Jun 17, 2015 ยท 2 minutes


Uber’s business model—skim profits off drivers, while avoiding the expenses that come with hiring drivers as employees—just suffered a major blow: the California labor commission has just ruled that Uber’s drivers are, in fact, employees, not contractors. Uber, which has seen its valuation soar to over $50 billion, can no longer claim that it is just a nifty little app that happens to pair up micro-entrepreneurial drivers and consumers, thereby avoiding the expenses and laws that other transportation and logistics companies have to bear.

The ruling will significantly impact Uber’s valuation, now that they’ll have to pay and treat their drivers like employees.

To be fair to Uber, it’s not the only transportation company that’s tried to squeeze more profits on the backs of its workers by misclassifying them as contractors. Last week, FedEx agreed to pay $228 million to settle a class action suit filed by its drivers for wrongly classifying them as independent contractors rather than employees. Last year, the Ninth Circuit Court of Appeals in San Francisco ruled against FedEx’s argument that its drivers were not employees, despite driving in FedEx trucks and wearing FedEx uniforms.

FedEx is a massive business, and can survive the loss of some profits; but for Uber the entire business model -- profit without the labor expenses -- will have to be reworked. Uber will now have to hire its California drivers and comply with California labor laws — that means better pay, workers comp, health care, sick leave, taxes . . . and it also means Uber will have to consider covering the costs of their employees’ vehicles.

The sharing economy could be turning around—Uber’s investors will now have to share more of those juicy profits with a large pool of workers.

UPDATE: Uber released a statement:

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. We have appealed this ruling.

And here's a copy of today's ruling:

Uber Technologies Vs. Barbara Berwick

[illustration by Brad Jonas]