up a little extra income and have little stable relationship with or commitment to the platform. And service-providers will want to join a platform that makes them into worker-owners (no more ‘multi-homing’) rather than treats them as gig-workers, full-time or not. Competition between platforms with worker ownership programs to attract the best service-providers may do much to address precarity and improve labour standards.

Organizing starts with the local government and local service-providers to persuade the local subsidiary to set up a Coop-ESOP for a variety of reasons: (1) for income reasons (increased productivity from owners), (2)for competitive reasons (to get best service-providers and more customers), (3). for public relations reasons, and (4) to better satisfy regulatory requirements imposed by the national or metropolitan authorities. Once the local subsidiary is on board, it has to persuade its owner, the Mother Company, that the ESOP is a good idea for the same reasons.

Tej Gonza is Young Researcher and Doctoral Candidate at the Faculty of Social Sciences, University of Ljubljana, and Managing Director of the Institute for Economic Democracy.

David Ellerman is Researcher at the Faculty of Social Sciences, University of Ljubljana, and President of the Institute for Economic Democracy. Among his numerous publications, he is the author of the book Helping People Help Themselves: From the World Bank to an Alternative Philosophy of Development Assistance (2007) whose Foreword was written by Albert O. Hirschman.

This article has been written for the Albert Hirschman Centre on Democracy’s series of commentaries on the need to redesign the platform economy on a more democratic and sustainable basis.
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