With all of Uber's turmoil -- need for a new CEO, public string of terrible decisions and events, and waning patience of regulators -- in a way this may be the worst to date. A U.K. employment tribunal affirmed today that the company's drivers are definitely employees and not independent contractors.

The ruling doesn't apply beyond the U.K. and Uber reportedly has said that it will appeal. But, make no mistake, this is the sign of a deep and wide fissure in the structure of company's foundation. If Uber can't maintain drivers' independent contractor status, the basic argument for its existence, and its funding, could quickly erode.

The company's business model is complicated. Uber has control over pricing and retains the relationship with customers, as you would expect with an employer. Drivers work only when they want, as would be true for independent contractors, and they bear costs of vehicles, maintenance, fuel, and insurance with contractor status.

People who would drive for Uber are attracted by the vision of part-time work that provides the opportunity to earn what seem to be goodly sums that, in practice after expenses, are significantly lower.

Studies have suggested that, depending on the location, Uber drivers generally make in the $15 to $18 an hour range before expenses that can run 20 percent to 30 percent. (Some locations, like New York City, can be far more remunerative.)

Uber also saves in other ways that could be significant. In the U.S., here are some of the additional expenses that would come with many employees:

  • Federal unemployment and half of Social Security taxes (7.65 percent total) on earnings
  • State unemployment taxes
  • Worker compensation taxes
  • Obligation to offer full-time (more than 30 hours a week) employees healthcare insurance
  • Systems to deduct and pay federal and state income taxes
  • Other employment regulatory compliance costs
  • Operational complexities, like arranging sufficient driver coverage for an area
  • The requirement to pay drivers by the hour rather than leave it to chance and rider demand
  • The cost of vehicle fleets or need arrangements to reimburse drivers for use of their own cars

The shift in operating dynamics would be massive and, likely, expensive. The company already loses something like $2 billion a year. Uber would have to pass additional costs on to customers, which could make its services less competitive.

Furthermore, Uber gets the investment dollars and attention it does in part because it's a "software" company and not a "taxi" business. Change the designation and suddenly those shares might not be seen as worth so much. A similar argument is the reason why the likes of Facebook and Google insist that they are technology companies and not publishers.

The ruling in the U.K. is not final in the face of an appeal and, again, doesn't extend to other countries like the U.S. However, with the number of lawsuits alleging employee status, similar rulings potentially could appear in other countries. That would be terrible news for a company trying to regain its footing after so many crises and scandals.

Published on: Nov 10, 2017