Uh-oh, Uber! California court rules drivers are employees — not freelancers

In a landmark ruling, California’s Labor Commission ruled that Uber drivers are employees, not independent contractors, reports Reuters.

For the most part, drivers for ride-sharing services such as Uber and Lyft are considered freelancers. Because of the drivers’ freelance status, these companies don’t have to worry about higher costs, which include Social Security, unemployment insurance, and workers’ compensation. In addition, drivers must shoulder various costs associated with driving their cars around, such as repairs, insurance, and gas. In part, the drivers’ freelance status is what allowed Uber to expand so quickly across the country and the world, because it didn’t need to pour money into maintaining its drivers or their vehicles.

The ruling, which came to light through a claim made by San Francisco-based driver Barbara Ann Berwick, essentially opens the door for Uber and, potentially, other ride-sharing companies to shoulder higher costs. It also has the potential of affecting the companies’ valuations, as Reuters points out.

Uber argued that its drivers are independent contractors, not employees, and that it is “nothing more than a neutral technology platform.” However, the commissioner didn’t see things that way, since Uber was found to be “involved in every aspect of the operation.” The ruling stated that since Uber knows which tools drivers use and pays close attention to their ratings — going so far as to make sure they can’t access the system if their ratings fall below 4.6 out of 5 stars — the drivers should be considered Uber employees.

As a result of the ruling, Berwick was awarded $4,000 to cover the expenses for which she sued Uber in the first place. According to the report, Uber plans to appeal the ruling and argued that the decision is non-binding.

“The California Labor Commission’s ruling is non-binding and applies to a single driver,” Uber told CNBC in a statement. “Indeed it is contrary to a previous ruling by the same commission, which concluded in 2012 that the driver ‘performed services as an independent contractor, and not as a bona fide employee.'”

Even if Uber disputes the decision, the case could set a precedent for how ride-sharing services categorize drivers, especially since the ruling was made in Uber’s home state of California. However, as such, the ruling only affects Uber drivers in California, and Uber likely won’t start paying the aforementioned additional costs until the appeal process ends.

The potentially business-altering case comes at an awkward time for Uber, as the company just invested a hefty amount of money into China, in order to further expand its operations.