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The tricky balance between legality and innovation in the sharing economy

Dec 26, 2012 2:06 am

Skift Take

As disruptive companies in the sharing economy take hold, local laws in some cases will change to accommodate them. That is beginning to happen.

— Dennis Schaal

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Phillip Zakhour is a pioneer of the so-called “sharing economy.” He makes his living by renting out the in-law unit of his San Francisco house on Airbnb, performing errands and odd jobs as a TaskRabbit and ferrying people across the city as a driver for Sidecar.

“I do this now because it pays,” said the 49-year-old a former software engineer, who says he can earn about $4,000 a month before taxes if he works really hard. “I’m a single dad with two kids and a mortgage. I’m not saving any money, but I’m surviving.”

But the Web- and app-based startups that have kept Zakhour afloat now face a thicket of regulatory, tax and labor issues in many of the cities where they operate. And that may threaten the livelihood of micro-entrepreneurs like Zakhour and the new wave of companies that pay them.

While the new companies say they are creating jobs by disrupting legacy industries that have fallen behind the technological curve, established industries — from hotels to taxi cabs — complain the newcomers are taking unfair competitive advantage and in some cases endangering the public by sidestepping safety, tax and labor rules.

Government agencies, meanwhile, are under mounting pressure both to enforce existing rules and regulations and to update them for new business models that didn’t exist five years ago.

“The sharing economy often straddles the line between pure sharing and commerce,” said Oakland attorney Janelle Orsi, cofounder of the Sustainable Economies Law Center. “Our laws should also make reasonable space for ‘nano-enterprise’ — all the small things people do to supplement their incomes. Why not allow people to make money giving rides to others?”

But Athan Rebelos, general manager of DeSoto Cab in San Francisco, says competitors like Lyft and Sidecar are not playing by the rules.

“These companies are coming in and competing with me and they are unregulated, and that is not fair,” he said. “They say they are not taxis, that it’s ride-sharing. But if you ask the general public, they perceive them as cab companies. If you take out the smartphone app part of the discussion, everything else is a taxi. They are just using different technology to book the vehicle.”

State regulators with the California Public Utilities Commission last month came down on the side of traditional cab companies, slapping startups Lyft, SideCar and Uber each with a $20,000 fine after accusing them of operating as passenger carriers without evidence of commercial insurance to cover injuries, property damage and workers’ compensation claims.

Tension between the new companies and regulatory authorities is not confined to San Francisco, even though many of the startups are based there. New York City is cracking down on Airbnb hosts, arguing short-term rentals violate state laws against renting out rooms or apartments for less than 30 days. And Washington, D. C.’s City Council last week hammered out a framework for accommodating car services like Uber.

The new companies say regulators don’t understand the pace of innovation or the contribution they make toward easing congestion and environmental degradation. Nearly 6,500 people signed a petition on behalf of Lyft and SideCar, urging the CPUC to protect ride-sharing.

“Every politician that we’ve talked to has been supportive of what we’re doing,” said Sunil Paul, CEO of San Francisco-based SideCar. “Transportation is generally a mess. It’s difficult to get around the Bay Area, and we’re out of room to expand travel by the automobile. Our overall view is that this is a new medium, and we need new rules to manage it. The regulators’ agenda should be the public interest.”

But Frank Lindh, the CPUC’s general counsel, isn’t easily swayed by the arguments about disruptive technology.

“These companies are for-profit companies, and they are putting people’s butts into seats,” he said in an interview with this newspaper. “Moving human beings for compensation is not new. My biggest concern is if there’s an accident, and a pedestrian or passenger is seriously injured. It’s literally an accident waiting to happen. You cannot conduct this kind of activity without proper licensing or insurance.”

The CPUC recently announced plans to open a new proceeding to hash out a compromise that would accommodate the new startups and the unique challenges they present in terms of oversight.

“We are not trying to put them out of business — there’s a lot of good things about them, including good social policy goals,” Lindh said. “This rule-making will help us explore the nuances. But in our view, fundamentals of public safety are not negotiable. We can’t just let private companies regulate themselves.”

SideCar, which launched in San Francisco in June, uses a smartphone app to match drivers with people who need rides. The company claims to be like the popular casual carpools that ferry commuters from the East Bay into San Francisco every weekend morning, just larger and more efficient. There’s no central dispatch service, and SideCar stresses that riders pay drivers a suggested “donation” instead of a fare.

The service has become crucial to the livelihood of people like Zakhour.

On a recent Friday night in San Francisco, Zakhour’s blue Toyota Prius was in high demand amid a steady drizzle. Many of his passengers were young people who work in the tech industry, and many had discovered SideCar through a friend who urged them to download the app.

“If I see a cab on the street I’ll flag it, but if I need to call a cab I’ll use SideCar,” said a passenger named Kathleen, who only gave her first name. “It’s just way more reliable. SideCar shows up. If you call a taxi, you either wait for 40 minutes or they don’t show up at all. It’s a really good system, and you don’t have to pay with cash. You can just use your phone.”

Zakhour complained that regulatory agencies were “set up for an old model, and they are not keeping up with what technology enables people to do.” As for what taxes he will pay for the money he earns from SideCar, he said he’s still trying to figure that out with an accountant.

SideCar CEO Paul claims drivers for his startup “are not actually contractors” but “volunteers.”

It’s not likely, however, that regulatory agencies and the IRS will agree with that definition.

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