Time for Uber to pay its dues
Ven 14 août 2020
Introduction
A judge in the state of California (USA) ruled that Uber and its rival Lyft should stop classifying their drivers as independent contractors and should classify them as employees instead.
Is this good news?
It depends on whom you ask.This is welcoming verdict for the millions of drivers and so-called ‘gig workers’ in US and across the world. Companies such as Uber will have to provide them benefits that a worker classified as an employee is entitled to in addition to health coverage, unemployment insurance etc.
Who are these ‘gig workers’ again?
There has been a new trend of copycat ‘business model innovation’ in industries as varied as postal delivery, food delivery, hired transportation, translation etc. This innovation involves companies decreasing their employee costs by classifying their workers as ‘independent contractors’ whereby the company can wash its hands off providing any benefits to these workers and instead pay them on a per-gig basis (hence the term gig worker), but still gain from their continuous employment.
In summary, these companies are 'cost-externalizing' wherein they benefit from the positive costs while the negative costs (such as health insurance, unemployment etc) are left for the individual worker or the government to bear.
Where is the ‘innovation’ here?
The innovation is in exploiting a loophole in labor laws across the world by not paying their workers any benefits. This reduction in operating costs enables these new players to offer their services below cost. It drives their entrenched competitors who have regular employees on payroll, out of business, as their cost structure is no longer competitive.
Wait, the workers are ‘independent contractors’! They are free to work for someone else.
In theory, yes they are. However, the hiring companies alter the ‘per-gig’ pay and additional incentives based on targets such as number of trips completed or food orders delivered per day. If a gig worker falls short of these targets, her earnings will no longer be enough to make a decent living. The net effect is that these companies hold an invisible leash on these workers through these incentives/soft targets.
Why is this bad news for Uber across the world?
Uber’s business model has been proving to be disruptive to the entrenched taxi industry and the people employed by the taxi industry across the world. Multiple local governments and regulatory agencies in US and outside US have had clashes with Uber both in and out of court because of this. The court ruling in California sets a precedent and gives much needed ammunition to pass on similar laws in other markets that Uber operates in.
Does the uber-valuation of Uber, hinges on an exploitation of this loophole?
Only partially, if not significantly. The high valuation presumes the following additional advantages:
- Technology: Uber’s usage of technology — combining GPS, ubiquity of mobile phones, internet access, and friction-free payments — to create a new way of hiring cabs is indeed revolutionary. However, existing taxi companies could easily replicate this part and they did in some geographies.
- Monopoly: Uber could drive competitors out of the market and create a monopoly thereby gaining the ability to set and drive prices higher. This is still theoretical and there have been either imitating competitors or competitors with implicit support of national governments who are making sure that there is still some competition.
- Self-driving cars: A high contributing factor in Uber’s valuation is its promised near future of self-driving cars where the cost of ‘drivers’ becomes close to nil. After a few years of sustained euphoria, investors and industry players have realized that real self-driving cars are much farther away in the future (read: check our previous article on self-driving vehicles dated July 18, 2020).
Are we going back to the taxi days? That is not the future I am looking forward to.
No. If Uber really goes under, there is a good chance that the existing taxi industry will pick up bits and pieces of Uber’s best parts and reinvent itself. Either that or other new players will fill the vacuum created by Uber.
Are you proclaiming Uber dead?
Not really. Far from it. Uber has enough investors who will stand by the company in its fight against the court ruling the same way they backed the company when it was fighting with the mayor in London or the taxi industry regulator in Sydney in the last few years.
What if they challenge this ruling and lose anyway?
It will be a big blow to the company and its business model. Dara Khosrowshahi – the current CEO of Uber – could still navigate the muddy waters and work his magic the way he did in his previous stint as the CEO of Expedia (4x earnings, expansion to 60+ countries and acquisition of three competitors).
The traditional taxi industry is struggling to replicate Uber’s business model. they could use some catch-up time, technology investment, and flawless execution. COVID-19 gave them much needed breather and time to close the gap. Time will tell where the winds will blow. Nevertheless, we can be thankful to Uber for moving forward the state of this industry. It is a different question if they themselves can reap the benefits of this effort.