Uber Spends $100 Million to Save Its Business Model, But It May Have Just Doomed It

I’ve written before at this august site about how Uber’s business model is to arbitrage state and federal law and replace a monopoly with a different monopoly. They obviously placed a high value on the arbitrage. How high? About $100 million:


Uber has survived a major threat to its business model, settling two legal suits brought by drivers who sought to be classified as employees instead of independent contractors.

The ride-hailing firm will pay up to $100 million to the 385,000 drivers, but their employment status will not change.

The class actions were brought in California and Massachusetts. Uber, which is valued at up to $70 billion, is on the hook for a $84 million initial payment, and another $16 million if it goes public.

I’m not seeing much of a reason for Uber to ever go public, so I should amend to say the arbitrage was worth $84 million. And while a judge has to sign off on the settlement, with both sides in agreement on the resolution I can’t see that being a big hurdle.

This concerned two big employee misclassification lawsuits, which if successful would have turned Uber into just another car service. Now that Uber settled, they don’t have to worry about providing worker’s comp or expenses or overtime or the employer half of Social Security taxes or any other benefit given to a worker on staff. In other words, they got off cheap.

As Michael Hiltzik points out, this highlights a big problem with class action lawsuits, namely that they’re nearly impossible to get through the courts in this day and age, and even if they do, once the legal team gets their cut they provide nothing of value to the actual litigants:

The key question left unanswered by the settlement announcement is whether the drivers are receiving enough in return for what they’re giving up. As is often the case with class settlements, the big headline number obscures how little trickles down to the plaintiffs. In this deal, drivers with the most time and mileage recorded with Uber are in line to receive one-time payments up to about $8,000. (Though the typical driver will receive far less from a settlement that averages out to $218 per driver.)

Nothing fundamental in the balance of income and expenses will change as a result of the deal–drivers will still be on the hook for gas, insurance and wear-and-tear on their vehicles, and Uber will retain the right to set fares and extract fees and commissions of more than 20%.

There are a few more benefits for drivers in the deal. Uber cannot deactivate drivers at will; they now must show cause and give drivers a chance to shape up before dismissal. Not accepting enough rides cannot be a cause. Driver’s associations can be established to work with management on driver concerns, but this could undermine the efforts underway for drivers to unionize. Finally, drivers can solicit tips from their passengers for the first time. But this WSJ piece gets at a couple reasons why that’s not going to work. The entire appeal of Uber was that it was seamless: you summon a car on the app and the payment is executed there, without having to fish around in your pocket or purse for cash. Riders thought the fare included tips and it’ll be hard to change that behavior. Plus, Uber won’t put a tip tool on the app, meaning drivers will be reduced to begging their clients for cash only, which plenty of people just don’t carry anymore. Yes, rider ratings would be at stake for non-tippers, but so will driver ratings for those that demand tips.

I guess Lyft allows tips and most people do it, so it’s not impossible. But I also don’t think it’s a huge step forward for drivers when they’re not getting a single benefit afforded an employee. The class action was an imperfect opportunity to help workers, but outside of a small cash payout the drivers really didn’t get much, and Uber kept its model virtually intact.

However, in an almost cosmic bit of justice, among the other legal actions, union drives, and National Labor Relations Board investigation is a gem of a lawsuit that actually relies on Uber’s boasting that their drivers are independent contractors. The case asserts that Uber’s drivers – including its CEO, Travis Kalanick, who has driven a few times – are engaging in price-fixing collusion. Allison Frankel laid it out earlier this month:

Uber argued that it’s simply not plausible to claim hundreds of thousands of drivers assented to a price-fixing conspiracy. (Uber does not disclose an actual number of drivers.) According to the company, the most plausible explanation is that each driver made an independent decision to sign up with Uber, not that these strangers conspired with each other and with Uber to inflate charges for customers. In the company’s depiction, it has increased competition by offering customers an alternative to taxis, car services, mass transit and even walking […]

But the plaintiffs said Uber can’t enjoy the benefits of its disruptive business model without suffering the consequences. Because Uber drivers aren’t traditional employees, but independent contractors who assented to Uber’s anticompetitive terms, they are plausibly co-conspirators under the U.S. Supreme Court’s 1939 ruling in Interstate Circuit v. U.S., according to the plaintiffs. And by insisting that it is not a taxi company or car service, they argued, Uber cannot claim it competes with those businesses. According to the plaintiffs, the relevant market for antitrust claims against Uber is mobile app-generated ride-share services – and Uber controls 80 percent of that market.

Hahahaha. Live by the independent contractor loophole, die by the independent contractor loophole, I guess. And at the root, does Uber create a monopolized “market” for its services that controls prices, including when those prices surge? Aren’t these allegedly independent contractors who could otherwise undercut each other on price operating under a fixed scheme? I think it’s worth some fact-finding.

None other than Jed Rakoff is the presiding judge in this case, and he allowed this case to go forward a few weeks ago, setting a trial date of November 1. While the misclassification case would have just made Uber unprofitable, this price-fixing case would effectively shut Uber down completely. It would be so poetic for Uber to wiggle its way out of every threat to treat its workers like employees, only to see that be the very thing that causes their downfall.

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