Uber is reclassifying UK drivers as workers — here’s what happens next

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A person using the Uber app in London.

Peter Summers | Getty Images

LONDON — Uber’s decision to reclassify its U.K. drivers as workers will lead to increased costs for the firm, according to analysts, hurting the company’s prospects in its most important European market.

Uber on Tuesday said it would begin treating all 70,000 of its drivers in Britain as “workers” entitled to a minimum wage, holiday pay and pension plans. It’s worth pointing out that this doesn’t mean “employee,” a separate legal status in the U.K. with extra employment rights.

It comes weeks after the country’s Supreme Court upheld a ruling that its drivers were workers, not independent contractors. While the decision applied to a small group of drivers, thousands more have taken action against the company. And experts have warned it could have major implications for the broader gig economy.

For Dan Ives, managing director of equity research at Wedbush Securities, the move represents a “gut punch” for Uber’s prospects in the U.K.

“We believe the company will reduce its footprint of drivers and ridesharing by roughly 30% over the next 12 to 18 months,” Ives told CNBC via email Wednesday.

“It’s all about profitability for Dara & Co. and with London being a Top 5 market globally the math is not favorable for Uber on the employee vs contractor reclassification.”

The company says it still expects to reach adjusted EBITDA profitability by the end of this year.

A crucial market

Meanwhile, Uber has long been the subject of criticism from London’s black cab industry, politicians and trade unions. James Farrar and Yaseen Aslam, the drivers who successfully defeated Uber in court, said the company’s driver reforms didn’t go far enough.

“The Supreme Court ruled that drivers are to be recognized as workers with entitlements to the minimum wage and holiday pay to accrue on working time from log on to log off whereas Uber is committing only to these entitlements to accrue from time of trip acceptance to drop off,” Farrar and Aslam said in a statement Tuesday. “This means that Uber drivers will be still short-changed to the tune of 40-50%.

The changes announced by Uber include:

  • Paying drivers at least the U.K. National Living Wage, which is £8.72 ($12.16)an hour and set to rise to £8.91 next month, after accepting a trip
  • Paid holiday time based on 12.07% of drivers’ earnings, paid out on a fortnightly basis
  • A pension plan with contributions from Uber as well as driver contributions

The new rules don’t apply to couriers on Uber’s Eats food delivery app.

Counting the costs

The move will undoubtedly lead to higher costs for Uber. Experts say it could also result in the ride-hailing giant pulling out of some regions.

“In places where Uber cannot avoid giving employment benefits to drivers, it is predicted to increase Uber’s costs up to 30%,” Pinar Ozcan, professor of entrepreneurship and innovation at Oxford University’s Saïd Business School, told CNBC.

“One can say that this will bring taxis and Uber to the same field to compete, with the difference between the two being based solely on technology and not on legal loopholes. This may cause Uber to adjust its growth strategy and exit markets that are less profitable.”

Bank of America estimates that Uber’s U.K. employment rights setback could cost the firm a total of more than $500 million.

“Assuming an 8% cost increase for UK drivers would translate to $132mn in hypothetical costs for FY21, or $105mn for the remaining about 9.5 months,” analysts at the bank said in a research note Tuesday. “Uber can likely offset that cost with lower driver incentives in the UK.”

Potential backdated benefits to Uber workers in the U.K. “could exceed $400mn depending on number of drivers in settlements,” they added. Bank of America maintained its buy rating on Uber stock, though, saying the outcome “reflects evolution, not platform risk” as new driver benefits could entice more drivers, reduce the need for incentives and raise the bar for competition.

“The remaining risk we see in the UK is potential need to charge and collect a VAT tax (ruling expected in next few months), which would likely require price increases and reduce price competitiveness vs. taxis,” the bank’s analysts wrote.

Uber says it doesn’t expect to raise fares as a result of the driver changes. However, Ives believes that increased costs for Uber will “ultimately … be passed down to the consumer.”

The U.K. situation echoes Uber’s fight with Californian regulators, who last year attempted to reclassify drivers of Uber and other ride-hailing services like Lyft as employees to grant them more employment protections.

But voters supported a ballot measure called Proposition 22, which exempted Uber and other gig economy platforms from reclassifying drivers as employees.

Uber is advocating a “third way” for classifying gig workers which offers them some protections but still ensures flexible working. The firm has shared proposals for such a model with the EU as the bloc reviews the working arrangements of gig economy platforms.



Source : CNBC