Uber grapples with multiple challenges to business model in Europe

Uber’s business model is being challenged on multiple fronts in Europe, as a legislative proposal from the EU and a High Court decision in the UK threaten to sharply drive up its costs.

On Monday, the UK High Court ruled that Uber’s operating model was not compatible with existing transport laws in London. This means that Uber and other ride-hailing operators can no longer think of themselves as a platforms connecting drivers with passengers, but must now operate largely as taxi companies, with obligations to their passengers and to drivers.

For Uber, which has already reclassified its drivers as workers, the ruling could lead to a hefty tax bill. Jolyon Maugham, a tax lawyer who runs campaign group the Good Law Project, said the decision could affect an ongoing dispute over Uber’s potential VAT liabilities, thought to be worth some £1.5bn, and its future liability to pay VAT on drivers’ takings. Maugham said the ruling could also prompt HM Revenue & Customs to take a closer look at Uber and other operators’ corporate tax positions.

Uber declined to comment on the potential tax liabilities, but the ruling risks putting its promises of continued profitability, on an adjusted basis, under additional strain. Uber eked out its first “profitable” quarter in this year’s June-August period by a mere $8m.

“It is an overall gut punch for the ride-sharing model. Uber has had to quickly adjust in the UK,” said Daniel Ives, managing director at investment firm Wedbush Securities. “The fear was more countries are going to follow what we’ve seen in the UK, and those fears are coming to fruition.”

For the first nine months of 2021, the UK represented 8 per cent of Uber’s entire global gross bookings for rideshare. Uber has already paid roughly £116m to its UK drivers in holiday pay, and set aside $600m earlier this year to deal with retrospective driver claims, following a Supreme Court ruling that determined that its drivers are workers, and therefore entitled to benefits.

However, concerns about more wide-ranging regulation were confirmed by new draft legislation from the European Commission, set to be published this week.

Under these proposals, seen by the Financial Times, all gig economy companies — from food delivery to cleaning services and ride-hailing — will be forced to prove that their workforces are self-employed contractors, not employees, for the first time. So far, gig economy workers have generally been considered self-employed, and therefore not entitled to minimum wage, sick pay or holiday leave.

The draft rules shift the burden of proof of workers’ status to the platforms, such as Uber, Ola, Deliveroo and others, which have to demonstrate that they do not control how the workers go about their jobs. The companies will therefore have to fulfil several criteria, including ensuring that couriers and drivers are able to choose their own schedules and able to work for others, to challenge their employment status claims.

“The employee model goes counter to what the gig economy has been built around,” Ives said. “So I think it could reduce expansion of ride-sharing companies throughout Europe, and obviously it’s a lot less profitable. We view the impact on profits to be in the hundreds of millions of dollars for the overall ride-sharing market in the EU,” he added.

This change reflects a “long-running and fundamental issue” with the way gig economy companies outsource labour, expenses and risk, said George Maier, a fellow at the London School of Economics specialising in platform economics and worker relations.“ What we are seeing is this model slowly hitting regulatory and legal barriers on a global scale.”

Meanwhile, the EU rules are expected to become law by the end of this current parliament in 2024, although the timeline may slip. If implemented by member nations in current form, the EU, analysts and Uber agree there will be increased costs for all gig economy companies, particularly in terms of labour.

The EU estimates the changes could cost the entire sector up to €4.5 billion ($5.1 billion) more a year, according to the draft proposals seen by the FT. Uber added that there would be significant negative consequences in terms of job losses, increasing consumer prices, and a shrinking overall market.

However, the threat to gig companies more broadly is not “existential”, according to analysts. “It’s very rare for behaviours to change back when the internet changes things, even in the case of cost inflation. Restaurants pay an extra 25 basis points on commission and the customer pays an extra 25p. That’s it, we all move on,” said Giles Thorne, equity analyst at Jefferies.

The more worrying issue is the imposition of a rigid labour model, Thorne said. “At this point, for platforms with a long runway of growth, having a flexible labour model contributes to overall scalability of your business. Fixed employment is not flexible.” 

Jason Galbraith-Marten, the QC who represented the App Drivers and Couriers Union in the latest High Court proceedings against Uber, said it was “now very likely that all private hire vehicle drivers in London are properly to be regarded as employed by the operator (or operators) for whom they drive”, meaning that thousands more drivers would be eligible for employment rights such as the right to minimum wage, to paid holiday and adequate rest breaks.

Mick Rix, a national officer at the GMB union, said it had already told Bolt — which maintains its drivers are self-employed, and has recently announced a policy of allowing London drivers to set their own fares — that it would pursue court action for backdated pay if the company did not change its business model.

Additional reporting by Hannah Murphy and Dave Lee

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