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California’s Uber Ruling Could Erase Billions

“Plaintiff was Defendant’s employee.”

Those four words may have destroyed billions of dollars’ worth of wealth and crushed the prospects of a paradigm-changing company.

The damning decision came from an administrative law judge at the California Department of Labor. The case sets an ominous precedent for a company that’s the very definition of disruptive.

I’m talking about Uber – the modern-day car service that’s shaken up the traditional taxicab industry.

But now, the company’s innovative business model may have just been crushed…

Goodbye to the “Gig Economy”

The case centered on the plaintiff, one of Uber’s drivers, who was seeking reimbursement for certain business expenses – a little under $4,000 in gas and tolls. The decision came down to whether Uber drivers are classified as employees or contractors – and the financial costs that might be imposed on Uber.

Of course, if it were just about the money, it would be easy for the company to rebalance its payment system. For example, it could cover gas and tolls and pay the drivers less, and all parties would still net about the same amount of money.

Companies with many full-time drivers, like trucking firms, do this all the time and manage to survive. Heck, it might even work in favor of Uber, as the company would have an incentive to negotiate cheaper gas prices at larger chains.

But by casting Uber drivers – who act as part-time contractors and control when they work – as employees, the California court’s decision poses a serious threat to both Uber’s business model and, in turn, its impact on the U.S. economy.

Employees or Contractors?

You see, Uber will accept anyone qualified as a driver as long as they keep their qualifications updated. That has allowed Uber to hire more than 150,000 drivers, most of whom the company has never met in person. But as an employer rather than a contractor, Uber will now have to take on additional responsibilities for these people – including many who only drive a few times each month to supplement their income.

Now, for people whose main livelihood is driving for Uber, classifying them as employees isn’t that big of a deal.

But it becomes a much bigger problem for occasional drivers. For example, how does Uber enforce a sexual discrimination policy on drivers it will never meet, and who only pick up a few fares on weekends?

If occasional drivers are legal employees, the costs to Uber will become prohibitive. It could even force the company to tell drivers that they must earn a base amount in fares or risk being let go.

Yet because of the way California viewed the evidence in this case, it’s clear that Uber couldn’t continue to operate within its current model.

Among the evidence the state cited to prove that Uber drivers are employees:

  • Drivers must have cars in decent condition, not beaten-up clunkers.
  • Drivers must maintain a high rating with customers.
  • Drivers must undergo background checks before Uber “employs” them.

That’s essentially the skeleton of Uber’s business. Without these distinctions, Uber is no different from a traditional taxi company that leases junked-out cars to anyone with a taxi license. Indeed, the whole point of Uber is to provide a better service at a competitive price.

The New Reality… But Does the Government Get It?

Unfortunately, the Uber decision has powerful implications for other disruptive companies, as well.

For instance, if someone renting their apartment on AirBnB is classified as an employee, is their apartment required to be handicap-accessible? If so, many people will be unable to supplement their income by renting out their apartments while on vacation.

Ultimately, it’s hard to blame the California Department of Labor for its decision – it had a small menu of options to choose from. But that doesn’t change the fact that legislators must become more aware of the ways in which employment is changing.

On both the federal and state level, we need to see a new category of employee – one who gets many of the same financial protections as traditional employees, but who doesn’t burden employers with compliance issues they can’t cover if the employee only generates a little revenue.

The increasing freedom of employees to work with multiple employers is one of the great benefits of today’s economy. But it’s also one of the biggest challenges. It’s time for our political leaders to come up with a system that permits this new reality without destroying jobs or putting too much power in employers’ hands.

To living and investing in the future,

Greg Miller

Greg Miller

, Senior Analyst

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