Will Uber Survive If Its Drivers Are Reclassified as Employees?

Homejoy, the “Uber for housekeeping” app, is closing shop at the end of July. Its CEO said that the shutdown was due to four impending lawsuits charging the company with treating employees as contractors.

Valued at $131 million in its last round of funding, Homejoy is a minor player in the sharing economy, but its downfall may well be a harbinger of things to come for other Silicon Valley startups that rely on contractors instead of employees.

Criticism that these companies mislabel their employees as contractors—depriving them of health insurance, a retirement plan, and other benefits—has been steadily building, and the lawsuits have started to pile up.

Last month, a San Francisco Uber driver won a claim that she had been misclassified as a contractor by Uber, and was awarded $4,000 in the process.

The ruling only applied to one individual, but another class-action lawsuit threatens to make Uber treat all of its drivers in California as employees.

An analysis by tech news and analysis site Re/code and ZenPayroll, a payroll automation startup, estimates that a reclassification of Uber’s 45,000 active drivers in California—those driving at least 20 hours a week—would cost the $209 million annually.

That number sounds ominous, but not fatal for a company valued at $50 billion that’s expected to at least double in size over the next year. Nonetheless, Uber faces threats on multiple fronts.

Last week, the Department of Labor issued a new guideline urging state and federal agencies—including the IRS — to heighten efforts against the misclassification of employees as contractors. The guideline called for putting the economic realities litmus test to use, which would classify a worker as an employee if he or she were economically dependent on that specific business.

Under this criterion, even if Uber’s arguments for why its drivers aren’t employees—such as flexible work hours, and working for multiple businesses at the same time—are valid, it would still have to treat its drivers as employees.

Related Coverage The Insider’s Guide to Life as an Uber Driver

In a footnote, the guideline made an allusion to the status of workers in the sharing economy, saying that an increasing number of employees are misclassified not as independent contractors, but owners or partners (drivers who use Uber and Lyft are officially called “driver-partners”).

The guideline is meant to clarify, and doesn’t constitute a law, but the encroachment of looming crackdowns and stray lawsuits has already nudged a few companies, such as Shyp and Instacart, to switch their workforces from contractors to employees.

A forced nationwide reclassification of Uber drivers as employees would have devastating consequences for the company’s valuation.

A forced nationwide reclassification of Uber drivers as employees would have devastating consequences for the company’s valuation. Uber reported 162,000 active drivers across the country in January, a figure that was rapidly growing. A back of the envelope calculation suggests that it would cost Uber nearly $1 billion per year to treat all of its U.S. drivers as employees.

The scenario would take a large chunk out of Uber’s annual revenue, which is projected to hit $10 billion by the end of 2015. But Uber operates in 54 countries. Such an expense could wipe out much of Uber’s profit margins in the United States, but the company overall is expected, unlike Homejoy, to survive a regulatory beating.

“It will affect their value (as it will the values of all of the sharing companies), but the company has enough buffer built into its margins to allow it to absorb the blow,” Aswath Damodaran, a professor of corporate finance at the Stern School of Business, commented via email. “The question is whether there are other costs coming (insurance etc.), where the model itself can be unsustainable.”

Despite the dark times ahead for the sharing economy, hope is certainly on the horizon.

Despite the dark times ahead for the sharing economy, hope is certainly on the horizon. The current crop of presidential candidates, particularly the front-runners, means that the executive branch may be inclined to tip the scales in Uber’s favor from 2017 onward.

Hillary Clinton has expressed, at worst, mere ambivalence toward the sharing economy.

“This on-demand, or so-called gig, economy is creating exciting opportunities and unleashing innovation,” Clinton said in a campaign speech last week at the The New School in New York City. “But it’s also raising hard questions about workplace protections and what a good job will look like in the future.”

Republican counterpart, Jeb Bush, was predictably more enthusiastic about the sharing economy. Bush made the telling choice of hailing an Uber cab during a visit to San Francisco last week, and had nothing but the loftiest praise for the company.

“This is a pretty vital service,” Bush said. “You meet people who are customizing their lives in a way that it’s time for celebration.”

Bush also described Uber in deliberate Silicon Valley jargon, saying that it was “disrupting the old order.”

The president has considerable latitude in interpreting and enforcing the law, a freedom that has sharply grown during the Obama administration — the November executive action bypassed Congress to effectively grant amnesty to 5 million illegal immigrants; Obama also backed a new rule earlier this month that would expand eligibility for overtime pay to some 4.6 million workers.

If the sharing economy can get the president on its side, it’ll probably scrape through.