Uber's Business May Be Upended Despite Limitations of California Labor Decision

NEW YORK (TheStreet) -- A ruling by the California Labor Commission that declared an Uber driver to be an employee of the ride-sharing company may not initially affect all Uber drivers, but potentially lays the groundwork for a serious disruption in Uber's business model.

That was the general consensus Wednesday after the Labor Commission awarded former Uber driver Barbara Ann Berwick $4,152.20 in expenses she had sought for the period in 2014 during which she drove for Uber. Uber views its drivers not as company employees in the traditional sense, but as independent contractors who drive for Uber whenever they want.

Initial reaction to the ruling was such that all Uber drivers in California would now be considered Uber employees. However, an Uber spokeswoman said in a statement that the Labor Commission's decision was an isolated case only affecting the single plaintiff, and that the ruling was also non-binding.

"Indeed it is contrary to 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," said the statement posted in Uber's online newsroom. "Five other states have also come to the same conclusion." Uber said it has already filed an appeal of the Berwick ruling.

However, industry analysts said the decision highlights many of the labor issues involving the growing ride-sharing business, and brings up the possibility that Uber's business model may be overturned at a time when the company is facing criticism about its operations and may be exploring going public in the near future.

"Anyone in the ride-sharing industry is operating on an employee-wide basis and could be impacted on a big degree," said Mike Olson, who follows the ride-sharing industry for Piper Jaffray. "Essentially, making a requirement of having the drivers as employees adds another level of operating expenses that's much heavier than before."

Uber has always maintained that its drivers are third-party contractors, not company employees. To support its arguments, Uber points out how it provides only the software platform that drivers and riders use to connect with each other.

The Commission's ruling, while only affecting one driver in Uber's home state of California, potentially sets a precedent for other drivers to seek recourse for their expenses while providing services for the company. Should Uber drivers eventually be declared to be company employees, Uber could see its costs skyrocket as it becomes necessary for it to cover everything from insurance premiums to Social Security to drivers' gas bills.

Rob Enderle, president of tech research firm the Enderle Group, added that the decision has the potential to be mirrored by labor commissions in other states.

"The big thing is that this would make it far easier to call them a taxi company, thus forcing them to compete as a peer, and with all the regulatory requirements of other taxi firms," Enderle said. In the end this could be the true intent of the Commission's ruling as we do exist in a political environment and it certainly isn't unheard of for one agency to help another."

Founded in 2009, San Francisco-based Uber has been in the spotlight for its approach to the commercial ride-service industry. Anyone who qualifies may become an Uber driver. To use the service, a person needs to download the Uber app to their smartphone, then enter their location and where they are going. Uber drivers, also using an app on their phones, receive a notice when a potential rider is nearby and can then choose to accept the fare. All payments are made electronically via the customer's credit card on file with Uber. Drivers' payments come from a percentage of their fares, and drivers are responsible for any expenses related to driving for Uber.

The company has garnered attention, too, due to the amount of venture capital and outside investment it has raised. Last December, Uber raised an additional $1.2 billion in outside funding, and in January, the company reportedly arranged for $1.6 billion in convertible debt from Goldman Sachs (GS). Altogether, Uber has raised more than $4 billion from outside investors, which has led to the company's lofty valuation of more than $40 billion.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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