Uber and the Sharing Economy Under Fire

Uber is once again under assault from the government.  

On Tuesday the California Labor Commission ruled that Uber drivers are not independent contractors, as the company insists, but instead employees. The commission’s decision could hamper Uber’s ability to grow in California and even slow the expansion of the “sharing economy” in its birthplace. 

Uber is the world’s largest ride sharing service. Recently the company was rumored to have a valuation of $50 billion. Uber thinks of itself as a tech startup rather than a traditional transit company. It created a mobile app that efficiently matches riders and willing drivers to create an alternative to taxis and chauffeur services. 

Labor activists have been complaining about Uber’s business model for years. Their main reason: Uber drivers are considered by many state governments to be independent contractors rather than employees. 

Since Uber’s drivers are not designated as employees, the company does not have to provide them with any benefits, including those required under federal law. It also leaves its drivers responsible for paying for their own cars, gas, tolls, and repairs. 

But this private contractor label is actually one of the reasons working with Uber is so attractive. Uber drivers have the ability to set their own schedule and do not have to commit to driving a minimum or maximum number of hours. Uber allows its drivers to essentially run their own small businesses and become their own bosses. 

Uber is successful precisely because driving with the company can be a full-time job for some and a side job for others. Potential drivers can quickly sign up through the Uber app and after a background check begin driving immediately. The simple hiring process means that driving for Uber is an easy way to make quick cash between jobs. Around 32 percent of drivers say that driving for Uber is a temporary job while they search for employment elsewhere. 

Drivers appreciate this unique model. Nearly 75 percent of Uber drivers say that driving for Uber has improved their life by giving them more freedom over their schedule. The independent contractor model is working well for Uber’s drivers, and their wages are often higher than those of traditional taxi drivers and chauffeurs, even including vehicle costs.  

While the California Labor Commission’s decision currently only applies to Uber (and a single driver), if it gains traction in California and become precedent, it would likely destroy Uber’s unique business model. 

If Uber drivers are suddenly classified as employees, the effects would be far reaching. Drivers would have to be paid benefits and receive compensation for gas, repairs, and more. In order to comply with this new regulation Uber likely reduce the cash wage that drivers now receive. The compensation package would have equal value, but the cash wages that are valuable to the drivers would diminish.

Due to higher administrative costs, Uber might eliminate the 32 percent of drivers who only expect to work with the company for a short time, and part-time workers.  If Uber were to raise its rates, easy transportation would be less accessible for everyday users. 

People currently drive for Uber because the job fits their needs. They could find traditional jobs that provide benefits elsewhere, but they instead choose the freedom offered by driving for Uber. While a few drivers may feel better off given benefits, the vast majority of Uber drivers who value flexibility in their work and reasonable hourly wages will suffer.

The consequences of this ruling could expand far beyond ride sharing. Uber is the poster child for the sharing economy. If the shared economy business model is no longer viable investment in businesses such as Airbnb may become harder to come by and innovation may slow down. 

California has for years been the home of tech startups. It is sad to see the state ruining the very innovations that its people have created.