Regulatory Challenges in the Sharing Economy

Sharing economy is the most common term for a diverse range of online platforms that facilitate the short-term rental of anything from rooms to cars to clothes to people’s skills and time. Peer-to-peer platforms, such as Uber and Lyft in the ride-sharing sector, Airbnb and Vrbo for short-term rentals, and TaskRabbit and Handy for temporary labor — among countless other companies — allow people to make money driving passengers, renting a room in their house, and taking on odd jobs, respectively. By using technology to match users and providers, these platforms enable a more efficient — and potentially more sustainable — use of idle resources. However, the sharing economy can also lead to more intensive use of these same resources or increased consumption, exacerbating negative externalities and posing challenges for regulators like state and local governments.

Another set of platforms, like Lime and Bird, which rent electric scooters and dockless bikes, have become increasingly significant in just the past few months. These platforms enable users to use their smartphones to find nearby scooters and bikes. However, the companies themselves own the scooters and bikes; and so, rather than connecting individual buyers and sellers, these platforms operate like Zipcar and other car-sharing firms with a fleet of cars available for very short rental periods.

Across all of these models, the sharing economy poses a myriad of challenges and potential opportunities for public lawyers and policymakers. These platforms and the people who use them interact in often unforeseen ways with existing regulatory regimes, creating calls for modified or new forms of regulation. In the early days of the sharing economy — and it is easy to forget that Airbnb was only founded in 2008 — the biggest challenges involved how to classify and regulate these platforms in relation to analogous services like taxicabs and hotels. To a significant extent, state and local regulators have resolved those threshold questions, with sharing economy firms largely subject to parallel, often lighter, regulatory regimes.

As the sharing economy has continued to grow, regulators are now facing a second generation of policy concerns as they address the growing impact of platform companies. These concerns include the rapidly changing nature of work, increasing traffic congestion and declining public transportation use, and housing affordability as short-term rentals threaten to reduce the stock of long-term rental units.

Resolving these policy concerns has become an increasingly urgent matter for sharing economy firms as they seek to stabilize their business models in preparation for a series of initial public offerings, with Lyft’s recent initial public offering only the first. In a regulatory landscape in continuing flux, it is essential for public lawyers to understand the governance challenges that these platforms pose and the lessons to be learned from the regulatory responses that have developed to date.

Reverberations Throughout the Legal System

As the sharing economy has grown, a persistent question has been whether the emerging platform model is bringing transformational change or instead an incremental modernization of what people have always done with transportation, lodging, spot labor, lending and other activities. This is a fair debate, but there can be little doubt that the sharing economy is already having a significant impact across multiple legal domains, if for no other reason than the greatly increased scale and visibility of the activities that it fosters.

The classification of those who provide services in what is sometimes called the “gig economy” is one particularly contentious regulatory fault line. Are providers independent contractors or employees of the platforms? That determination — which we unpack in more detail below — has implications for the panoply of employment-based protections afforded by state and federal law, including employment antidiscrimination protections, workplace safety requirements and wage-and-hour laws. Whether providers in the sharing economy are employees or contractors can also have significant tax consequences.

Another important policy front has emerged from the unfortunate, albeit not surprising, fact that old-economy prejudices have crept into the sharing economy, with discrimination evident in the transportation-network-company (TNC) and short-term rental (STR) sectors, among others. That reality has brought antidiscrimination laws to bear across the sharing economy, including in transportation and short-term rentals, although the precise coverage of traditional civil rights protections is sometimes less than entirely clear.

Given that sharing economy companies connect providers and consumers through online platforms, consumer protection and privacy questions have emerged as the sector has scaled up. Data collection and analysis are central to the platform model, as is the reliance on trust-based feedback loops on all sides of the transactions that they facilitate, with nearly every interaction rated by consumers and providers. These trust and verification methods — and the dynamic nature of the sharing economy — have led some to argue in favor of flexible, decentralized, participatory regulatory processes as well as a degree of self-regulation. The promise of such regulatory approaches is that they would prove more responsive to rapidly changing business models, but that promise relies on the good faith of platforms, requiring regulatory backstops to police bad actors. Platforms have not displaced the need for public licensing regimes, although they have in many instances spurred the development of less rigorous regulatory frameworks, which work in conjunction with the platforms’ own measures to police providers and users.

Beyond employment, tax, antidiscrimination, consumer protection, privacy and other cross-cutting concerns, the sharing economy raises specific sectoral regulatory concerns. Home sharing intersects with zoning, housing and building codes, and lodging taxes; TNCs raise licensing, insurance and public safety questions; electric scooters must comply with traffic rules and vehicle safety requirements; and peer-to-peer lending has developed in the shadow of general lending requirements.

Start-up companies regularly seek to enter markets first and ask for regulatory permission second, arguing that the services they are providing are not covered by existing regulations. It is thus critical that regulators understand these models and their regulatory implications — even if that requires placing burdens on platforms to explain why and how what they are providing is covered. As Seleta Reynolds, the general manager of the Los Angeles Department of Transportation, recently pointed out about the emerging “airtaxi” industry (autonomous drones designed to transport people that are nearing the launch of operations in several cities),“FAA may let you fly, but it’s cities that will let you land.”

It is incumbent on public lawyers to understand where the platform economy is landing — and what that means for their regulatory responsibilities.

Emerging Regulatory Landscape: Two Examples

To better appreciate regulatory challenges in the sharing economy, consider two particularly prominent examples of the legal system adjusting in real time to disruption: the contested relationship between service providers and platforms and the local impacts of the spread of the platform short-term rental market. The first example cuts across most sectors of the sharing economy, while the second reveals a variety of challenges in a single sector. In both instances a significant degree of regulatory uncertainty remains as courts have reached differing conclusions and new regulatory challenges continue to arise.

Gig Workers: Employees or Independent Contractors?

One persistent legal question underlying the sharing economy is whether providers of services facilitated through platform companies — drivers on Uber and Lyft; delivery people on GrubHub and Postmates; cleaners, movers, handymen, and other service providers on Taskrabbit, Handy, and Thumbtack, among others — are employees of those platforms or independent contractors. The legal tests for determining employment status vary by the relevant federal or state statutes at issue in areas such as minimum wage and overtime, antidiscrimination protections, workers’ compensation, unemployment insurance, collective bargaining rights, and other employment-based regulations.

A common default approach that courts take to this determination examines the extent of a company’s control over someone’s work, considering factors like the skill required; the source of the instrumentalities and tools; the location of the work; the duration of the relationship between the parties; whether the hiring party has the right to assign additional projects to the hired party; the extent of the hired party’s discretion over when and how long to work; the method of payment; the hired party’s role in hiring and paying assistants; whether the work is part of the regular business of the hiring party; whether the hiring party is in business; the provision of employee benefits; and the tax treatment of the hired party.

In other instances, statutes provide more detailed and specific guidance to determine an employment relationship, often aimed at ensuring broad coverage.

Employee advocates have argued that sharing economy companies assert control over many of the most central aspects of how providers operate on platforms, including, in many instances, the fees that providers charge, performance standards, pay rates, and other traditional indicia of employment relations. Platform companies counter that because providers themselves decide “when, where, and how long they work,” they should be considered independent contractors. Courts and agencies have not reached a consensus on these arguments, and platform companies have responded by seeking statutory or regulatory changes in several states to codify the status of providers as independent contractors.

Home Sharing: The Local Regulatory Landscape

While debates over worker classification involve the relationship between platform companies and service providers, a separate set of regulatory skirmishes has pitted platforms, providers and users against the broader community. In the realm of short-term rentals, there is growing concern among local officials that as companies like Airbnb and Vrbo proliferate, they are moving existing housing out of the long-term rental market. This has the potential to exacerbate housing shortages and negatively affect affordability. The effect of short-term rentals on housing costs depends in part on the share of such rentals that are full-unit listings removed from the long-term rental market or rentals of a room where someone otherwise lives.

One of the key challenges for local officials has been crafting regulations that effectively distinguish between hosts occasionally renting spare bedrooms and people and companies renting out multiple units on the platform.

One way that regulators have made this distinction has been by imposing fees that vary based upon the intensity of use, for example, charging a larger licensing fee or higher tax rate for hosts who rent their unit more than a specified number of nights in a year. Such measures may more effectively discourage the conversion of long-term rentals to short-term rentals.

But such measures can prove difficult to administer. Underscoring this point, a proposed measure in Massachusetts that would have scaled a range of state and local taxes based upon intensity of use failed and was replaced by a significantly simpler framework that simply applies the equivalent of the hotel tax to short-term rentals, exempting hosts that rent a limited number of nights annually.

In contrast with more customized regulatory responses, which might better target particular concerns, some local governments have chosen to impose outright bans on unhosted short-term rentals or prohibitions on whole-unit rentals in specific neighborhoods. Others have sought to limit the concentration of short-term rentals at the building or neighborhood level.

As they seek to limit the location and intensity of short-term rentals, local and state regulators have also confronted challenges in obtaining the data necessary to ensure compliance. Regulatory frameworks often include a requirement that property owners register with the city or state. Registration systems can enable local governments to obtain data about the location of rentals throughout the city and, to a lesser degree, the intensity of their use.

Local governments also have imposed requirements that potential hosts include their registration number in any online listing and that platforms remove listings that lack such a number. However, platform companies have challenged these requirements and the penalty fees for listings that do not include a valid registration number in court on grounds that the ordinances, by forcing the platforms to monitor third-party content, violate section 230 of the Communications Decency Act (47 U.S.C. § 230).

The U.S. Court of Appeals for the Ninth Circuit recently rejected this claim in HomeAway.com v. City of Santa Monica, declaring that section 230 did not bar enforcement of a Santa Monica ordinance prohibiting platforms from facilitating short-term rentals that were not licensed by the city.

[T]he Ordinance does not require the Platforms to monitor third-party content and thus falls outside of the CDA’s immunity. The Ordinance prohibits processing transactions for unregistered properties. It does not require the Platforms to review the content provided by the hosts of listings on their websites. Rather, the only monitoring that appears necessary in order to comply with the Ordinance relates to incoming requests to complete a booking transaction — content that, while resulting from the third-party listings, is distinct, internal, and nonpublic.

Airbnb chose to settle a separate lawsuit against San Francisco, agreeing to help enforce registration laws by collecting data on hosts and sharing it with the city, as well as deactivating listings that lack a valid registration. While data sharing remains a flash point in disputes between sharing economy firms and local governments, in the contexts of STRs and TNCs, some larger cities have been successful in obtaining data directly from firms, often threatening to shut down their operations.

In other cases, Airbnb and HomeAway have challenged data-collection requirements by bringing claims under the Fourth Amendment. In January 2019, the companies received a preliminary injunction from a federal district court, barring New York City from enforcing part of a July 2018 ordinance that would require the platforms to turn over data monthly regarding hosts and listings. New York City responded by promptly issuing a subpoena to Airbnb and HomeAway for data regarding listings in the city.

Conclusion: Lessons for Public Lawyers

A few lessons can be drawn from the challenges that regulators have confronted in responding to the sharing economy’s transformation of a diverse range of business sectors. It is important for public lawyers to take a holistic view of these regulatory challenges and of the sharing economy’s effects.

Platform companies often seek to leverage ambiguity about regulatory coverage and, at times, regulatory gaps genuinely exist. As important as it is for public lawyers and policymakers to ensure that new business models operate within regulatory bounds, emerging sectors can cast existing regulations in a new light. The sharing economy thus has the potential not only to disrupt existing regulatory regimes but also to prompt improvements, and the data produced by sharing economy firms may improve the targeting and enforcement of regulations well beyond the platforms themselves.

The sharing economy, like much technological innovation, moves rapidly, so public lawyers should count on continued innovation and be prepared to address the concomitant issues. The rapid rise of microtransit platforms offering e-scooters and dockless bike shares, for example, may make urban transportation more sustainable, or it may simply clog local sidewalks, but regulators can anticipate the primary challenges that they pose, applying lessons from earlier waves of platform economy transportation companies. Those lessons, in turn, should help inform responses to the next revolution, such as autonomous vehicles.