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Uber dealt blow as California rules drivers are employees, not contractors


Uber's logo on a smartphone. Reuters/Kai Pfaffenbach

Uber's logo on a smartphone. Reuters/Kai Pfaffenbach

Uber's logo on a smartphone. Reuters/Kai Pfaffenbach

A driver for Uber is an employee, not a contractor, according to a California ruling that eventually could push up costs for the smartphone-based ride hailing service and hurt the closely watched start-up's valuation.

The California Labor Commission's decision could ripple through the burgeoning industry of providing services via smartphones, with potential implications for other “crowdsourced” services such as Uber rival Lyft, chore service TaskRabbit, and cleaning service Homejoy.

The ruling - which Uber insisted applied to only one driver - was the latest in a series of legal and regulatory challenges facing the company and other highly valued start-ups in the United States and other countries.

The June 3 ruling, which applies only in California, came to light on Tuesday after Uber appealed it in a filing in state court in San Francisco, where both the company and the driver in the case are based.

Classifying Uber drivers as employees could mean considerably higher costs for the company, including Social Security, workers’ compensation and unemployment insurance.

That in turn could affect its valuation, currently above $40 billion, and the valuation of other companies that rely on large networks of individuals to provide rides, clean houses and other services.

Because it is appealing, Uber will not have to change the way it does business, for now.

Uber said in a statement that officials in five other states have found that its drivers are independent contractors.

And in 2012, the same California commission found that another Uber driver was an independent contractor, citing evidence such as the ability of the driver to determine his own hours.

But in this case, where the commission appeared to have considered a broader range of factors, officials found Uber is "involved in every aspect of the operation."

Uber, however, touted driver autonomy.

"The number one reason drivers choose to use Uber is because they have complete flexibility and control," the company said in a statement. "The majority of them can and do choose to earn their living from multiple sources, including other ride sharing companies."

Uber has argued for years that its drivers are independent contractors, not employees, and that it is "nothing more than a neutral technology platform."

But the commission said Uber controls the tools driver use, monitors their approval ratings and terminates their access to the system if their ratings fall below 4.6 stars.

Although the ruling affects only California, the state is Uber's home base, one of its largest markets, and sets a path often followed by regulators and courts in other states.