According to a ruling by the California Labor Commissioner's Office, Uber drivers are not independent contractors but are rather employees.
The ruling could cause the costs of the smartphone-based ride sharing service to increase and could hurt the valuation of the startup company.
Uber insists that the ruling only applies to one driver, but it is the latest in a long line of regulatory and legal challenges that the company is facing alongside other crowdsourced services such as ride-share rival Lyft, cleaning service Homejoy and chore service TaskRabbit.
While the ruling from June 3 will only apply in California, it could lead to huge ramifications for Uber not just in the United States but also in other countries where it operates.
If drivers under Uber would be classified as employees and not as independent contractors, this would mean much higher costs due to additional requirements such as Social Security, compensation and insurance for unemployment.
In addition to higher costs, the over $40 billion valuation of Uber could also take a hit.
Uber, however, will appeal the ruling, and so will not need to implement any changes to its system for now. The company claimed that officials from five other states in the country ruled the opposite, that Uber drivers are independent contractors and not employees.
In fact, back in 2012, the same commissioner involved in the current situation ruled that a driver of Uber was an independent contractor, as the driver was able to determine his own working hours.
The June 3 ruling that would give Uber driver Barbara Ann Berwick a sum of $4,152 is not the first of its kind. Last week, Fedex made a settlement worth $228 million with about 2,300 deliver drivers who were classified as independent contractors and not as employees. In January, another judge in California ruled that the truck drivers in Long Beach and Los Angeles ports should be treated as employees and not independent contractors, with seven drivers owed over $2 million worth of damages.
Uber has been claiming for years that it is only a "neutral technology platform," with drivers being independent contractors and not employees. However, because the company controls the tools that the drivers use, monitors the approval ratings and terminates their classification as an Uber driver if they get low ratings, the commissioner thinks otherwise.
The ruling could inspire workers under other similar services to file lawsuits against the companies. If other such crowdsources service companies would give in, however, the lost-cost labor model of the industry would greatly suffer due to the additional costs of reimbursements and other additional benefits to what would then be termed as employees.