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Making drivers into employees, not contractors, could hurt Uber's business

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This might be the most expensive $4,000 the company will ever spend

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The California Labor Commission ruled today that an Uber driver should be given the status of employee, not contractor, and ordered the company to pay her $4,152.20 in business expenses for time she worked as an Uber driver in 2014. If this ruling is repeated in upcoming court cases, it could mean Uber would need to provide its drivers with benefits like health insurance and overtime pay. The company could also be on the hook for payroll tax, unemployment insurance, workers’ compensation, and state taxes.

All that would drastically reduce the profitability of the fast-growing startup's current business model, which has powered it to a $40 billion valuation and massive global reach. "With a business model based on offering affordable fares, these companies may not be able to survive a ruling against them in this area," argued Jennifer Robles of Owen Dunn Insurance. "Without contractor status, it’s likely these companies could not continue at a profit, leaving traditional taxi drivers decidedly happier and thousands of Lyft and Uber drivers out of work."

Uber v. Berwick by Jordan Crook

The decision could add 30 percent to Uber's labor costs

According the National Employment Law Project (NELP), a workers’ rights group, the change from contractor to employee could amount to an extra 30 percent in labor costs. "Uber has had many bumps along its road, but this one is a genuine roadblock," said Forrester analyst James McQuivey. "The entire model depends on fluid labor -- some will say exploiting labor, others will say liberating it. In the end, it only matters what the regulators say, and they have spoken, at least for now."

There are three critical factors the Internal Revenue Service (IRS) considers to decide if someone is an employee or an independent contractor: "behavioral control, financial control, and relationship." Uber has always maintained that it is a tech platform and marketplace connecting drivers and riders, not a traditional employer. But the fact that Uber controls both the fares and the driver's cut, as well as Uber's ability to decide what cars can be used and when to fire poorly rated drivers, convinced the commission that Uber drivers were employees under its behavioral and financial control.

"Uber exerts a lot of control over how its drivers behave."

"Uber manages to exert a lot of control over how its drivers behave," says Alex Rosenblat, a researcher at Data and Society who has been studying the company and its relationship to its drivers. "They can deactivate you for having a bad rating. They also make it possible for customers to reach drivers if they leave something behind after a ride. A driver will want to return that iPhone and keep their rating up, but has no way of being paid by Uber for that time."

The battle is far from over. "Uber should and will appeal, but it may also be time for Uber to start showing some love to drivers, many of whom are watching their profits shrink as Uber grows and continues to position itself to be an investor darling," argues McQuivey. "Regulators may or may not listen to reason, but they certainly listen to the cries of drivers and those who want their tax revenue."

In a statement, Uber said that the same California commission had ruled in its favor two year earlier and that today's ruling was non-binding.It also pointed out that the commission's ruling was confined to the single driver who filed suit. But today's ruling followed earlier legal losses for Uber and its rival Lyft from this past March, when two judges in San Francisco decided that juries would have to decide the status of the services drivers in larger class action lawsuits. The decision of the Labor Commission, which Uber is appealing, won't have any bearing on its upcoming court case. But it shows that drivers are finding ways to make a convincing case their status with Uber should be fundamentally reevaluated, and regulated.

Given these uncertainties, it's easy to understand why Uber is investing so heavily in the development of its own driverless car technology. "These guys will fight and avoid until they hit their end goal, which is the driverless car," says Chris Dolan, a lawyer who sued Uber over a fatal accident involving one of its drivers. "The game is delay, make as much money as you can, then get rid of the problem."


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