The state of California’s legal challenge on Uber’s gig economy business model has got the ride-hailing app threatening to shut down in California.
A California state attorney had sued Uber following the state’s new labor law (AB5) that declassified ride-hailing drivers as independent contractors. A San Francisco court ruled that Uber and Lyft drivers in California should be treated as employees, and Uber is not having it.
In an interview with MSNBC, Uber CEO Dara Khosrowshahi said Uber will likely shut down temporarily if it doesn’t appeal the ruling. Judge Ethan Schulman of the San Francisco superior court gave a preliminary 10-days window to allow Uber and others affected by the ruling to file an appeal.
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Uber has maintained that there is nothing wrong in running its business on the gig economy, after all, it’s what most of the drivers want. Consequently, Khosrowshahi has expressed his disappointment over the ruling, calling it “unfortunate.”
“We think the ruling was unfortunate. We respect, obviously, the law and the court and the judge. If the court doesn’t reconsider, then in California, it’s hard to believe we’ll be able to switch our model to full-time employment quickly, so I think Uber will shut down for a while,” he said.
Khosrowshahi said the cab company may have to shut down until November, to allow voters to decide on Proposition 22. Uber and a coalition of gig economy firms had launched over a $100 million referendum aimed at saving the business model.
Part of Proposition 22 is improved welfare for the drivers, and in January, Uber announced new features to its app that will provide more ‘flexibility’ and ‘improved pay’ for the drivers. But it did not address the concerns raised by the state of California, which includes work benefits such as healthcare and government protection in times of crisis.
Moreover, under the improved work measures rolled out by Uber, researchers at the UC Berkeley Labor Center found that the measure would only guarantee $5.64 an hour wage, about $10 less than what was proposed under Proposition 22.
For Uber, it is a battle to survive in a state holding its biggest market, and to prevent a precedent that will rock its business model.
Apparently, Uber has been raking in millions of dollars at the expense of drivers, providing affordable rides that cannot foot the $15 per hour minimum wage, but enough to keep its business afloat and its revenue coming.
Khosrowshahi said during the interview that forcing Uber to comply with the AB5 law will mean unaffordable rides in a few cities.
“You would get a much smaller service, much higher prices, and probably a service that’s focused in the center of cities or the suburbs that we operate in right now,” he said.
Understandably, compliance with AB5 will hurt Uber to a great deal, given that its business has been built around and driven by a large population of riders enticed by cheap rides. But this business model has been described by analysts as ‘predatory’ as it only protects the interest of the company.
To address the situation, Khosrowshahi proposed a new law that would force gig economy companies to pay into benefits funds for drivers.
A New York Times op-ed reported him as saying: “drivers can continue to have the flexibility they have, but they can enjoy the protections – benefits fund, an earnings standard-so that they’ve got the protections many associate with full-time work.”
It is not clear how much he wants paid into the benefits fund, what is clear is that it will not cover employee benefits.
Uber has been enmeshed in regulatory controversies since it came into existence in 2009, and has been known for inciting drivers’ and public sympathy to have its way.
The push to have its drivers recognized as employees started in 2016 in London, and has recently begun to garner momentum in American states. Against this backdrop is Uber’s fight to survive the most trying time of its existence – the pandemic. Coronavirus showed up early in the year and forced the ride-hailing company to change its focus from competition to staying in business.
The effects of the pandemic, which include lockdowns and movement restrictions, halted Uber’s operations around the world, forcing it to focus more on food delivery. Surrounded by these hurdles and legal battles, any change in the gig economy business model now will mean a threat to Uber’s existence.