How the 'Uber effect' is changing work

The Uber app on a mobile phone
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Living like a royal has never been easier.

On-demand service start-ups like Uber and Handy enable consumer access to everything from a chauffeur to a home cleaning service—services once mainly for the well-off—with just a tap on your smartphone or the click of a mouse.

But on-demand apps aren't just changing the way consumers buy products and services, they are also fundamentally changing work. And while consumers are obvious winners in this new economy, the story for workers is more complex.

The on-demand workforce

Venture capital funding has grown more than ten-fold in the on-demand space over the last five years, spurring a wide range of new services.

Some examples: Start-up Zeel provides in-home massages on demand; Glamsquad brings professional hairdressers and make-up artists to users on demand; WunWun is a personal courier service available to New York City and San Francisco residents; and Instacart, a grocery delivery service promises orders in under an hour.

It's even begun to cross over into white-collar professions including those in the medical and legal space: HealthTap app gives people instant access to medical advice from a doctor, and Avvo enables legal expertise on-demand.

Yet, while the rise of these on-demand platforms has given independent contractors new opportunities, there are still growing pains.

Because the platforms force everyone to compete in the open market, it pushes things to the lowest common denominator, and that doesn't always benefit the worker, said Rita McGrath, a professor of management at the Columbia Business School.

"The consequences for the workers themselves are quite mixed. If you have a rare, valuable, easy to describe skill, then you can do very well in this economy. But if you are an average person, the advantages of it are not that clear relative to having a regular job," McGrath said.

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Companies that provide platforms for the on-demand economy make money by taking a transaction fee from every job a freelancer gets on their platform. And because the workers utilizing their platforms are considered contractors, they are not required to provide certain benefits, like health care.

While this business model has proved very profitable for companies in the space, it's simply not sustainable in its current state, said Court Cunningham, CEO and founder of Yodle, which provides online marketing services for small businesses.

"It's not clear under the current economics if this is a good deal for the independent owner—and I think it's probably not, which means the economics are going to have to change," he said. "And that means these businesses are not as profitable as they think they are, because they are going to get squeezed out on the share that they can take."

Most recently, Uber and Lyft have come under fire by workers for blurring the line between contractor and employee.

The companies are being sued by workers that allege they are being wrongly classified as independent contractors so that the companies don't have to reimburse them for expenses like gas and insurance.

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McGrath said that as the landscape of employment evolves, society may need to make a decision about how it classifies employment, because it's not as black and white as it once was.

"I don't think our legal system has quite caught up with reality yet," McGrath said.

"If you look at the way all of our human capital systems are designed. Education, health insurance to retirement insurance, either you are employed or you are not. And there's this grey area in between which is what a lot of people are finding themselves in," she said.

Yet, despite the growing pains in the space, these on-demand platforms are offering freelancers many benefits. And technology is playing a big role in the growth of this employment shift.

The upside of on-demand employment

About 53 million, or 34 percent, of American workers are now freelancers, and technology is one of the key forces helping the majority of them find work, according to a recent survey released by the Freelancers Union and Elance-oDesk, a freelance platform.

"What we are seeing is this macrotrend of people really embracing the freelancing lifestyle, and now we have the technology in place to bolster it and provide a viable means of employment," said Jamie Viggiano, vice president of marketing at TaskRabbit.

Another factor enabling the shift: The ubiquity of mobile devices. Because most people now have a smartphone in their pocket, it's possible to locate and distribute jobs much more effectively in real time, said Oisin Hanrahan, the CEO of Handy.

Mobile technology has also empowered workers to have more flexibility and freedom, Viggiano said.

"Workers want to choose their own hours, they want to choose their own rate, they want to choose where and when they work. It's all these platforms, like TaskRabbit, that provide that opportunity via the app," Viggiano said.

But it's not just these on-demand platforms leveraging freelance workers. Corporations are also increasingly growing dependent on contractors for business.

Signs of a bigger shift

More than half of human resource and business leaders say their need for "contingent" workers will keep growing over the next three to five years, according to Deloitte's Global Human Capital Trends report for 2015.

A big reason for this is because freelance workers give companies more flexibility, said Benjamin Dollar, a principal at Deloitte.

"Far more companies are using more contingent workers than they used to before," Dollar said. "It enables them to respond to upturns and downturns more quickly, so they have more flexibility and more versatility to respond more rapidly to changing market conditions. This is a huge change."

But the model for this kind of employment is still evolving, and it's possible that more independent contractors will demand benefits much like Uber workers are currently doing. And there's a strong case to be made why companies should meet some of those demands, Dollar said.

"We may very well see more companies offering what looks like traditional programs for balance sheet employees to contractors," Dollar said. "That is certainly possible because companies who want to attract the best talent and attract the best contract labor are going to need to be able to offer those people things that make them want to go there."