The Changing Legal Landscape of the Sharing Economy

From Uber to Airbnb, businesses that provide web-based platforms enabling peer-to-peer exchanges are leaders in a growing sector known as the “sharing economy.” These companies are cutting into markets traditionally dominated by large corporations through technology that’s created a digital marketplace. Now at the fingertips of millions on smartphones, tablets, laptops and even smart watches, this digital marketplace lets companies act as intermediaries between individuals looking to exchange goods and services, often at prices far below those found through conventional avenues. 

Yet while such platforms are drawing millions of users, they’re also attracting an avalanche of legal troubles. What does this mean for the future of the sharing economy? And what guidelines are there for companies looking to follow in the footstep of these digital marketplace giants? 

The Cross Section of Market Demand and Lawfulness

What makes the sharing economy so interesting is that it’s platforms fulfil previously unmet market needs in highly regulated industries. The regulations were set in place before these technologies existed. The legislators had no way of predicting the arrival of the sharing economy. This has left companies like Uber and AirBnB functioning at the cross section of market demand and lawfulness. The opportunity is clear, and so are the risks. Just read the headlines and you’ll find plenty of news about public scandals, legal battles and plenty of unwanted attention from regulatory bodies. These new platforms are forcing laws to be called into question, and driving the public, legislators and regulatory bodies to reinterpret the rules. 

A lawsuit by an Uber driver led to California’s Labor Commission ruling that an Uber driver is not an independent contractor, but actually an employee. If passed as law, this would mean a barrage of taxes, liabilities, and benefit requirements, a change that would threaten Uber’s $50 billion valuation. Closer to home, the Albertan government recently declared that Uber’s current insurance policies fail to meet the requirements of the province’s Insurance Act. As a result, the Alberta government instituted a working group to develop regulations for ride-for-hire companies operating in the province. 

Airbnb hasn’t been faring much better. The company was recently fined €30,000 in Barcelona for breaching local tourism laws and is facing similar issues in some large U.S. cities. The constant battles and fines are taking a toll on the innovators, whose costs are adding up while valuations drop. The teams behind these platforms are realizing that the models they set out to pioneer might be too ripe for their time. With threats from all sides, can the sharing economy survive? 

In order to use the services, Uber and Airbnb users must accept each company’s terms of service, which expressly deny the company’s involvement in the transactions that their platforms were conceived to enable. While those terms of service are an important factor in each enterprise’s initiatives to cover their legal bases, recent rulings (such as the Californian decision that Uber drivers are employees) signal that there are ways for these companies to be pulled into the fold of liability. Innovators such as these could be held liable for mishaps and misfortunes that accompany exchanges concluded through their platforms. Protecting users while simultaneously safeguarding the company’s interests won’t be easy. 

Emerging Opportunity in a Sea of Deeply Entrenched Rules

The hotel and cab industries are interesting cases in point. The high degree of regulation in these sectors that poses a threat to new peer-to-peer sharing models is no surprise due to the potential liabilities involved. What happens if an Uber driver hits a pedestrian, or if the neighbour of an Airbnb hosts has to endure a revolving door of guests next door? 

In legal terms, these factors are known as “externalities” and traditionally, the taxi and hotel industries internalized these externalities, hoping to keep service providers on a tight leash through self-regulation rather than waiting for legislation to impose tougher rules from the outside. However, since these new companies operate outside the normal regulatory sphere, their activities bring the potential for a whole host of externalities that current liability and insurance regimes are ill-equipped to deal with. 

An entrepreneur who launches a new platform on the edge of the current regulatory sphere needs to consider the potential liabilities involved. When capitalizing on an opportunity with a business that functions at the edge of the law, the risks should be weighed against the benefits and forethought should be put into what industry resistance, backlash and legal threats could arise. Since the path may very well be wrought with challenges, a crisis plan should be in place… or rather, a number of crisis plans, since these types of opportunities offer a criss cross of growing opportunity and legal challenges. 

Planning for Crisis

Preparing for these legal challenges should be an integral part of the company’s strategic planning. Companies that will survive the turbulence will anticipate the various obstacles that will come up long in advance, putting a plan in place to respond intelligently and within the legal framework of their host territory. You can be sure innovators like Uber have an expert legal team working to protect the company’s interests and defending it against threats from all sides; industry regulators, legislators and even the public in some places. 

For companies like Uber and Airbnb, the real battle probably won’t be confined to the courtroom, but rather fought in the corridors of city hall. The greatest challenge disruptive companies face is from regulators who aim to protect both the public and traditional industries, and secure new forms of tax revenue. While a great legal team is vital, so is a skilled public relations department that can work alongside regulators to protect the public and inform and educate decision makers. Pro-actively cooperating with regulators might be the best strategy to protect a disruptive company’s interests and keep legal battles to a minimum. As the old saying goes, the best defence is a good offense.

About the Author:

Sam Michaels

Samuel Michaels is the founder of Canada Legal Help. He writes on topics including access to justice, legal service provision, and legal system innovation. Samuel is a J.D. graduate from Osgoode Hall Law School.