California ruling challenges Uber business model

Kaja Whitehouse | USA TODAY

NEW YORK — In a ruling that raises questions about sky-rocketing valuations for Uber and Lyft, California's Labor Commission has ruled that a driver who filed a complaint against Uber Technologies was an employee, not an independent contractor.

The ruling could significantly increase costs for the $40 billion ride-hailing startup if it is copied by other states and in other cases.

Uber currently saddles its drivers with the bulk of expenses — including the vehicle itself, maintenance, insurance and gas — by labeling its drivers independent contractors rather than employees. If Uber is forced to treat drivers as employees, it would bear more of those costs as well as Social Security, workers compensation and other benefits, experts said.

The driver, Barbara Berwick, was awarded a mere $4,152 — chump change for Uber. But the San Francisco start-up is appealing the ruling, according to documents filed with California state court in San Francisco, where the appeal will take place.

In a statement, Uber said the ruling "is non-binding and applies to a single driver." The company also said the ruling contradicts 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."

Experts warned that the Uber's business model could be in trouble if this week's ruling spreads.

"This ruling out of California [could] cause the financial engine behind Uber to break down because this will definitely drive up costs," said Hayley Dryer, a labor employment attorney of Cullen and Dykman.

Since it was founded in 2009, Uber has held its drivers at arms length by claiming it merely provides the technology to match them with riders. But the California Labor Commission said Uber maintains a good deal of control over its drivers, which makes it more of an employer than the "neutral technological platform" it claims to be.

Uber "is involved in every aspect of the operation," including the fares drivers charge, the model of cars they drive and, to some extent, how often they work, the commission said. Drivers also cannot negotiate how they divvy up fares with Uber, the commission said.

"In light of the above, Plaintiff was Defendants' employee," the commission ruled.

Berwick, who ran for local office in San Francisco in 2010 and has described herself as "a community activist," worked for Uber from July to September of last year. She argued for extra compensation for her stint, including reimbursement for certain costs.

The commission denied Berwick's claim for extra wages, but granted her claim for reimbursable expenses, including $3,622 for the 6,486 miles she drove on behalf of Uber, as well as $256 in toll charges.

Berwick was also granted $274 in interest. She did not immediately return a request for comment.

Both Silicon Valley and Wall Street have been throwing money at Uber and Lyft in hopes of cashing in if the companies file to sell their stock on the public market. But the company's growth also depends in good part on it's current business model

Uber, headed by CEO Travis Kalanick, has attracted money from mutual fund companies Fidelity Investments and Wellington Management in rounds that now value the company at more than $40 billion. Lyft recently attracted a $100 million investment from billionaire Carl Icahn, who is supporting the smaller ride-hailing company alongside hedge fund manager Dan Loeb and tech giant Alibaba.

Uber has clashed with its drivers before, including protests over rate cuts to compete with Lyft and traditional taxi companies. Protesting drivers argued that the cuts unfairly dent their earnings without alleviating their costs.

Labor unions have also protested the company's hands-off approach to its drivers. In March, Phumzile Mlambo-Ngcuka, United Nations under-secretary-general and executive director of UN Women, said no to collaborating with the ride-hailing company to create jobs for women drivers in part due to protests from labor unions.