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This ruling could knock Uber's wheels off

The concept of ride-sharing company Uber has been simple: Consumers pay for rides from other people who have cars. Because Uber vets the drivers and arranges the match through its app, it gets a cut of the fare.

That simplicity has made Uber one of the fabled tech unicorns: a startup worth at least $1 billion in valuation, based on what investors are willing to pay for a share. But that may get a hasty reevaluation in light of a new legal decision.

A long-watched California case has potentially thrown a huge monkey wrench into the arrangement. Under Berwick v. Uber, the California Labor Commission found Barbara Ann Berwick, a former Uber driver, to be an employee of the company. The ruling, actually made on June 3, came to light during an appeal filing on Tuesday evening.

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The monetary award of $4,152.20 is trivial for a company like Uber, which has raised a reported $5.9 billion in funding. But if Berwick is found to be an employee after the appeals process, and if other jurisdictions -- state and national -- took a similar stance, Uber would face a critical problem that could force it to deal with extensive costs and liabilities and drastically undercut its market value.

One reason for Uber's popularity among big investors has been that it treats drivers as contractors rather than employees. That allows it to scale its operations, and its revenue, quickly without the commensurate increase in expenses that would be necessary to field fleets of vehicles and drivers. However, should it suddenly have to treat drivers as employees, the financial calculus would immediately change.

Some potential impacts on Uber:

  • Responsibility for vehicle operating costs
  • Requirement to pay drivers as hourly employees
  • Need to pay for insurance, workers' compensation, unemployment and other taxes and fees
  • Possible obligations under the Affordable Care Act
  • Responsibility for back taxes at the U.S. federal and state levels
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Uber has long insisted that workers are independent contractors, largely because they can choose when to work. But as the decision noted, "The reality, however, is that Defendants [Uber] are involved in every aspect of the operation." Uber vets drivers, "controls the tools the drivers use," restricts their use of its intellectual property and sets prices. Drivers have no investment in the business other than their cars, which must meet Uber standards.

In a statement, Uber said the "ruling is non-binding and applies to a single driver." It further said the commission came to a different conclusion in 2012, with five other states also having come to the conclusion that drivers are independent contractors, and that "the number one reason drivers choose to use Uber is because they have complete flexibility and control."

The problem Uber faces from the ruling is not that it's binding, but that this sort of decision could help sway rulings of other regulatory bodies. Many state and federal labor and tax laws use some of the same standards in determining worker status. Should larger states, or federal bodies, change their treatment of Uber, it could completely upend the dynamics of the company's operations, at least in part or all of the U.S.

Uber has faced regulatory opposition before, typically in the form of state or local restrictions on cab and taxi services that it allegedly did not meet. So far Uber has been largely effective in working around or negotiating restrictions. But a ruling that drivers are employees rather than contractors creates an entirely different scale of obstacle.

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