Uber has been fighting for years to keep its 3.9 million drivers classified as independent contractors, which means they are in business for themselves and ineligible for benefits.
Now heavyweight California, home to the highest-paid Uber drivers, has introduced a law that may hurt the money-losing company’s finances even further
California passed a law this month designed to crack down on companies that misclassify workers as independent contractors, which may lead to thousands of Uber drivers becoming employees and qualifying for benefits.
San Francisco-based Uber said it won’t automatically reclassify the drivers as workers after the law goes into effect in 2020, according to its top lawyer, Tony West. He said most drivers are happy with the status quo because they work fewer than 40 hours a week.
“We expect to continue to respond to claims of misclassification in arbitration and in court, just as we do now,” West said in a recent statement. “But we will also continue to advocate for the independence and choice that drivers tell us again and again in surveys, polls, focus groups, and personal conversations that they value most.”
California’s new law is the latest challenge facing Uber, whose shares have dropped 25% since their May IPO. CEO Dara Khosrowshahi, since taking over in August, 2017, has spent much of his time settling legal disputes connected to his predecessor Travis Kalanick according to Mike Issac’s new book “Super Pumped: The Battle for Uber.”
The company has been beset by ethical challenges, with the benefits issue being among the latest. According to Issac’s book, when Uber announced in 2014 that it would charge customers a $1 “Safe Rides Fee,” the company made it sound that it was the right thing to do. After all, few consumers would find fault with Uber’s plans to fund “improved background checks,” driver safety education and mobile background checks.
But there was less to the Safe Rides Fee than it appeared. According to Isaac, the money that was collected was never explicitly set aside for improving safety. Drivers got a short on-line safety course. Improvements to the mobile app didn’t happen until years later. The upshot is that Uber earned nearly $500 million over time by lying to customers.
“[Uber] paid its top five executives $143 million in compensation last year, including $45 million to its CEO. So why are Uber drivers struggling to put food on the table?”
Uber paid $28.5 million in 2016 to settle a class-action lawsuit over the fees. However, the damage to its brand isn’t something that money can easily fix with money.
In California, Uber has unsuccessfully fought efforts to allow district attorneys to enforce the contractor bill. According to a recent Wall Street Journal article, Uber may have to schedule California drivers and pay them a minimum wage. As a result, prices might rise by as much as 30% for riders, which would discourage use and push up costs, particularly if other states enacted similar rules, the paper said.
Democratic presidential candidates such as U.S. Senator Bernie Sanders from Vermont as well as labor unions see things differently than Uber. Sanders tweeted spoke in May his support of a strike by Uber and Lyft drivers over the worker classification issue.
“Uber is not a poor company. It paid its top five executives $143 million in compensation last year, including $45 million to its CEO,” Sanders said in the Tweet. “So why are Uber drivers struggling to put food on the table?”
Sanders’ views were echoed by Democratic rivals including former vice president Joe Biden, U.S. Sen. Elizabeth Warren of Massachusetts, Mayor Pete Buttigieg and U.S. Sen. Kamala Harris of California. Gig Workers Rising, which organized the strike, claims Uber is putting profits over its drivers by denying them “crucial benefits” such as health insurance and overtime.
For Wall Street, the fight over worker classification is a big deal for Uber because it is a fundamental part of the company’s business model. As Uber highlighted in its S-1 filing with the Securities & Exchange Commission, forcing the company to treat workers as employees would have a “material impact” on the business.
More than 60,000 drivers who had entered into arbitration agreements with Uber have filed or expressed an intention to file arbitration claims are arguing that they should be considered as “employees.”
“These arbitration demands could result in significant costs to us, which could include filing fees of up to $1,500 for each arbitration demand for which we are found to be responsible, the legal costs incurred by us in connection with defending such arbitrations, and any adverse judgments issued in any arbitration,” the filing said.
Uber shares are trading at about $33, more than $10 under its IPO price of $45 from April. Uber reported a $5.2 billion loss in its most recent quarter, its largest ever. To stem the financial bleeding the company has cut 435 positions in recent weeks.