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Earlier today, it came to light that Uber recently lost a case that could eventually force the company to classify drivers as full time employees. The decision was made in March and became public because Uber filed an appeal yesterday.
The reason the ruling is so significant is that operating costs for Uber would go up dramatically if the company is forced to classify all drivers as full time employees. Uber would be on the hook for payroll taxes, benefits, and other fringe items that full-time employees enjoy. Given the amount of capital Uber has raised, it wouldn’t put the company away, but it would make its customer economics and operating margins a lot less attractive.
Reaction to the news has the Internet buzzing, but it is important to note that Uber has said the ruling only applies to one driver. With that said, if this case causes a domino effect, the impact could be significant.
As the cofounder of a company that’s paid thousands of freelancers millions of dollars over the past couple of years, I’m watching the case very closely. Because of the precedent that was set by the LiveOps case years ago, I anticipate Uber will win its appeal, but if it doesn’t, and if we see the impact domino across the on-demand economy, here’s a look at who stands to lose and who stands to gain:
Shyp – Shyp is taking a totally different approach to hiring freelancers. From the get-go, anticipating that there may be legal issues down the line, the company classified some Shyp Heroes as employees. They are likely to see little-to-no exposure if Uber loses.
The Freelancers Union/Employments Stats – The number of Americans who no longer look for work (effectively “dropped out” of the workforce) is at an all time high. Many of these Americans are piecing together incomes through services like Uber. The Freelancers Union has been fighting to unionize freelancers so that they are entitled to all of the benefits that full time employees enjoy. This would be a huge win for them and would put them instantly on the map of every state legislature.
Elance/oDesk (now Upwork): Many companies, like Uber, Lyft, and Taskrabbit, have no way around the fact that a freelancer has to show up to a job in person. Other marketplaces, like 99Designs, give freelancers the ability to work virtually. If this ruling passes, and freelancers are now classified as full-time-employees (with the companies being the “employer of record”), you are going to see a ton of work outsourced to low cost regions. Companies like Elance, Guru, Freelancer, and others have large quantities of freelancers from low-cost-regions who will do the work cheaper.
The On-Demand Economy: If Uber loses, the amount of capital you will need to raise to start on On-Demand Economy company will drastically change. Every “On Demand” company will have to factor in large chunks of cash for Social Securiy, Payroll Tax and other associated costs. It will also make these types of companies extremely difficult to scale given that you’ll have to issue a W2 to every (former) freelancer.
The American Freelancer, the Consumer: We will see companies outsourcing jobs, rather than “insourcing” to Americans. This will reinforce the notion that American workers are too expensive, and you will see any virtual work outsourced. For in-person work, like the type of work Handy/Homejoy and others provide, the consumer will lose. The cost will ultimately be passed on to the consumer, making it less palatable and convenient to use these types of services. Disintermediation will become more commonplace.
It will be interesting to see how this all plays out. I don’t anticipate Uber will lose its appeal, but if it does, we will see a similar lawsuit in every single state. Regardless of what happens, this will be an intriguing case to watch.
Sunil Rajaraman is cofounder of Scripted.com.
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