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Over but not out

22 April 2016 By Reynolds Holding

Uber has just taken another detour on the way to an inevitable legal showdown. The ride-hailing service, valued at more than $60 billion in its latest funding round, on Thursday settled two class-action lawsuits claiming drivers in California and Massachusetts are employees rather than so-called independent contractors, agreeing to pay up to $100 million. But the Silicon Valley darling is only buying time.

In what’s known as the sharing economy, the likes of Uber and accommodation site Airbnb pride themselves on disrupting old-school taxi, hotel and other businesses. Their weaponry can include lower expenses. Airbnb’s hosts often escape hotel regulations and taxes; Uber’s drivers, as independent contractors, cost the company less than full-fledged employees. Losing this type of edge could undermine any number of upstarts’ financial viability.

Uber said its drivers were not employees because they used their own cars and could work whenever, and for whomever, they wanted. Drivers countered that Uber controls how they work and the operation of its service generally, making them employees.

The drivers’ early victories – including permission to sue as a group – were headed for appeals that could have overturned them. That may help explain why they agreed to remain independent contractors in exchange for $84 million guaranteed, potentially more if the company goes public, protections against Uber arbitrarily cutting them off, and the ability to form drivers’ associations.

The issue is far from closed, however. A judge must approve the deal, and another court or labor official could still find that Uber drivers are employees. Companies like TaskRabbit, which allows people to hire neighbors for small jobs, depend on individuals much as Uber does. They could challenge their employment status and, like FedEx workers in 2014, eventually win in court. A few sharing-economy peers have pre-empted the issue: Some Instacart shoppers and Shyp couriers are now employees.

Uber has covered drivers’ fines for illegally picking up passengers and thumbed its nose at other local regulations around the world. The tab is adding up, though. A single $100 million payment won’t hurt much. But string a few together and it could turn into a debilitating cost of doing business.

U.S. laws are fuzzy enough to ensure the status of Uber’s drivers will continue to be tested. The rise of the sharing economy is already provoking talk of new hybrid employment forms, too. Eventually, though, the question is likely to be decided by a collision in court.


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