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How California Regulation Will Destroy Uber’s Business Model

Recently the state of California struck a major blow to the ride-sharing industry, primarily the popular app-based taxi service, Uber. On June 19th, the California Labor Commissioner issued an order which officially labels Uber drivers as employees, instead of independent contractors like the ride-sharing business had intended for them to remain.

This reclassification of the drivers that opted into Uber’s business venture was due to the Labor Commissioner’s argument that the standards for applying to become an Uber driver and the expectations laid forth constituted that of a regular working employee. Apart from the numerous loopholes and expectations Uber and the state will have to work through in order to comply, Megan McArdle, a syndicated columnist, pointed out in her latest article some other factors that will make things more difficult and cumbersome over time:

Uber has to worry about not just the expense of complying with all these mandates, but also the expense of documenting that it has complied with these mandates — which will mean more paperwork and hassle for Uber’s HR staff and for the drivers themselves. The effect would be to introduce a substantial wedge between what Uber spends to keep a driver on the road and what drivers actually get in their checks. How many people will still be driving when their work starts to be micromanaged and their checks are docked to pay for all the new requirements?

California is not the only state that has created massive opposition for these ride-sharing companies such as Uber, states such as New York, North Carolina, and Virginia have been in this debacle before:

  • State governments are trying to crack down on these services with new, unnecessary regulations.
  • Uber and Lyft were the subject of a cease and desist letter in Virginia, which was subsequently lifted after a public outcry.
  • Airbnb was served with a subpoena from the New York Attorney General over alleged violations of hotel regulations.
  • The government in North Carolina is now talking about enacting new regulations to stifle these businesses, as they enter new markets.

FreedomWorks research analyst Logan Albright summed up perfectly why state governments should avoid creating additional regulation and red tape for these app-based services as a whole, not just rider-sharing services specifically:

Mobile apps are providing services that benefit consumers, workers, and communities. Don’t let regulators drive them out of business in order to protect favored monopolies.

Bottom line, allow individuals to opt into private agreements as long as both parties consent to the terms laid out in order for both parties to enjoy making a profit out of their services. The more government gets involved with rigging the game against entrepreneurs and people looking for work, the more our economy hurts because new business ventures and consumers are squashed before they can flourish.

1 comments
CraiginGroveland's picture
CraiginGroveland
06/23/2015

I'm all for free enterprise, limited government, and innovation - and new paradigms.

That said, lets not forget one of the key services we all expect from our government - PROTECTION.

Protection is a fine line between to much and to little, between using force (the force of law) and education, and a fine line between dependency and self-sufficiency and individual responsibility. Balance is, in my opinion, key. Balance is worth keeping in mind.

Mr. Albright said, "Mobile apps are providing services that benefit consumers, workers, and communities. Don’t let regulators drive them out of business in order to protect favored monopolies."

Benefits are good. Stopping government from forcing people out of business is good. But jumping to the conclusion that protections are "in order to protect favored monopolies" ignores the balanced protection function of government.

I'm in the public service -lodging- business, and public safety is a BIG part of the service equation. Some aspects of public safety are regulated, some is inherent in the products and services we use, and other parts are a result of being informed and committed to public safety. For example, food storage and preparation regulations, refrigerators and dishwashers that comply with public safety standards, and various practices, such as pest control, facility cleanliness, guest security, emergency guidelines, adequate parking, signage, health policies, allowances for physical limitations, fit within the local community, even adequate insurance to compensate for unforeseen situations, etc., etc….

Then there is the social and business fabric of the community that may need time to shift to a new paradigm. If the benefits are so strong for services like airbnb and uber, then transition time is necessary. If, for example, the future of lodging significantly shifts towards homeowner and renter properties making up a large portion of the overnight lodging supply, driven by incremental income needs vs. for-profit business needs, and whereby the protections mentioned above are not incorporated into the renting equation, protection of the public and its property is compromised, and so is economic stability.

It will take time to level the playing field for public protection - regulation and enforcement, incorporation of new products and services, and proprietor education.

The overnight rental industry consist of a very diversified collection of players - a wide range of players from large worldwide enterprises to mom-and-pop small businesses. There is no single monopoly. And although there are very sizable special interest groups, government really does need to stay focused on its prime directive of protection. Yes, balanced protection, which includes both public safety and a stable shift into new commercial business, and new local neighborhood social fabric paradigms.

Craig Maxwell

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