At least one Uber driver is now an employee of the ride-hailing company, according to the Labor Commissioner of California. The ruling does apply to only that individual but it sets a precedent that threatens Uber's business model and could cost the company billions.
Valued at $40 billion and in talks to raise even more money, Uber skirts financial burdens by billing itself as a "logistics company," and engaging drivers as "contractors." Social security, taxes, health insurance and minimum wage are employer responsibilities the San Francisco-based company isn't obligated to offer contractors. But if all Uber drivers are classified as employees—rather than contractors—in legal actions following the California court ruling, that will change.
"For Uber, it would definitely hit them on the social security part but it is also going to hit them on the unemployment insurance that they will have to pay for and workers' compensation," Amar Mann, a regional economist at the Western office of the Bureau of Labor Statistics, said. "Those are three really big areas where Uber is not paying anything and that could potentially change."
Social Security
Self-employed workers—which includes Uber drivers—who make more than $15,720 annually, are taxed at a rate of 15.3% for Social Security and Medicare. Employed workers on the other hand are taxed at half that rate (7.65%) and their employers are responsible for the other 7.65%, according to the Social Security Administration. Uber would take on this extra tax burden if all drivers are classified as employees.
To put this in perspective, if you take the fact that the average Uber driver makes about $19.04 an hour in wages (according to data released by Uber), a driver who works 40 hours a week would make approximately $39,600 annually. At a tax rate of 7.65%, that means that Uber would have to pay about $3,000 a year in social security taxes just for that employee.
Unemployment Insurance Tax
Let's take a look at how this tax works in the Golden State as an example. Employers in California are required to pay an unemployment insurance tax on the first $7,000 an employee earns. For a new employer, the unemployment insurance tax rate is 3.4% for the first two to three years. After that period, the maximum amount an employer can be taxed is $434 per employee, per year, according to the Employment Development Department of California. Last month, Uber CEO Travis Kalanick boasted that there are 22,000 Uber drivers in San Francisco alone. At a this rate of 3.4%, the company would be responsible for a staggering $5.2 million in unemployment insurance taxes just for its San Francisco fleet.
Workers' Compensation
Beyond that, Uber would face workers' compensation costs. Last fall, California passed a law that requires "transportation network companies" to have at least $200,000 in primary insurance coverage for the company and the driver and an additional law (which takes effect July 1) that requires drivers to to carry at least $1 million in insurance for personal injury and property damage. Uber, however, does not face the same workers' compensation requirements as other companies due to its contractor-based model. If this becomes standard for Uber and other companies such as Lyft, it will have a major impact on drivers throughout the country.
"In many states, an individual who is an independent contractor and if that firm, in other words that individual, has just one employee— meaning him or herself—they are not even required to purchase workers comp coverage to insure themselves. That is very common in many if not most states," Bob Hartwig, the president of the Insurance Information Institute, said.
Health Insurance
Health insurance for Uber drivers would have a hefty price tag. The company would of course not be required to provide insurance to all its drivers. Only those who drive enough to be classified as full-time workers and excluding drivers who have insurance through another job or a spouse would qualify. Forbes contributor Dan Diamond did a little back of the envelope math to see what it would cost Uber to provide health insurance to drivers that fall into this camp. Under the assumptions that just 20% of Uber's estimated 160,000-plus drivers would qualify for coverage and that Uber would spend about $3 an hour on health insurance per employee (according to BLS data, the average cost incurred by an employer in the transportation industry is $2.74 per hour, per employee), health insurance could cost Uber about $150 million over the course of a year, according to Diamond's estimate.
