A federal judge has made a ruling that could destroy Uber’s business model. Edward Chen, a U.S. District Court Judge for northern California, ruled that Uber drivers have the right to file a class action suit challenging the company’s classification of them as contractors rather than employees.
If the suit were to go forward, up to 160,000 current and former Uber drivers in the Golden State could sue the company for wages, unemployment insurance, and benefits they would have been owed as employees, Fortune reported. That could cost Uber untold billions of dollars because it would have to pay the drivers minimum wage and overprice for every hour they worked.
The costs could be far higher because Uber would also presumably have to pay federal withholding taxes for Social Security and Medicare, as well as state taxes for workman’s compensation and unemployment insurance. If that was not bad enough, Uber employees could also sue for unpaid workman’s comp and unemployment benefits.
It is hard to see how Uber could remain in business if this were to go forward. It would also set a precedent for rulings in other states and deprive Uber of some of its more profitable markets, such as New York. Uber is already cutting back its operations in Florida where the state declared a former Uber driver an employee in May.
The number of drivers that could be affected by the suit is unclear. Uber itself estimates that around 15,000 drivers could participate, but as many as 160,000 people have worked as Uber drivers in California alone, Vice News estimated. That could lead to lots of messy legal action as attorneys ask the courts to decide who is and who is not an Uber employee.
Could Lead to an Import Precedent
The floodgates to more legal action are already open. The attorney behind the suit, Shannon Liss-Riordan, told Vice that she has already been contacted by around 2,000 drivers from all over the United States. Other attorneys are sure to jump on the bandwagon as the suit progresses.
Not surprisingly, Uber is planning to appeal Chen’s ruling. That could generate an important precedent because the cause might go all the way to the U.S. Supreme Court. It is unclear if the Supremes would hear that case or how they would rule. That precedent could affect the entire Gig Economy, including such companies as Lyft.
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What is clear is that Uber’s on even shakier legal ground than we thought. Nobody knows if its business model is legal or not. Once again, I have to ask how is this company worth $50 billion – how? A company that could be shut down by one lawsuit is not a great investment.
It looks as if Uber’s future is in the hands of the courts. That makes it even less of a cutting edge solution and more of a scam than we thought.