California labor commission challenges Uber’s use of drivers as contractors

The California labor commission has ruled that one of Uber’s drivers should be considered an employee, not a contractor. The ruling stands to put a major dent in the ride-hailing service’s business model.

Because Uber is involved in all aspects of the business, the court ruled earlier this month that the company has to treat drivers as staff, Reuters reports. The ruling came as a result of a complaint from one of Uber’s San Francisco-based drivers. Uber is apparently appealing the labor commission’s decision to award the driver $4,000 in expenses.

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“Although some of the factors in this case can be indicative of the workers being independent contractors, the overriding factor is that the persons performing the work are not engaged in occupations or businesses distinct from that of [Defendants]. Rather, their work is the basis for [Defendants’] business,” the California labor commission ruling said.

The reason this seemingly small court decision is such a big deal for the monstrous car service is that Uber relies on treating its drivers as contractors to keep costs down. On its own, this ruling doesn’t do much. Rulings from the California labor commission cannot set a precedent for future cases. However this case could help shape public opinion about whether Uber drivers should be considered contractors or employees. It might also inspire more drivers to file complaints. If that were to happen, federal or state agencies might be inclined to take a closer look at Uber’s operations.

Using contracted drivers is the model that has allowed Uber to expand so rapidly. Aside from the staff at its headquarters in San Francisco, Uber has few expenses. Though Uber facilitates the transaction between riders and drivers, fares go directly to drivers. Uber takes a percentage of the total fare as a commission.

With this ruling in place, Uber is only responsible for reimbursing one driver. However, if Uber was ever forced to bring its drivers in-house, the company could be responsible for wages, taxes, and benefits, driving costs up significantly.

As such, the ruling may make some investors a little nervous.

A cadre of big-name firms, including First Round Capital, Google Ventures, Sherpa Capital, Menlo Ventures, and Kleiner Perkins Caufield & Byers have invested roughly $6 billion into Uber. All of them expect a robust return on investment in the form of an initial public offering.

When Uber took a round of debt financing earlier this year, many speculated that the company could be preparing for an IPO. Whether the question around drivers as contractors or employees will affect Uber’s public offering is up for debate. But long-term, the lingering question may cause problems for the company’s bottom line.

Update 10:11 a.m. PT: Uber has responded to the news with a statement.

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Reuters’ original headline was not accurate. 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. It’s important to remember that the number one reason drivers choose to use Uber is because they have complete flexibility and control. The majority of them can and do choose to earn their living from multiple sources, including other ride sharing companies.

This article has been updated to clarify the labor commissions ability to set precedent, which it cannot.