If you’re at all familiar with Uber, then you’re probably at least somewhat familiar with its business model. Well, if the plaintiffs in an ongoing lawsuit have their way, that business model may need to be radically revised in the coming years. A San Francisco judge recently granted class action status to Uber drivers who are suing the company in an attempt to settle the question of whether they are employees or independent contractors. The final answer to that question may result in a dramatic increase in the price of the services offered by the company.
For many people with an interest in such things, the new class action status of this lawsuit presents a number of causes for concern. Uber, after all, has been quietly leading something of a revolution in the way certain types of services are offered to consumers. Its revolutionary way of providing taxi services in those markets where it operates turned out to be just the tip of the iceberg in this new world of on-demand, technology-based services. Today, people in metropolitan areas can order a wide range of services such as pizza, automobile repair, and housecleaning services, just by logging into apps on their smartphones.
Those businesses too may be directly impacted by the results of the suit against Uber.
How Uber Got to This Point
From the moment that Uber began operation, it has drawn the ire of monopolistic taxi companies because of the challenge it presents to the way they have always done business. The company began offering an affordable alternative to those traditional taxi services by using independent drivers to ferry customers from one location to another. To better control costs and provide drivers with more freedom, anyone who drives for Uber is classified as an independent contractor.
Independent contractor status has become the subject of quite a bit of debate over the last half-decade, partly due to concerns for workers, but primarily due to government’s desire to ensure that tax collections are as uniform as possible throughout every segment of the economy. These independent workers are not considered actual employees for tax purposes, and receive no standard W-2 forms for tax filings. They also are not entitled to health or unemployment benefits, and do not receive vacation, retirement plans, or any of the other wage and salary benefits that standard employees are entitled to by law.
They file something known as the 1099-MISC, and are responsible for paying their own taxes, since those taxes are not withheld from the income they receive from the company. With that responsibility, however, there are also certain benefits. Independent contractors have – at least in theory – greater scheduling flexibility, more control over how they do their jobs, and fewer restrictions placed on them by superiors – because in the most technical sense of the word, they have no superiors. They are basically single-owner companies.
The Facts of the Case
In this lawsuit, the question ultimately comes down to an issue over whether the company is properly classifying these drivers as independent contractors, or whether they should more correctly be labeled as employees. To determine that issue, the court will have to examine a number of issues related to the independent contractor status to judge whether these drivers meet that standard.
In most cases involving this question, the main issue ends up being the amount of control that the contracting company can exercise over the methods used by the independent contractor to provide any contracted services. That includes how much control the worker has in determining how he does his job, and whether things like tools are provided by the payer. Factors such as benefits, the ongoing nature of the business relationship, and the importance of the work to the company’s operations are also critical.
The lawsuit involves three Uber drivers who have asked the courts in San Francisco to classify them as employees. They seek complete reimbursement for all of their expenses, and if they win they are likely to receive that compensation. Those expenses include the wear and tear and maintenance costs to their vehicles, as well as the fuel they have been forced to buy to carry out their duties while working with Uber. Naturally, a good part of their argument will rest on just how much control Uber exercises over the way that these drivers perform their jobs.
There is also an additional demand for payment of tips. Plaintiffs allege that Uber has not been passing customer tips on to the drivers, and has instead kept that money in its company accounts. At this point, however, the judge has instructed those plaintiffs to provide more documentation to support the tip allegation before that too can be included within the class action.
The View from the Outside
Some analysts believe that the plaintiffs’ case may be a strong one. After all, Uber has a number of important controls that it exercises over every driver that signs up to work with them. These controls include the necessity of relying on the Uber app for everything from finding passengers to receiving payment, as well as other guidelines that have to be followed to comply with company policy.
At the same time, it is important to note that the line between independent contractor and employee has been murky for some time. More importantly, there are many contractors in a variety of fields that have to meet stringent customer mandates in order to fulfill their contracts. So, even tight control over the methods used in the performance of any job duties is not always dispositive in making these determinations.
The Effects of the Decision
As with any judicial decision with the potential for impact that far exceeds the interests of the parties in the case, the Uber suit has the potential to upend similar industries. If the plaintiffs win, then other independent contractors in similar situations may be motivated to bring the same types of lawsuits in their industries. Just in this case alone, a successful suit could force Uber to revisit its entire business model, requiring it to pay Social Security taxes, provide health insurance, and offer vacations, retirement packages, and other benefits.
Obviously, that would dramatically increase the company’s business costs, and will almost certainly lead to higher customer rates and other major changes. There is, of course, always the risk that an adverse ruling may prove so costly to Uber that it simply abandons its business model altogether. That may be a stretch, though, since the company has already amassed billions and can almost certainly adapt to any changes that a loss in court might necessitate.
Critics of these on-demand business models certainly won’t be shedding any tears at an Uber loss in court. Many have long lamented the damage that Uber’s success has inflicted on the once powerful taxi monopoly, and worry about the impact similar start-ups may have on other entrenched industries. These critics also point to the fact that a number of on-demand companies like Alfred, BloomThat, and Munchery already treat their workers as employees and have done so without severely curtailing their own growth or success.
In the end, Uber has been successful enough that it will probably survive even if it is forced to reconsider its classification of the company’s drivers. How that will impact future on-demand start-ups, however, remains unknown.