Labor Dispute Threatens Uber’s Profit Margins

Uber in Danger of SkyrocketingUber and Lyft are two of Silicon Valley’s hottest startups, but a recent legal decision may upend their entire business model. The California Labor Commission issued a ruling that rideshare drivers are employees, not contractors. The decision could have far-reaching implications, not just for Uber and Lyft, but also the herd of startups seeking to emulate their success.

The plaintiff in the case, Barbara Berwick, argued that Uber should compensate her for business expenses, such as gas, insurance, maintenance, and detailing. As a contractor, Berwick and other drivers are not entitled to the same protections and benefits of standard employees. She won the case, but the decision is non-binding. Uber was ordered to pay her $4,152.20. (Source: Forbes, June 17, 2015.)

Uber defended their hiring structure by arguing they are simply a technology platform that connects drivers and passengers. Flexibility and independence is precisely why drivers choose to partner with Uber.

A Battle Lost

While Uber and Lyft tout drivers’ ability to choose their hours, the companies still retain the power to terminate a driver from their app. Critics allege that this level of control, in addition to the practices of vetting drivers and using performance evaluations, is substantial enough to classify drivers as employees.

The California case is not the first labor dispute for Uber. In May, a Florida-based driver successfully filed for unemployment insurance on the basis of having worked for Uber. If the trend continues, Uber’s labor expenses could rise significantly, hurting its profit margin. As an example, when MyClean, a home-cleaning service, switched from the contractor model to the employee model, its labor costs rose by 40%. (Source: Business Insider, June 17, 2015.)

The War Continues

On Tuesday, Uber filed an appeal with a state court in San Francisco. In a statement, the company fought back against the decision:

“The California Labor Commission’s ruling is non-binding and applies to a single driver. Indeed it is contrary to a previous ruling by the same commission, which concluded in 2012 that the driver ‘performed services as an independent contractor, and not as a bona fide employee.’ Five other states have also come to the same conclusion.”(Source: Forbes, June 17, 2015.)

So while the decision is certainly a win for Berwick, the legal fight for contractors is far from over.