Virtual Employees

uber-logo-380x285In the wake of the runaway success of the ride-sharing service Uber, a plethora of mobile apps is emerging–seemingly overnight–to hook users up with people who want to rent out their personal facilities, equipment, cars etc. on a per-use basis.

A number of established mainstays of the bricks-and-mortar world are feeling the heat from these mobile device-oriented competitors, including the hotel industry, which is being squeezed by Airbnb, as well as the owners of taxi fleets in major cities who have seen their business decimated by the onslaught of Uber.

Uber, which doesn’t own any car fleets, hire any drivers or bother with city-approved taxi medallions (which in a metropolis like New York can cost more than $100,000 each to acquire) has enjoyed explosive growth. Wall St. currently estimates the privately held company has a market cap of nearly $50 billion. Airbnb, which lets people offer their homes to travelers in lieu of hotel rooms, also is experiencing exponential growth.

There have been some serious hiccups along the way: an Uber driver in Europe was accused of raping a passenger, raising questions about how the service screens its drivers; Uber has encouraged users to rate their drivers so passengers can check out the ratings on the app before they get into the car. This prompted the drivers to respond by rating passengers and sharing this information online with other Uber drivers, a turnabout that was hilariously highlighted by Maureen Dowd in one of her recent Op-Ed columns (she said the app showed five Uber cars speeding in the opposite direction after she summoned them).

So are we entering a brave new world in which traditional facilities and services are usurped by mobile matchmaking apps? Not so fast. This week, the California Labor Commission issued a which appears to have placed a huge pothole directly in the path of Uber’s high-rolling business model.

Responding to a complaint filed by an Uber driver in San Francisco over unreimbursed expenses, the Labor Commission ruled that the driver is in fact an employee of Uber. Uber unsuccessfully argued that it’s only a platform that facilitates transactions and that its drivers are independent contractors and therefore not entitled to compensation. Uber cited a previous ruling from the Commission that seemed to lean in that direction, and similar determinations from five other states. It said its drivers have “complete flexibility” and are free to work for other ride-sharing start-ups as well as Uber.

The ruling in favor of the driver may have ramifications that go much further than whether the guy in San Francisco gets his gas and toll money back.

A labor lawyer representing Uber drivers in a separate class action lawsuit said the ruling is “significant” to his case. And industry analysts say the language of the California ruling appears to aim at the heart of the business model for Uber and similar service-facilitating apps. The Labor Commission noted in the ruling that Uber vets the drivers, dictates what types of cars they can use and controls the payment and all other aspects of the transaction.

“Aside from the car, plaintiff [the driver] had no investment in the business. Plaintiff was Defendants’ employee,” the Commission stated, awarding more than $4,000 in expense reimbursements to the driver.

Uber is appealing the ruling to the Superior Court of California in San Francisco. Analysts say that if the ruling is upheld it could eventually force Uber to pay Social Security, healthcare and other benefits to its pool of drivers, which currently number about 160,000 in the U.S. and perhaps an equal number overseas.

We suspect that kind of administrative work would have to be undertaken outside of cyberspace. It could require a desk, a lot of paper and eventually…a new facility.

When the Internet exploded into a global phenomenon in the mid-1990s, most of the e-Commerce pioneers thought they could reap a tsunami of dollars by facilitating transactions without investing in bricks-and-mortar facilities. But the trajectory of Amazon clearly shows that, at some point, the rubicon between the digital and physical worlds inevitably is crossed in order to maximize profitability. Until Jeff Bezos made the commitment to establish an Amazon distribution system in the physical world, the cyber behemoth he created generated revenue in the billions but no profits.

Today, Amazon is one of the largest logistics players on Earth, with dozens of huge distribution centers and thousands of employees.