On the eve of its IPO, Uber can’t shake a lingering legal question

Uber’s IPO Filing: 6 Numbers You Need to Know

The company filed on April 11, 2019.

By GRACE DOBUSH May 8, 2019

Last month, the EU Parliament approved new rules to protect workers in the gig economy. It says companies engaging “on-demand, voucher-based and platform workers” must allow them to refuse work and be paid for canceled work; they must honor workers’ right to take jobs with other companies, pay workers to train, and give workers limited probationary periods. In short: “gig” workers deserve some of the protections regular employees enjoy.

An EU Parliament press release went as far as to name-check specific companies, including one IPO-bound ride-hailing behemoth in particular: Uber.

Members of the European Parliament “approved minimum rights for workers with on-demand, voucher-based or platform jobs, like Uber or Deliveroo,” the statement says.

With such an explicit call-out, it’s clear the rules were written with Uber in mind. There’s just one problem: Uber says that when it comes to its drivers, operating in 90 EU cities, the new rules do not apply.

The difference of opinion is the latest round in a long-running question at Uber, one that still dogs the company as it zooms toward its IPO on Thursday: Who actually works for Uber, and what does the company owe them?

Self-employed or just employed?

For its entire 10-year history, Uber has insisted that its drivers are, in fact, self-employed.

That distinction is key to Uber and other companies that rely on a flexible workforce. The individuals who perform the services work whenever they like, for how long they’d like, and get paid for the work they complete. Classifying workers as independent contractors has a tremendous upside for business since it means workers are responsible for their own taxes, health insurance and pension contributions, and the companies they do work for aren’t responsible for payroll taxes, overtime or other costs associated with regular employees. The system keeps labor costs low, and—the companies argue—consumer prices are low as a result.

“Companies like [Uber] build their entire business model on keeping their workers classified—and many would argue misclassified—as self-employed,” says Mark Graham of the University of Oxford and the Fairwork Foundation.

But for nearly as long as Uber has argued its drivers are independent contractors, drivers and critics have offered a counter argument: that drivers are employees deserving of minimum wage, paid leave, and unemployment benefits. Their rationale is that Uber dictates where drivers go and how much they charge, and that drivers provide the company’s core service. Some Uber drivers are going on strike across the U.S. and Europe on Wednesday, the eve of Uber’s IPO, to demand a living wage, greater transparency over fares, more job security, and, in some instances, benefits.

These opposing viewpoints have triggered an avalanche of lawsuits. Take, for instance, the 13,600 drivers in Massachusetts and California who went to court in a class-action push to be considered employees. Uber settled the six-year-old case in March for $20 million but will continue to classify the drivers as independent contractors. In 2015, a driver in London said he faced “repercussions” from the company if he cancelled a pickup, and, in some months, made less than £5 per hour, below the U.K.’s £7.20 threshold. The London employment tribunal ruled in 2016 that Uber was in fact an employer that must give drivers minimum wages and paid leave, and denied the company’s appeal in December. Uber is appealing that ruling to a higher court. Uber is likewise appealing a 2017 ruling from a judge in Sao Paulo, one of Uber’s most important markets, that a driver is an employee deserving of benefits.

Driven to change?

Along the way, Uber has made a few concessions. In settling the California and Massachusetts case, it agree to make changes to how it removes drivers from its platform. Last year, Uber extended health insurance and accident coverage to more than 150,000 drivers and couriers in 21 European countries. And at a Fortune conference in October, Uber CEO Dara Khosrowshahi said he was considering rolling out similar benefits to its independent contractors worldwide. (Uber told Fortune it has since expanded accident insurance to drivers in 40 U.S. states as well as Saudi Arabia, Pakistan, Egypt and South Africa but not health insurance.)

“If you’re going to call your drivers partners, then treat them like partners. So that you don’t get this world where independent contractors are the ‘have-nots’ and full time employees are the ‘haves,’” Khosrowshahi said at the Fortune event. “Where we would like to take independent contractors is into a state where it’s not a ‘have-not’ state—you can create a framework of benefits, etc., around the world as well. We have a long way to go, but at least in Europe we’ve gotten one step closer.”

Nevertheless, the new EU decision rules and Uber’s pushback against them indicate two things as Uber prepares to go public: there remain legal and regulatory challenges to the employment arrangement at the heart of Uber’s business, and Uber remains firmly dug in on its stance.

In fact, a spokesman for Uber told Fortune he would not even comment on the new EU directive because the rules say genuine self-employed workers are excluded and Uber drivers are self-employed.

Owning the risks

Uber’s own IPO prospectus provides a rather blunt explanation of the obstinance: “Our business would be adversely affected if Drivers were classified as employees instead of independent contractors,” it says. If changes to foreign, state, and local laws required the company to reclassify its 3.9 million drivers as employees, it would “fundamentally change” its business model, according to the document.

A question now is how investors will view the risks associated with the ongoing debate that’s so core to Uber’s business.

“We will see more lawsuits regarding employees, and it will be fought on a state-by-state basis [in the U.S.],” says John Coffee, a securities law professor at Columbia University. “The odds are against Uber continuing to characterize their drivers as independent contractors.” And if Uber has to start paying the benefits it has avoided for so long, that will certainly reduce profitability, he says.

In Europe, “countries have been moving towards greater protections for gig workers, at least as compared to the U.S.,” University of Alabama law professor Deepa Das Acevedo says. So initiatives like the EU rules should not come “out of the blue.”

New York University business professor Arun Sundararajan, meanwhile, argues that Uber actually has a competitive advantage on this front, at least compared to its rivals. Its economy of scale puts it in a better position to absorb the increased cost of drivers’ employee benefits should it be forced to do so.

While the worker classification issue is likely to continue to nag Uber, the soon-to-be-public company might just be trying to run out the clock at this point. If Uber’s investment of billions into autonomous car technology pays off, it eventually won’t need any human drivers at all.