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No, driver lawsuits won’t destroy the ‘Uber for X’ business model

Friday, March 13, 2015

Two U.S. District Court judges in California dropped ominous rulings for Uber and Lyft this week, clearing the way to a jury trial on the question of whether their drivers are independent contractors or bona fide employees.  The app-enabled car services want to be able to continue treating their drivers like independent contractors, which saves them lots of payroll-related costs. But the plaintiffs say they’re pretty much required to act like employees -- and should be entitled to all the benefits and protections that come with it.  What the juries eventually decide could have massive implications for the “Uber for X” business model, which is based on the use of independent contractors. But could these cases destroy it, as some have fretted? Not necessarily.  If the juries decide that Uber and Lyft exert too much control over their drivers for them to be actual independent contractors, then the companies will face a choice. Either they relinquish that control, by relaxing requirements about the types of cars drivers can use or how they solicit business. Or they maintain that level of control and treat their drivers like employees.

Both routes have downsides for the companies. Giving up control over things like the technology drivers have to use and the manner they have to project makes it very difficult to maintain the same level of service, which the firms market as a differentiator — lots of people prefer Uber because of the “classy ride” they’re selling. So that’s probably not a viable option.  Maintaining control, through making drivers into employees, comes with the cost of workers compensation, payroll taxes, health care, social security taxes, unemployment insurance and liability for labor law violations. According to employment law attorney Richard Reibstein, that adds an extra 30 percent on average in costs on top of wages.  So, consider Uber. The company takes 20 percent of its drivers' fares; the drivers keep the rest. Adding in the cost of benefits could hurt the company's profits, but Uber might not let that happen. Instead, it could then do a few things: Either reduce the driver’s cut, pay them some of what used to be their salary in taxes and benefits, and net slightly less from the transaction. Or, it could find some other way to cut costs and increase prices to maintain its margins. Or something in between.  (click on link to read full story) 

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