Uber, the California-based ride service that has upended the taxi cab industry in just a short few years, was dealt a major blow to its business model this week, one that could have major financial consequences for similar startups.

The California Labor Commissioner’s Office has ruled that Uber must consider San Francisco Uber driver Barbara Ann Berwick an employee. The ruling stems from a claim Ms. Berwick made for about $4,000 in unpaid wages and expenses while working with Uber over two months. The ruling came down earlier this month and was first reported by Reuters Wednesday morning. Uber is appealing the decision, which would only apply to drivers in California. If it sticks, however, and if other states follow suit, it would be a huge financial blow. Since its launch in 2009, the company has grown at a staggering rate. It now operates in 58 countries and at least 300 cities and has accumulated $2.8 billion in venture capital funding (the company’s valuation is approximately $40 billion). Its invasion of territory long occupied by traditional, city-regulated taxicab services has been swift; in March, the number of Uber cars on New York City streets surpassed that of the city’s iconic yellow taxis for the first time.

The company’s virtually nonexistent operating costs are a major contributor, making expansion easy and functioning as a strong selling point for financial backers. Uber counts just 1,000 employees at its San Francisco home base; the 167,000-plus drivers operating under the Uber name worldwide are treated as independent contractors – they supply their own vehicles, set their own hours, and collect their own fares, and Uber acts as the middle man, connecting them with riders and collecting a commission.

But the Labor Commissioner’s Office argued that Uber’s involvement in “every aspect of the operation,” including handing down specific parameters for the tools the drivers use and terminating their access to the platform if their user ratings fall too low, represents an employer-appropriate level of control. Furthermore, it said, without drivers like Berwick, there would be no Uber.

"Defendants [Uber] are in the business to provide transportation services to passengers. Plaintiff did the actual transporting of those passengers," the ruling reads."In light of the above," the ruling continued, "[Berwick] was [Uber]'s employee."

The employment status of Uber’s drivers has been a thorny issue since early in the company’s run, and it hasn’t let up. In the past, the company argued that the arrangement absolved the platform of liability when drivers get involved in accidents or commit crimes. Several drivers for both Uber and its competitor, Lyft, have filed lawsuits seeking compensation for damages incurred on the job. Last month, Florida’s Department of Economic Opportunity, a state agency, ruled in favor of a Miami driver who filed for unemployment when his SUV was hit on the job and taken out of commission, deciding that he qualified as an employee for Uber and was thus entitled to jobless benefits.

“The relevant inquiry is how much control Uber has over its drivers while they are on duty for Uber,” Judge Edward Chen ruled in that case, echoing the California board’s reasoning. “The fact that some drivers are only on-duty irregularly says little about the level of control Uber can exercise over them when they do report to work.”

Such decisions could inform the future of a growing sector of the US economy. A number of app-based startups, including Flipkart, TaskRabbit, and many more, have a similar structure to Uber, acting as a middle man for users to connect and exchange services. Funding for such startups is big business; venture capital firms have poured $9.4 billion in funding to “on-demand" businesses like Uber since 2010, according to The New York Times.

Even beyond the tech world, contract work in general is on the rise: according to a recent Census Bureau report, the US economy has added 4 million “zero employer” businesses over the past decade, as more people move into the type of flexible freelance work that Uber offers.

But labor advocates argue that the businesses that facilitate much of this work have found a legal way to pay workers as little as possible while reaping the bulk of the profits themselves. "The euphemism is the ‘share economy.’ A more accurate term would be the ‘share-the-scraps’ economy,” former US labor secretary Robert Reich wrote in February. “New software technologies are allowing almost any job to be divided up into discrete tasks that can be parceled out to workers when they’re needed, with pay determined by demand for that particular job at that particular moment. The big money goes to the corporations that own the software. The scraps go to the on-demand workers.”

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The California ruling is “nonbinding and applies to a single driver” Uber said in a statement. But if taken as precedent, it has potential to undermine the nimble profitability of such businesses. If Uber drivers are considered employees, the company would have to provide employees benefits and regular salaries, and pay the government for Social Security and Medicare taxes for each employee. The sharing economy, in other words, might have to grow up and give a real job.

[Editor's note: An earlier version of this story misstated the name of the California Labor Commissioner’s Office.]