Two class action lawsuits filed by a Boston labor lawyer could spell the end of the road for Uber’s business model in the U.S. if they succeed. In separate suits filed in California and Boston, Shannon Liss-Riordan is arguing that Uber violated the law by classifying its drivers as independent contractors rather than employees. If Liss-Riordan succeeds, her suits could mean big trouble for Uber Technologies Inc. Right now, Uber is extremely profitable because it doesn’t have to pay its drivers a regular salary, provide benefits, pay overtime, worry about the health insurance mandated by the Affordable Care Act (Obamacare), or unionization. Instead, all the privately held app company needs to do is sit back and take 20% of its drivers’ fares in exchange for its service.
That’s a very profitable business model that has given Uber a value that some analysts estimate at over $18 billion. That’s more than either of the major publicly traded car rental companies, Hertz Global Holdings (HTZ) and Avis Budget Group (CAR), is worth. That’s why Uber is able to put so many cars on the street and provide effective competition to cab companies. Uber has been able to create a massive network of drivers without any investment beyond the development of its app. If Uber has to start paying its drivers like employees, it’ll have to shut down in the United States. Uber’s competitors, such as Lyft and Sidecar, would be driven out of business. It goes without saying that these suits could be a major headache for other internet and app companies that rely upon independent contractors such as Elance-Odesk.
Uber Driver’s Contract Might Not Be Valid
A federal judge in California has already issued one ruling in favor of Liss-Riordan. The judge threw out the arbitration clause in Uber’s driver’s contract that gives Uber drivers the right to sue Uber at least in the Ninth Circuit of the U.S. federal court system that covers the West Coast.
Among other things, that might mean that Uber’s driver’s contract is not valid in the U.S., which could lead to many more lawsuits. Uber has already admitted that its drivers were operating with insufficient liability insurance, a practice that might have violated California state law. Uber might have no choice but to move its operations outside the U.S. or change them dramatically. That’s a development that would definitely boost the value of companies offering other forms of car sharing. Big beneficiaries could be Avis Budget, which owns Zipcar, a service that offers car-sharing in 34 U.S. cities, and Hertz, which runs a similar service called Hertz 24/7 in 30 U.S. states. Hertz and Avis could be big winners because they can provide car sharing without a driver or any of the legal problems Uber is facing.
It looks like the Uber revolution that could change our cities might be delayed, and a lot of hipsters might have to go back to taking old fashioned taxi cabs or the bus.