The MC: The Mackinac Center Blog

A Possible Uber Setback for Ride-sharing in California

Examining the distinction between a contractor and an employee

A recent ruling by the California Labor Commissioner’s Office could change the way that popular ride-sharing services such as Uber operate. The Seattle Times noted the decision that classified one of Uber’s drivers as an employee “may turn out to be an even bigger roadblock to the company’s business than regulatory changes because it could change Uber’s cost structure, requiring it to offer health insurance and other benefits, as well as paying salaries.”

What does this mean to those who love the low-cost, innovative, and job creating service? Most likely, if courts uphold the decision, higher costs and possibly less opportunity for those who want to work for themselves.

In early June the commissioner’s office ordered Uber to reimburse Barbara Berwick, a driver using its service, roughly $4,000 in expenses for tolls and mileage, ruling that she was an employee, and not an independent contractor, as Uber maintained.

Independent Contractor vs. Employee

Workers can fall into several categories, but the two most common are independent contractor and employee.

Independent contractors are essentially small business owners. They generally determine their own hours, provide their own equipment, have specific expertise, and have control over their working environment. Like other small business owners, their “salary” is really the profits they earn from their work for clients. Think a homeowner hiring a plumber to fix a toilet, or someone coming weekly to mow the lawn. The plumber and lawn mower are not the homeowner’s employees.

Clients of independent contractors pay a fee to the contractor as they would for any service. The client is not responsible for taxes, health insurance, or the myriad state and federal labor laws applying to employees. Unless stipulated in the contract, clients are not responsible for reimbursing the contractor’s expenses.

Employees, on the other hand, have much less flexibility. They truly work at the behest of someone else. The employer usually determines the hours of the employee, provides work-related equipment and dictates how the employee performs the job. Employers must comply with all labor laws, may reimburse expenses, pay half the Social Security and Medicare taxes of employees, and because of Obamacare, most must provide medical insurance.

In this type of arrangement both the employer and the employee have much less freedom than they would as a client or an independent contractor.

Uber’s contract

Uber’s contract allows drivers to “accept, reject, and select among the requests received via the service.” The drivers have “no obligation” to accept any request and have no set or required hours. In other words, drivers can work as much or as little as they want. The only parameter Uber sets for the amount of work is that it may suspend its account with a driver who has been inactive for 180 days, though the driver can reapply in person or via email.

For passenger safety and to maintain the loyalty of the users, Uber does set some standards. It requires drivers to maintain their own equipment (cars). Uber also sets standard pricing for drivers so that users know how much their trips will cost. Uber collects payments from the user and then pays the drivers. All of this occurs after the driver voluntarily chooses to use the app to pick up a user.

Uber vs. Berwick

Berwick, who according to The New York Times “has a history of being litigious,” has filed at least 20 lawsuits in the last 25 years, including one in which she sued “an employee of a pizza parlor for $500 in damages for leaving restaurant menus on her gate.” Berwick sued Uber for back wages, the repayment of expenses, and damages for her time as a driver during 2014, claiming she was an employee.

Uber asserts it is simply a platform (mobile app) to allow two parties to arrange transportation — commonly called “ride-booking” or “ride-sharing.” Uber connects drivers with “users” requesting transportation. Since Uber does not control the hours worked by the drivers nor does it provide equipment, it is generally outside the definition of an employer. Uber maintains that drivers are independent contractors and not employees.

Berwick is no stranger to entrepreneurship. In the late 1980s she started a phone sex company called Berwick Enterprises, which she later expanded into money management and apparently ride-sharing. Uber honored a request by Berwick to pay all the money she earned as a driver to that company.

The arrangement between Uber and Berwick Enterprises helps illustrate that Uber’s model is a service for other companies and not an employer of employees.

Looking at it another way, Berwick could have signed up her money management company for advertising in a magazine whose goal was to connect its readers with quality financial advisors. If the magazine had strict quality controls for advertisers and required standard pricing to keep the loyalty of its discerning readers, then Berwick might have claimed to be an employee of the magazine she was advertising in.

When put in this context, though, it is clear that the arrangement would be for advertising for Berwick’s company, and that she would not be an employee of the magazine.

The situation between Berwick and Uber is not much different. It is providing a service that allows drivers, as independent contractors or small business owners, to find clients in need of transportation. The relationship fosters competition and as many regular Uber users may attest, this competition results in high quality service at competitive rates.

For drivers using Uber’s service, it results in more freedom and opportunity.

For now, the California ruling affects only one driver. But if courts uphold and apply it to the company as a whole, Uber’s business model may fundamentally change, losing the flexibility and innovations that have made it great.

(Editor’s note: A version of this article appeared on the Illinois Policy Institute Blog.)

DPS Emergency Manager Could Make Big Changes

Steps in the right direction are possible without changing laws

Almost everyone has a plan for fixing what ails Detroit Public Schools: the governor, a coalition of special interest groups, and several advocacy groups. While each group differs in its approach — the governor's proposal would split the district in two, while the coalition's plan would limit school choice — every plan would require creating a new law specifically for DPS and Detroit-area charter schools.

But significant steps could be taken without any legal change. With a state emergency manager already overseeing DPS, some actions could be taken immediately to reform the district.

Split the district in two to contain debts

To address DPS' sprawling financial collapse, the governor's plan would split the district in two, with the old district paying off the debts of DPS, and the new district tasked with educating students. Emergency managers of both the Highland Park and Muskegon Heights school districts have already taken similar actions to improve district finances.

In Highland Park, the emergency manager's operating plan for the district included turning over educational responsibilities to a charter school, while using existing property tax revenue to pay down accumulated debt.

Muskegon Heights put a similar arrangement in place: Again, the district converted its schools into charter schools, and revenues from the district's 18-mill nonhomestead property tax were dedicated to paying off Muskegon Heights' debt.

Technically, these arrangements are a form of a state bailout: By using the districts' property tax revenue to pay off accumulated debt, less money is available from the state’s School Aid Fund, which funds districts throughout the state. This means that less state funding is available for other school districts and charter schools than would have otherwise been.

Both Muskegon Heights and Highland Park have been able to dramatically reduce their deficits as a result of this arrangement, with Muskegon Heights reducing almost all of its $11.9 million deficit in just two years.

It seems that if Highland Park and Muskegon Heights emergency managers were able to make such changes, DPS could as well. Rather than converting the district wholly into a single charter school district, the emergency manager could convert single schools individually, focusing on converting schools in need of the greatest educational and financial turnaround.

Instead of having a single charter school operator run these schools, the emergency manager could contract with several operators to offer different programs and different management throughout the district. Indeed, the emergency manager could use converting schools as an opportunity to empower some of DPS' best school leaders to head new, independent charter schools.

A side benefit of charter conversion would be to contain burgeoning teacher pension costs. Teachers hired on by new DPS charter schools would not have to participate in the state teacher pension fund, as is the case of most charter school employees. The Michigan Public School Employees Retirement System is dramatically underfunded, meaning that every employee removed from the system helps reduce long-term liabilities for taxpayers.

Nonetheless, converting DPS schools to charter schools would involve some sort of taxpayer bailout. As with Highland Park and Muskegon Heights, less money would be available in the State School Aid Fund. However, it appears that state legislators are already open to this, with $50 million set aside in the school aid budget to help DPS pay off its debts.

Charter conversion offers best safeguard for state taxpayers

A state bailout of some kind for DPS is likely unavoidable. The district has been under emergency management for years, and yet has failed to get its finances in order. For DPS to recover, the district would have to attract back tens of thousands of students — a highly unlikely scenario in the foreseeable future. With DPS’ dramatic decreases in enrollment, there may be no way for the district to pay off debt it accumulated as a larger district.

The harsh reality is that DPS has taken on more than $1.6 billion in general obligation debt, and has run a deficit for the past seven years. In fiscal year 2014, according to the Citizens Research Council, DPS overspent by $172 million. In light of past overspending, any proposal that entails giving an outsize award to DPS should also take care to protect state taxpayers. Converting DPS schools to independent charter schools provides the best safeguard for several reasons.

First, while some conventional districts have run deficits for years (and will continue to for years more), charter schools have a track record of responding quickly. Past experience shows charter schools that fail to deliver academic success or are poorly managed fiscally are eventually closed. Conversion protects state taxpayers from being approached repeatedly for additional bailout money.

Second, DPS has lost more than 100,000 students in the past decade, as families have left the city or have chosen to place their children at a school that best fits their needs. Converting the large district to smaller independent schools is a quick way to reduce administrative and educational infrastructure that are no longer needed.

Finally, charter conversion will allow many independent charter school operators to try varying models for converted DPS schools. Not every one will be successful, but splitting up the district will create a wide variety of schools, run by new operators and former DPS leaders. Creating an independent network of schools will create more opportunities for success than simply placing a large, expensive bet on a single sprawling district.

GOP Group Calls for Eliminating Civil Forfeiture

Mackinac Center scholar spoke on the issue prior to vote

MIRS Capitol Capsule (subscription required) reports on the debate between a Mackinac Center policy analyst and the Oakland County sheriff over the issue of civil asset forfeiture.

The 14th District Republican Executive Committee recently overwhelming voted to support a resolution that would effectively end Michigan's civil asset forfeiture laws. The decision came after hearing testimony from Oakland County Sheriff Michael BOUCHARD, who spoke in favor of the notion of civil asset forfeiture and the Mackinac Center's Jarrett SKORUP, who spoke against the idea.

"This is a serious issue for the citizens of Michigan and our deliberations treated the topic as such," said Janine KATEFF, chair of the 14th District Republicans.

She said what grabbed her members was the notion that "you are innocent until proven guilty in court" but a person is treated "guilty" when police confiscate a person's property.

The Mackinac Center believes property should only be transferred over to the state after a person has been convicted of a crime. Skorup has an upcoming study about the problems and solutions for Michigan.

It is Fine to Get Detroit Out of the School Pension System

Other districts already pay for Detroit's liabilities

Detroit Public Schools has been in financial trouble for a long time, and ensuring that DPS can pay its bills is likely to require further state funding. As plans for fixing DPS are debated, school officials throughout Michigan have begun to worry that their state funding will be reduced when a bailout for DPS is finalized.

What these officials don’t realize is that their districts are already paying to catch up on Detroit’s pension liabilities. Every school district is a cost-sharing member of the Michigan Public School Employee Retirement System, which is drastically underfunded. MPSERS costs are not calculated by determining each district’s individual share of retirement costs and accumulated liabilities, but for all districts as a whole. The total costs are then converted to a single percentage of payroll and assessed on districts statewide.

Unfortunately, the assessments have been insufficient to cover the benefits earned by employees. Currently, MPSERS requires $26.5 billion more than it has in the pension fund to cover these benefits.

The result of this underfunding is that Detroit has already off-loaded the bulk of its pension cost onto other districts. DPS employees earned more retirement benefits when the district was three times larger than it is today. According to MPSERS’ annual report, close to 25,000 DPS employees paid into MPSERS in 2004, compared to just 9,118 in 2013. 

Now, as a smaller district, DPS is paying less to catch up on those underfunded benefits. In other words, DPS added to the state’s pension liabilities when it was large and is not paying as much for them now that it is smaller.

Indeed, DPS is behind even on the smaller amounts it is assessed now. The district owes more than $80 million to MPSERS, because DPS has failed to make mandated payments in the past.

None of this would be a problem if retirement benefits were paid as they were earned, (as required by the state constitution). But you can’t turn back the clock and do it over again.

Of total current MPSERS contributions, 83 percent go to pay for underfunding of the pension system and to catch up on retiree health care obligations. It is unknown just how much of that the $26.5 billion MPSERS shortfall is caused by Detroit. The retirement system is not set up to answer that question. But it is likely that Detroit’s past employees played a significant role.

MPSERS contributions are tremendously burdensome for school districts and school employees. In 2014, school districts paid $2.4 billion in retirement contributions. That’s roughly 17 percent of the entire school aid budget.

These are mandated costs and providing relief from them can help Detroit pay its other bills. Doing so may increase contribution rates in the rest of the system by another point or so. But those rates are already increasing. The state added another billion in unfunded liabilities this year alone. Rather than worry about Detroit, the best thing school officials can do for their districts’ future is to advocate for responsible and comprehensive MPSERS reform.

The state school pension system is broken. It is not an invalid choice to release a district in an emergency like Detroit’s from MPSERS and the it increasing burdens. More than half decade of state management of DPS is an argument for absolving it from the state-mandated retirement system.

In addition to saving Detroit from having to pay 33 percent of its payroll to MPSERS like other districts, removing DPS from the pension system would mean its new employees we be offered benefits that are paid as they are earned instead of deferring obligations to the future. In other words, retirement benefits will no longer become long-term liabilities.

Detroit may lose out on special payments the state is making to assist schools with their pension contributions, but those payments do not cover the full contribution cost anyway.

There much for legislators to consider in finding a solution for Detroit — getting rid of geographically assigned schools and possibly converting the district to a charter district, to cite two possibilities — and their impact on short-term retirement contribution rates should sidetrack such discussions.

The Real-World Costs of Union Release Time

Proposed law would require public workers to work for the public

The Michigan Senate is considering a bill that would prevent taxpayer-funded union “release time” in most settings. There is a real-world cost to this practice, which allows union stewards to spend time working for a private entity when they are supposed to be working for the public.

Senate Bill 280, introduced by Sen. Marty Knollenberg, R-Troy, would prevent collective bargaining agreements from offering paid release time used by teachers or other school district employees to conduct union business. While still allowing employees to spend time working on union negotiations, this would be paid for by the union rather than taxpayers. This would relieve taxpayers from footing the bill for employees who perform no educational services.

In 2011, documents obtained by Michigan Capitol Confidential showed that taxpayers were spending millions of dollars on these special arrangements. Thirty-nine districts had employees who were released from their normal job to spend at least half their time working for the union at a cost of at least $2.7 million.

We are currently updating that analysis. Early results show that dozens of districts are still offering full or partial release time at a large cost to taxpayers.

For example, the union president in Livonia Public Schools earns a full salary and benefits at a cost of nearly $98,000. But Joanmary Nenninger is not teaching in a classroom – she spends her time working on union business at taxpayer cost.

Taxpayers are paying double for these types of arrangements — once for the union workers and again for a substitute or another school employee to take their place in the classroom. That’s a bad deal for our public education system.

Debate on Money in Politics Featured in Media

Michigan press features arguments in advance of Thursday's debate

On Thursday, June 25th, the Mackinac Center will hold the Arthur N. Rupe Foundation Debate on the topic of Money in Politics. The debate will address the competing claims of disclosure and privacy/free speech in politics today. Registration for the event guarantees refreshments and seating, and closes on June 22.

Several media outlets have covered the question in advance of Thursday's debate. On June 22, MLive published an overview of the event and the Lansing State Journal published editorials from Bradley Smith and Rich Robinson.

Both debaters joined Kyle Melinn, who will moderate the debate, on Michigan's Big Show June 22, to preview their arguments.

On June 24, Rich Robinson and Bradley Smith discussed the debate and their opinions on it with Frank Beckmann. The segment is available here.

The Fight for Free Speech

Think tanks juggle privacy and advocacy

Things aren’t looking good for individual privacy – at least for those who wish to participate in public policy debates. Despite the First Amendment’s strong defense of free expression, speech is increasingly regulated – especially political and policy dialogue.  For an increasing number of nonprofit organizations, disclosing contributors’ identities is the price paid to be allowed to advocate in the public square. Some fight back against these regulations, arguing in the name of free speech and individual privacy that promoting public policy should not be regulated in the same way as funding a political candidate. A timely example is playing out in the courts right now.

In the fall of 2014, the Independence Institute, a free-market think tank, sued the Federal Elections Commission (FEC). The institute wanted to run a radio ad in support of a bill establishing new federal sentencing guidelines. The ad would have urged listeners to contact their legislators, and would have given the names of two senators supporting the bill. The Independence Institute is a 501(c)(3) research and education entity, meaning that it can publicly advocate for the policies it favors. However, since it is not a political organization, the institute cannot campaign in order to support or oppose politicians. But because one of the legislators named in the ad was running for reelection, the institute feared that airing the ad would subject it to FEC enforcement for having made an “electioneering communication,” and that it would be forced to disclose the names and addresses of its donors.

Under the Bipartisan Campaign Reform Act (better known as McCain-Feingold), an “electioneering communication” is any communication which refers to a candidate for federal office, which is made within 60 days of the election in which that candidate will run, and which is targeted at the “relevant electorate.” Any entity that spends at least $10,000 per year on electioneering communications is required to disclose the names and addresses of contributors who made aggregated donations of $1,000 or more.

Rather than broadcast the ad, the Independence Institute sued the FEC in federal court, arguing that the definition of electioneering communication is too broad and that regulation of such communication ‘chills’ policy discussion by burdening speakers for merely mentioning candidates. It attempted to distinguish between “issue advocacy” (arguing for a bill or policy) and “express advocacy” (campaigning for a politician) – but the court didn’t buy the distinction, citing Supreme Court precedent explicitly rejecting attempts to limit disclosure requirements to express advocacy.

The Independence Institute appealed the case this spring (and the appellate court denied motions for summary judgment which means the institute will at least have the opportunity to be heard), but, as the district court pointed out, no other appellate court has ever held contrary to the Supreme Court that the government may not impose disclosure requirements on speech, or that those requirements may not constitutionally apply to issue advocacy. The institute has an uphill battle.

However, privacy advocates have had a few minor victories (most recently in Delaware and Indiana), but those decisions are narrower in scope than some of the broad disclosure-mandating decisions handed down elsewhere in the last year. For instance, the DC Circuit ruled in November that organizations making electioneering communications must disclose all donors over a certain giving level – regardless of whether or not those donors knew about the communication or intended to fund it.

In California, the Ninth Circuit just upheld a requirement that every nonprofit that solicits charitable contributions must register and reveal the names and contributions of all donors who give more than $5,000 annually. Florida, Hawaii, Kentucky, New York, and Mississippi also demand donor lists from nonprofit organizations seeking to operate in those states. Meanwhile, think tanks in Connecticut and Montana are, like the Independence Institute, struggling against regulations that classify issue advocacy as political activity requiring donor disclosure.

Residents of the Wolverine State may be relieved to know that their donor privacy freedoms remain largely intact. Michigan modified its laws in 2013 to call for identifying information on political ads, ‘robocalls’ and mail, but it still falls well short of requiring full disclosure. In fact, Governor Snyder authored an opinion piece shortly after implementing those reforms, pledging to protect Michiganders’ speech rights. “There’s a movement afoot to require organizations to issue new disclosures – to name names of those who donated money for issue advocacy,” he wrote. “[D]isclosing donors’ names results in the use of scare tactics that are designed to suppress speech and participation in the political process. That … cannot be tolerated.” Perhaps eventually the judiciary will agree. 

June 19, 2015 MichiganVotes Weekly Roll Call

Green light to Uber; red light to film subsidies; mobile beer bars and more

House Bill 4122, Repeal state film producer subsidies: Passed 24 to 13 in the Senate

To repeal the program that gives Michigan tax dollars to film producers. Since 2008 some $500 million has been distributed to producers. This week's votes send the bill to the Governor for approval or veto.

Who Voted “Yes” and Who Voted “No”

House Bill 4325, Establish overspending public school “early warning system”: Passed 25 to 12 in the Senate

To require school districts to submit their annual budget projections and assumptions to the state each July, and establish a process of review and concurrence involving intermediate school districts. Non-concurrence would trigger reporting and oversight requirements. Related bills would require funding be withheld from districts that fail to reduce their overspending.

Who Voted “Yes” and Who Voted “No”

House Bill 4328, Authorize withholding state money from overspending school districts: Passed 25 to 12 in the Senate

To give the Department of Treasury the authority to withhold state school aid payments from an overspending school district that fails to submit an acceptable “deficit elimination plan,” or that then falls more deeply into financial trouble.

Who Voted “Yes” and Who Voted “No”

House Bill 4329, Authorize emergency manager for chronically overspending school district: Passed 25 to 12 in the Senate

To authorize appointment of an Emergency Manager for an overspending public school district that fails to comply with the deficit reduction plans and procedures required by House Bill 4325 and related bills.

Who Voted “Yes” and Who Voted “No”

House Bill 4273, Eliminate February election date: Passed 30 to 7 in the Senate

To eliminate the February election date authorized by a 2003 election consolidation law which required all regular elections in the state to be held on either the last Tuesday in February, or the Tuesday after the first Monday in either May, August, or November.

Who Voted “Yes” and Who Voted “No”

Senate Bill 328, Authorize more State Police officer grades: Passed 35 to 0 in the Senate

To create two new grades of State Police officer, called "inspector" and "recruit." The current grades are colonel, lieutenant colonel, major, captain, lieutenant, sergeant and trooper.

Who Voted “Yes” and Who Voted “No”

Senate Bill 165, Authorize pedal-powered beer bars: Passed 96 to 13 in the House

To establish in statute that a “commercial quadricycle,” which is a pedal-powered mobile beer bar, is not considered a “motor vehicle” even if it has auxiliary power, and instead would be subject to much less onerous regulations. Under this and Senate Bill 166 passengers would be allowed to have open beer or wine containers, but the driver would be required to have a blood alcohol level of zero.

Who Voted “Yes” and Who Voted “No”

House Bill 4640, Regulate Uber, Lyft, etc. - insurance provision: Passed 70 to 40 in the House

To establish that passengers using services like Uber and Lyft would be covered by the same type of insurance as passengers in taxicabs. This means the unlimited personal injury protection (PIP) coverage required by the state no-fault insurance law would be provided by the passenger's own auto insurance, and by the driver's policy only if the passenger had none.

Who Voted “Yes” and Who Voted “No”

House Bill 4637, Regulate Uber, Lyft, etc.; preempt local bans: Passed 71 to 39 in the House

To establish a regulatory framework that would enable “transportation network companies” like Uber and Lyft to operate in this state, including a preemption on local government regulations or bans. The companies would have to get a state permit and carry liability insurance. The bill requires background checks on drivers and annual vehicle inspections.

Who Voted “Yes” and Who Voted “No”

SOURCE:, a free, non-partisan website created by the Mackinac Center for Public Policy, providing concise, non-partisan, plain-English descriptions of every bill and vote in the Michigan House and Senate. Please visit

A Look Back at Michigan's Battery Subsidies

Mackinac Center policy analysts discuss A123 took a look back at the hundreds of millions of dollars approved for the battery maker, A123 Systems. The Mackinac Center and Michigan Capitol Confidential covered the deals between the state and company for years, before the entity went bankrupt.

Policy Analyst Jarrett Skorup was quoted in the story:

“The general lesson for policy makers is that they make very poor venture capitalists because they’re not spending their own money,” said Skorup. “They’re spending other people’s money and those politicians weren’t putting their own stock portfolios into A123 Systems. They were putting taxpayer money into them.

“And the lesson for taxpayers should be, when politicians are making these claims about job projections they should be extremely skeptical. In Michigan, almost none of those — we’ve done multiple studies, other news organizations have done multiple studies — reach the actual projections that they promise.”

A123 has been bought out by another group and is set to turn a profit in 2015 - without new state support.

In a separate article, assistant director of fiscal policy James Hohman was quoted on A123 developments and the company's connection to Fisker, another company that received government subsidies and later declared bankruptcy.

MEDC vs. Road Spending Poll Featured in Daily Caller

Two-thirds of voters support turning subsidy money over to roads

The Mackinac Center recently released the results of a poll conducted by Mitchell Research & Communications, Inc. showing two-thirds of respondents preferred putting money currently spent on corporate subsidies through MEDC toward roads.

The poll was featured in a June 17 article at the Daily Caller, which also referenced an earlier poll commissioned by the Mackinac Center indicating strong voter support for the end of the state's film subsidy program in favor of road funding.