A San Francisco-based driver for smartphone-based ride-hailing service Uber is an employee, not a contractor, according to a ruling by the California Labor Commission.
The ruling, filed on Tuesday in state court in San Francisco, was the latest in a host of legal and regulatory challenges facing Uber and other highly valued start-ups in the United States and other countries.
The commission said Uber is "involved in every aspect of the operation."
Classifying Uber drivers as employees opens the company up to considerably higher costs, including Social Security, workers’ compensation and unemployment insurance. That could affect its valuation, currently above $40 billion, and the valuation of other companies that rely on large networks of individuals to provide rides, clean houses and other services.
Uber had argued that its drivers are independent contractors, not employees, and that it is "nothing more than a neutral technology platform."
But the commission said Uber controls the tools driver use, monitors their approval ratings and terminates their access to the system if their ratings fall below 4.6 stars.
The ruling affects only California. However, the state is Uber's home base, one of its largest markets, and sets a path often followed by regulators and courts in other states.
It's hard to overestimate just how big of a sucker punch this is to Uber's gut. Uber is able to compete on price because it doesn't have to pay payroll taxes, FICA, worker's comp or the big one in California, provide Obamacare. It can pay drivers straight cash and not worry about that because everyone's a contractor.
If it now has to do that, suddenly the whole Uber business model goes out of business. They won't be able to pay drivers nearly the money they were offering before, and that's going to hurt them. They just become a glorified taxi service after that. It's certainly going to be a hell of a lot harder for them to raise capital in an IPO with this ruling hanging over their heads.
Imagine the press Uber's going to get when it fights this, too. It's a lose-lose situation for them and they know it. There was never anything super "disruptive" about Uber, they just took contractor rules to the extreme and tried to price taxis out of business with rock bottom labor costs (all assumed by the contractors of course) and they just got barbecued for it.
Couldn't have happened to a nicer company, or a nicer industry for that matter. There's nothing revolutionary about exploiting the hell out of the people who work for you.