Written by Ben Rapp
Since Uber, a Ridesharing platform, was founded in 2009, it has completed almost ten billion trips, approximating about fourteen million trips each day. With a valuation of more than 80 billion dollars during its IPO, Uber’s business model is completely reliant on using independent contractors as drivers.
Unlike employees that have to report to higher management in a company, independent contractors act as their own bosses. Hiring independent contractors saves companies a significant amount of money – over 30 percent in total costs. Companies do not need to pay for the healthcare or vacation time. The contractors are only paid when they are needed and working.
However, in September, the California Senate passed a bill that could require Uber drivers and other independent contractors in the gig economy, to be treated as employees. Reclassifying drivers as employees will be detrimental to the Uber business model and could result in the end of Uber.
Uber’s business model relies on drivers logging into the platform when they want, and getting paid only for trips that they complete. If Uber were to employ drivers rather than contract them, the drivers, riders, and even the company itself will be negatively affected.
Drivers will now need to be on a set schedule. They will no longer have the liberty to drive when they wish. As employees, they will have set hours and will no longer be able to drive for Uber as a side hustle in their free time. Customers will not be happy with this change, as it will cause an increase in prices for Uber trips. In order to pay drivers the minimum wage that will be required once they are classified as employees, Uber will have no choice but to raise the price of rides. This price increase will most likely be transferred to the customer. Additionally, because there will be a set number of drivers, there will be a shortage of drivers in peak times, and an oversupply of drivers in slow times. Uber, as a result, will be losing money by paying drivers who are not bringing in revenue. The independent contractor model, which allows drivers to sign on to drive based on market demand, and Uber to pay drivers only a percentage of the revenue they earn, is the only way a company like Uber can function in today’s market.
It’s highly likely that Uber already sees the threat of this new legislation to their business objectives, as they have recently attempted to diversify their offerings. In 2018, Uber purchased Jump Bike – a bike sharing service. Just a few weeks ago, Uber announced that it would be offering helicopter rides from downtown Manhattan to JFK Airport. These pivots into other areas of transportation prove that Uber anticipates issues with the rideshare portion of its business, as it attempts to shift its image of a ridesharing platform to that of a transportation platform.
Despite Uber’s immense popularity, it has yet to turn a profit. Uber posted losses of $1 billion on revenue of $3.1 billion for the first quarter of 2019 in what was the company’s first earnings report as a public company. Gross bookings rose 34% to $14.6 billion in the same time period. While it expects to be profitable in the next few years, a requirement to hire its drivers as employees rather than make use of independent contractors will make that reality impossible.