When California regulators decided earlier this week that a San Francisco Uber driver was indeed an Uber employee, speculation inevitably followed about the dire impact the decision might have on the company’s bottom line.
Uber has historically classified its drivers as independent contractors, avoiding the taxes and benefits that an employer usually has to cover for its workers. For more than a year, Uber has been fiercely fighting lawsuits from drivers that want to be reclassified as employees.
We've done the math on how much employee taxes and benefits would cost Uber if this happens, and we can see why they're fighting so hard. With the help of Saint Louis University law professor Miriam Cherry and Duke economist Michael Munger, we've estimated that it will cost Uber tens of thousands of dollars per driver who becomes an employee.
In ruling on the complaint against Uber filed by driver Barbara Ann Berwick, the California Labor Commission found that Uber acted more like an employer than, as the company claimed, a mere software platform connecting independent drivers with passengers.
Uber’s drivers are currently so-called 1099 workers, named for the tax form that applies to independent contractors. Uber pays no taxes on their wages. But if its drivers were employees,
Uber would have to fork over state and federal taxes for unemployment, disability, Social Security and Medicare. For a hypothetical San Francisco driver making $50,000 a year, that would work out to somewhere around $4,940 in taxes annually per driver.
Here’s how that breaks down:
But that's not all. Uber would also have to provide full-time drivers with benefits. According to the Bureau of Labor Statistics, on average, a service worker’s benefits compensation accounts for about 29 percent of total compensation as of March 2015. Assuming that Uber was reasonably generous when it came to retirement and health insurance plans, its bill per hypothetical Bay Area Uber driver making $50,000 per year would come out to $20,423 in annual benefits. (That number includes the tax bill above.)
Here’s how the numbers break down when we include taxes and (reasonable) benefits:
That number, of course, is very rough, and, as Cherry pointed out, likely on the generous side. Uber may not offer all of the benefits that the Bureau of Labor Statistics includes in its averages, such as a retirement package, and it could save money by opting for things like a cheaper health insurance plan. And since Uber does not publicly disclose information about how many of its drivers work more than 30 hours per week, it's impossible to tell just how many drivers would qualify for benefits, such as health insurance, that are only legally required for full-time workers.
But Uber could also be on the hook for covering costs associated with driving that, at the moment, individual drivers pay for themselves. In Tuesday’s ruling, the California Labor Commission ordered that Uber reimburse Berwick for business expenses, such as bridge tolls and mileage put on her car in accordance with California labor laws. Using the IRS’ standard mileage reimbursement rate for 2014, the commission determined that Uber owed Berwick $3,662 for 5,468 miles driven over 49 days, plus $256 for bridge tolls.
Reimbursing drivers for vehicle mileage could become a huge operating expense for Uber. A data dive by NerdWallet last year found that to make $50,000 annually, our hypothetical San Francisco Uber driver would need to complete 60.21 trips each week. In San Francisco, data that driver dashboard startup SherpaShare crunched for Fusion shows that the average Uber trip is 5.3 miles and drivers only have passengers in the car about a fourth of the time they are driving. Even if Uber only reimbursed drivers for miles driven with a passenger in the car, that would work out to about $9,542 each year.
And, Munger noted that, like restaurants, if Uber drivers did not net enough fares to equal minimum wage, Uber would also be obligated to pay employee drivers the difference.
Any way you slice the numbers, classifying Uber drivers as employees is bound to cost the company tens of thousands of dollars per employee. And that, said Munger, could threaten the basic premise of Uber’s existence.
“The decision, if it is adopted more broadly, flies in the face of the very premise of the sharing economy,” he said. “The sharing economy is based on using platforms on smartphones to sell reductions in transactions costs. Companies need to be able to reduce their businesses to software. Employees get in the way of that.”
Many, like NYU economist Arun Sundararajan, have instead advocated rethinking what exactly constitutes “employment.”
“Rather than forcing full-time employment on on-demand work firms, we should instead pursue a policy direction that creates a comparable safety net for workers who are not full-time employees,” Sundararajan told Fusion.
The California Labor Board ruling does not set a legal precedent in the same way that a court ruling does — it only applies to one driver, Berwick.
But the case could set off a wave of lawsuits like the two federal class-action suits attorney Shannon Liss-Riodan is currently fighting against Uber and Lyft to classify drivers as employees.
And if Uber is ever forced to treat its drivers like employees, one thing is certain — it won’t be cheap.