Much Is Riding on Whether Uber's Drivers Are Employees
Uber is hailing a ride to court as a handful of its London drivers demand employee-status recognition -- a designation with strings (and costs) attached for the ride-sharing company.
The San Francisco-based Uber is defending itself as a tech company that acts as a middleman between rider and driver, and that it should not be deemed a transportation company, a solicitor representing the drivers told The Guardian.
The 19 drivers are arguing they were "subject to rating and were not told where the customers needed to be dropped off," according to The Guardian. They contend they should be considered workers at Uber, which they view as a single entity and not an agglomeration of "self-employed businesses," The Guardian added.
It is Uber's business model, with drivers, or so-called partners, operating as independent contractors, that has many investors interested in the company. It is also helping to keep the ride-sharing company profitable.
But if a court finds that Uber's drivers should be considered employees, it will hurt the company's bottom line.
"Definitely will cost them more than a buck, no question about it," said Baruch College Professor Steven Melnik in a phone interview with Real Money Wednesday. "Uber's profitability will take a major dive."
The ride-sharing company's profitability hinges on the partner designation for its drivers, meaning they operate as independent contractors -- not employees entitled to benefits and the subsequent tax implications. As a result, Uber does not have to pay employee-related taxes on its drivers, helping to keep the growing company profitability. While that designation is being determined in court, Uber continues to push back its initial public offering.
In a London trial beginning Wednesday, one Uber driver told a tribunal -- a body with the authority to pronounce judgment based upon the evidence presented -- that he earned less than the minimum wage and feared repercussions if he cancelled a pick-up, according to a report by The Guardian. In his witness statement, James Farrar said drivers receive 80% of fares paid by passengers with Uber taking the remaining 20%, adding that he has no ability to negotiate a different deal, The Guardian reported.
This London group is not the first to take legal action against Uber. In April of this year, the company paid $100 million to settle two class-action lawsuits to keep its California and Massachusetts drivers as independent contractors.
CEO Travis Kalanick said in an April blog post that $84 million was guaranteed to the drivers and Uber could pay an additional $16 million, but only if the company goes public and its valuation grows by 150% above its December 2015 financing valuation (approximately $62.5 billion) within a year after an initial public offering.
Kalanick continued that Uber is "so pleased that this settlement recognizes that drivers should remain as independent contractors, not employees."
Still, some drivers were not satisfied with the settlement. Plaintiff Douglas O'Connor said in a court filing that the deal is not in his interest or in the interest of any Uber driver.
Uber is now facing similar class-action suits in Florida and Illinois, which claim the company violated the Fair Labor Standards Act. Drivers are looking to recover unpaid overtime wages and work-related expenses, the Los Angeles Times reported in the beginning of May. An Uber spokesman told the Los Angeles Times that "as employees, drivers would have set shifts, earn a fixed hourly wage and lose the ability to drive with other ride-sharing apps."
Melnik said the employee versus independent contractor case is very tough and he sees arguments on both sides. Employee taxes are also at stake.
"At the end of the day what the IRS is looking for is the amount of control," Melnik said. "Control over ways and means to get to the end result, whatever the ultimate goal is."
To determine the degree of control and independence of an independent contractor, the government will look at various factors determined by the IRS, such as behavioral control,financial control and the type of relationship.
Right now, Uber drivers use their own cars, set their own schedules and are paid weekly.
Also, Uber just inked a deal with Hertz Global Holdings (HTZ) - Get Report at the end of June, Bloomberg reported. A Hertz spokesman Bill Masterson told Bloomberg that midsize cars for Uber (and Lyft) drivers will rent for $180 a week, including all mileage and insurance costs.
Melnik said that, in his opinion, Uber's situation is a "gray area." He pointed out that Uber facilitates leasing cars for drivers, saying that there is a "strong argument that the tools of the trade are supplied by Uber." Xchange Leasing advertises that Uber drivers can "get behind the wheel for $250," saying that all credit levels are welcome to apply.
But he countered by saying that Uber could argue that it is making cars cheaper for drivers.
Generally, if a company does not treat its workers as employees it allows them to avoid regulatory requirements such as minimum wage laws, health-care regulations and non-discrimination requirements. Also, Uber does not have to pay payroll taxes, which it would have to do if drivers were to be considered employees. (If a driver pays all of the taxes, he or she is permitted to deduct half of the taxes from his or her income as an above-the-line deduction).
But if Uber drivers were to be recognized as employees, Melnik said the ride-sharing company would have to pay taxes retroactively for all of its employees and could be subject fines or penalties -- and competing companies with the same policy, like Lyft, would be forced to do the same -- cutting into the $62.5 billion company's profitability.
Editor's Note: This article was originally published at 3:17 p.m. EDT on Real Money on July 21.