San Francisco-based tech company Uber was founded in 2009 as a way to connect people in the city who needed rides (but couldn't find taxis) with limousine and town car drivers who wanted to make extra money. The company went public in May 2019 and the stock trades under the ticker symbol UBER.
Today, Uber connects drivers and passengers in 400 cities worldwide and its drivers include, not just professionals, but also average people willing to drive strangers around for a fee. The company launched its UberEats food-delivery app in 2014 and a helicopter taxi service to JFK airport in New York City in 2019.
Uber has seen a number of competitors, such as Lyft and Via, spring up in the ride-sharing business and the company has faced regulatory issues worldwide. From being banned from airport curbs (and entire countries) to increasing operational risks, Uber has four challenges on its hands in America and abroad.
- As it struggles to be profitable Uber faces several challenges both in the U.S. and worldwide.
- There have been legislative and court challenges to Uber classifying its drivers as independent contractors rather than employees.
- Changes in laws can also affect how much Uber pays in taxes; it already faces complaints from various governments that it shirks its tax liabilities.
- Some countries and airports have banned or drastically limited ride-sharing companies.
- Some authorities are imposing access or other special fees on Uber, increasing the cost of a ride and making the service less competitive than traditional taxis.
1. Status of Drivers
One ongoing thorn in Uber's side has been the status of its drivers: whether they should be classified as employees or independent contractors.
Uber, not surprisingly, prefers the latter. It 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, or worker's compensation. And, it is not required to reimburse drivers for mileage.
Drivers welcome the flexibility and freedom that comes with not being an employee (or so Uber claims). Uber drivers can work when they want, for as many hours as they want. And they can quit anytime.
That may be so, but other Uber drivers are upset about being treated as independent contractors, their working conditions, and the earnings that effectively often amount to less than minimum wage. Uber has settled major class-action lawsuits launched by drivers in Massachusetts and California.
In 2021, with the lifting of pandemic restrictions, Uber has had problems in getting enough cars on the road to meet newly increased demand. It has offered sign-up incentives and significantly raised prices for rides. But it's also fiddled with compensation structures, so drivers tend not to share in the bigger fares—while their earnings are up, it's due more to bonuses rather than pocketing a percentage of the tab.
Uber has also faced legislative challenges on this issue in California, which—with its population of 39 million—is a huge market for the company (not to mention its home, and the site of its first ride). In 2019, the California Senate passed Assembly Bill 5, a rule that would've required Uber, Lyft, and other ridesharing companies to treat workers as employees rather than independent contractors. Uber's top attorney said in response that the company would not begin treating drivers as employees despite the legislation.
It also launched a campaign to undo it, along with Lyft and other on-demand delivery companies. On Nov. 3, 2020, Uber-backed Proposition 22 was introduced on the ballot in California, which defined app-based transportation and delivery drivers as independent contractors—overriding Assembly Bill 5. The voters approved it. Uber CEO Dara Khosrowshahi said the company will “more loudly advocate for laws like Prop 22,” and "work with governments across the U.S. and the world to make this a reality.”
So, round two to the ridesharing firm. But the saga continues. On Aug. 20, 2021, Alameda County Superior Court Judge Frank Roesch ruled that two sections of Proposition 22 were unconstitutional and that the measure as a whole was unenforceable. Uber and Lyft announced they would appeal. Prop 22 remains in effect, while its ultimate fate remains uncertain.
Still, drivers in other states may likely wage their own court battles against the company. And Uber has to consider the PR angle to all this: The impression that a high-profile, billion-dollar company exploits workers doesn't play well in the court of public opinion.
In February 2021, Britain’s Supreme Court ruled that a group of Uber drivers should be classified as workers entitled to a minimum wage and vacation time.
Related to the employer-employee relationship between Uber and its workers are tax issues. If Uber loses its status as a technology company—a mere go-between linking riders and drivers—and instead is classified as a livery 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.
3. The Risk of Being an Uber Driver
Aside from non-compliance with taxes, Uber drivers face incredible risk when working in cities or countries that have banned the company. In various countries, Uber is 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.
4. International Expansion Comes With Risks
As Uber continues to expand outside of the United States, it increases its operational risks. In Asia, for example, the ratio of taxis to the population is 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 using apps such as Alipay—negating Uber's competitive advantage of being able to pay for a ride with its app.
The number of countries with Uber drivers as of January 2021.
With more reliable and cheaper service than in the U.S., 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 company that disrupted the transportation system. In its role as a liaison between customers and drivers, the company takes a cut and the platform is among the most successful in the world. But Uber has struggled to attain profitability. In its first report as a public company, Uber said it lost more than $1 billion on $3.1 billion in revenue during the first quarter of 2019. In its latest report for the second quarter of 2021, net income was $1.1 billion on $3.9 billion in revenues—but the bottom line still showed a loss of $509 million (adjusted EBITDA).
While Uber stands to make a crazy amount of money given its high revenue and the low wages that drivers earn, it's not shocking to learn that Uber is facing many challenges as it grows.