San Francisco-based tech company Uber was founded in 2009 as a way to connect people in the city who needed but couldn't find taxis with limousine and town car drivers who wanted to make extra money.
Today Uber connects drivers and passengers in 57 countries and has expanded its driver repertoire to include not only professional drivers but also average people willing to drive strangers around for a fee. Since 2009 the company has seen a number of competitors, such as Lyft and Sidecar Ride, spring up and has faced regulatory issues worldwide. From being banned at airports and entire countries to increasing costs of operation, Uber has four challenges on its hands in America and abroad. (See also, Taxi Industry: Pros & Cons Of UBER And Other E-Hail Apps.)
California Leads The Way
In a decision that follows a similar Florida ruling, California recently ruled against Uber's claim that its drivers are independent contractors. The decision from the California Labor Commissioner has been appealed by Uber and will be heard by California courts sometime in the future. A binding judgment that declares Uber drivers as employees would have significant impacts on a multitude of industries (Airbnb and Instacart for example) and will be disastrous for Uber's business model. (See also How Airbnb Makes Money.)
Right now Uber maintains that it is a technology company and that its sole function is to connect drivers and passengers. This works out well for the company – it can start operating in new markets easily and doesn't need to concern itself with employer-employee laws and the related responsibilities and obligations. Without an employer-employee relationship, Uber isn't obliged to pay Social Security taxes, unemployment insurance and worker's compensation. Neither is it required to reimburse drivers for mileage.
While some drivers are upset about being considered independent contractors, others welcome the flexibility and freedom that comes with not being an employee. Uber drivers can work when they want, for as many hours as they want and for less than minimum wage if they so choose.
If the California courts declare Uber drivers to be Uber employees, the company will be forced to either lower payments to its drivers, pay them minimum wage, increase rates or, in the worst case scenario, stop operating in California. With a population of 38 million, California is a huge market for Uber. In addition, the new, legal precedent suggests drivers in other states will likely wage their own court battles against the company.
The next challenge that Uber faces relates to the employer-employee relationship. If Uber is dismissed as being a technology company, governments can argue that the entire ride payment is revenue for Uber and subject to city and state taxes.
Uber already faces complaints from various governments that it shirks its tax liabilities onto its drivers and that the drivers are often non-compliant about paying their taxes. More tax legislation could exacerbate the problem and will also mean either an increase in ride fares or the end of Uber operations in that particular city or state.
The Risk of Being an Uber Driver
Aside from the risk of potentially being noncompliant with taxes, Uber drivers face incredible risk when working in cities or countries that have banned the company. In various countries and a few American cities, Uber has been outright forbidden. In others, there is a call for regulation in the industry or for the governments to declare the car-sharing app illegal.
Aside from government intervention, airport authorities have been cracking down on Uber drivers. The authorities have begun charging Uber drivers access fees to drop-off and pick-up customers at the airport. The access fees increase the cost of a ride for consumers, making the service less competitive when compared to traditional taxis. (See also Will Uber Replace Airport Taxis?)
International Expansion Comes With Its Own Risks
As Uber expands outside the United States, it increases its operational risks. In Asia, for example, the ratio of taxis to population are higher than in America. Because of this, there is more competition between Uber drivers and traditional taxis. Furthermore, taxi service in Asia is fast, clean, cheap and, in some countries, can be paid for via NFC cell phones — negating Uber's competitive advantage of being able to pay for a ride with its app.
With more reliable and cheaper service than in America, it seems unlikely that there is a strong market for Uber abroad. As the technology company expands and is met with governmental opposition and protest, it will find it harder to get drivers to compete against established taxi companies.
The Bottom Line
Uber is a new company that's shaking up the transportation system. In its role as a liaison between customers and drivers, the company takes a 20-30% cut and, with 2015 revenues expected to be $10 billion, Uber stands to make a crazy amount of money for an app company. Given its high revenue and the low wages that taxi drivers earn, it's not shocking to learn that Uber is facing many challenges as it grows.