London became the latest major market to crack down on Uber on Monday, suspending its license to operate in the UK capital. It’s a move that not only ends a bitter end to a two-year struggle for legitimacy, but also opens up fresh fears about the sustainability of the business model. The city’s transport regulator cited a “pattern of failures” that “placed passenger safety and security at risk”.
Because of an appeal by Uber, nothing will change for passengers and drivers who the use the Uber app for the time being, but it does not look in a good position to overturn the ruling. London, with about 3.5 million users, is the largest market in Europe for the ride-hailing app. While the company beat earnings estimates in Q3, it still racked up a net loss of $1.2 billion, which was the 3rd largest in the company’s history. Its largest-ever quarterly loss of $5.2 billion was reported just 1 quarter prior, in Q2 of this year. As Business Insider writes, if Uber is barred from more big cities, there is a risk it won’t be able to maintain the kind of critical mass required to attract the capital needed to sustain a loss-making enterprise of this scale.
While London has shined a huge spotlight on Uber and taken the most serious action it could against the company, it’s not alone in going after the gig economy juggernaut. In a number of key markets, including Argentina, Germany, Italy, Japan, South Korea, and Spain, the company’s ridesharing business has been blocked, capped, or suspended, or Uber has been required to change its entire model.
US state and local governments are leading the largest regulatory charge against ride sharing, however. Unlike London, their concerns are not based around the safety of riders, but rather, the compensation and employment status of drivers.
If a proposal taken up in early October by the Los Angeles City Council becomes law, rideshare firms would be required to pay their drivers at least $30 an hour. That figure would consist of $15 in minimum hourly pay, plus another $15 for expenses including gas, insurance and vehicle maintenance. According to Capital & Main, Los Angeles estimates that nearly a quarter-million rideshare drivers operate in the city limits, completing nearly 9 million trips each year.
Seattle is currently initiating a study to determine what the minimum wage should be under their upcoming “Fare Share” plan, with results expected by the Springtime, according to the mayor’s office. The experts tapped were hired for a similar wage study in New York, paid for by the New York Taxi and Limousine Commission.
The outcome of that study led to New York City setting a minimum wage of $17.22 for rideshare drivers, alongside another $10 per hour to cover maintenance and other fees drivers incur. The wage hike just took its first victim this month, being cited as a major catalyst in the demise of ride share startup Juno earlier this month. For the late Juno, wage regulations pushed customer prices up by nearly 20%, bringing their rides per day down to 25,000 immediately before their chapter 11 petition from 47,000 per day in 2017. Juno also said it spent substantial money on legal fees to defend itself against lawsuits from drivers, riders and competitors alike that the company described as “opportunistic.”
Legal issues have been particularly problematic for Uber in New York. Just prior to losing their own suit against the city to prevent capping the number of vehicles allowed to cruise on Manhattan streets this month, local ride-hailing drivers filed a $5 million lawsuit against Uber that claims the company wrongfully deducted taxes from their paychecks and did not pay them the full income they earned from rides. The suit claims 96,000 drivers’ contracts with the company require them to be paid the passenger’s full fare minus Uber’s service fee. The lawsuit also alleges that the company used a manipulative system of payments in which customers were paying a higher fare than what was being reported to drivers, with Uber pocketing the difference.
The biggest opposition to the current business model of ride sharing is based around how they classify their drivers’ employment status.
California recently passed a bill, titled AB5, that has implications for any worker classified as an “independent contractor” but could hit ride sharing particularly hard. The landmark bill, ratified in September, will make nearly a million ride-hailing workers, on-demand delivery drivers, and others in California eligible for the same minimum wage, benefits, and vacation days to which full-time employees are entitled. Assuming ride-hailing and delivery companies comply with AB5, the related costs of a driver now being classified as an independent contractor are expected to rise by at least 30% once classified as an employee.
However, in October, a group of Lyft, Uber and DoorDash drivers announced a statewide ballot measure for the November 2020 ballot to counter AB5. Called the Protect App-Based Drivers & Services Act ― funded by Uber, Lyft and DoorDash ― the measure aims to ensure drivers and couriers can continue to be independent contractors with flexible work hours. The ballot measure looks to implement an earnings guarantee of at least 120% of minimum wage while on the job, 30 cents per mile for expenses, a healthcare stipend, occupational accident insurance for on-the-job injuries, protection against discrimination and sexual harassment and automobile accident and liability insurance. Regardless of which way the state goes, though, costs will be on the rise.
New Jersey’s Department of Labor and Workforce Development has already decided that Uber exploited drivers by not classifying them as employees. Via a decision by the Ninth Circuit U.S. Court of Appeals, ruling companies that have used independent contractors may now be subject to potential exposure for wage and hour claims going back four years, New Jersey slapped Uber with a massive $650 million bill for unpaid employment taxes and interest penalties. The state contends that the ride-hailing company misclassified its drivers as independent contractors, instead of employees. If New Jersey alone seeks $650 million from Uber, consider the vast amount of money at stake when you add in all of the other states, along with the other companies built upon gig workers. Uber’s driver costs could spiral higher by more than 20% (much like NYC’s Juno faced) if they are forced to reclassify workers as employees, according to Bloomberg Intelligence.
Going forward, ride sharing companies like Uber, Lyft, and others could continue to face legal and regulatory challenges. While these companies are used to absorbing losses, outright banning of certain providers and huge fines for owed taxes would definitely set the budding industry and its expectations for profitability back significantly and threaten to upend the entire business model they’ve built.
Additionally, the entire idea behind ride sharing was that it would eventually become just as, if not more cost efficient than driving your own vehicle. Costs rising by double digit percentages could push regular users back into their own private vehicles, or even back onto public transit.