A person who uses the Uber app in London.

Peter Summers | Getty Images

LONDON – Uber’s decision to classify its UK drivers as workers will result in increased costs for the company, analysts say, hurting the company’s prospects in its main European market.

Uber said Tuesday it would begin treating all 70,000 of its drivers in the UK as “workers” eligible for minimum wages, vacation pay and retirement plans. It should be noted that this does not mean “worker”, a separate legal status in the UK with additional employment rights.

It comes weeks after the country’s Supreme Court upheld a ruling that its drivers are workers and not independent contractors. While the decision was made with a small group of drivers, thousands more have taken action against the company. And experts have warned it could have a significant impact on the general gig economy.

For Dan Ives, Wedbush Securities’ Managing Director, Equity Research, the move is a “slap in the face” for Uber’s UK prospect

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

“For Dara & Co. it’s all about profitability. With London being a top 5 market in the world, the calculation is not cheap for Uber in terms of reclassifying employees and contractors.”

The company continues to expect to achieve Adjusted EBITDA profitability by the end of this year.

A crucial market

Uber’s UK ride-hail business accounted for 6.4% of all gross mobility bookings in the fourth quarter of 2020. Still, London is by far the company’s most important market in Europe. Uber has around 45,000 drivers and 3.5 million drivers who use its app in the UK capital.

It’s not the first time Uber’s UK business has gotten into trouble. The London transport guard TfL has twice revoked the company’s license to operate in the city for security reasons. Uber was granted an 18-month London license in September.

Meanwhile, Uber has long been criticized by the London 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 should be recognized as workers with entitlements to the minimum wage and vacation pay during working hours from signing in to signing out, while Uber only commits itself to those entitlements from the date of acceptance Travel to failure incurred, “Farrar and Aslam said in a statement on Tuesday. “This means that Uber drivers are still 40-50% switched on short notice.

The changes announced by Uber include:

  • You pay drivers at least the UK National Living Wage, which is £ 8.72 ($ 12.16) an hour and is set to increase to £ 8.91 after accepting a trip next month
  • The paid vacation time is based on 12.07% of the driver’s income and is paid every two weeks
  • A retirement plan with contributions from Uber as well as driver contributions

The new rules do not apply to couriers in the Ubers Eats Food Delivery app.

Count costs

The move will no doubt result in a higher cost for Uber. Experts say it could also cause the hail giant to withdraw from some regions.

“In places where Uber cannot avoid providing employment benefits to drivers, Uber’s costs are expected to increase by up to 30%,” said Pinar Ozcan, professor of entrepreneurship and innovation at Oxford University’s Saïd Business School CNBC.

“It can be said that this will put Taxis and Uber on the same footing to compete, with the difference between the two being entirely based on technology and not legal loopholes. This could lead Uber to adjust its growth strategy and less Markets leaves profitable. “

Bank of America estimates that Uber’s setback in employment rights in the UK could cost the company more than $ 500 million overall.

“Assuming an 8% increase in costs for UK drivers, the hypothetical cost would be $ 132 million for fiscal year 21 or $ 105 million for the remaining 9.5 months,” the bank’s analysts said in a research Report on Tuesday. “Uber can likely offset these costs with lower driver incentives in the UK.”

Potential retrospective benefits for Uber employees in the UK “could exceed $ 400 million depending on the number of drivers in settlements,” they added. However, Bank of America maintained its Buy recommendation on Uber stock, saying the result “reflects evolution, not platform risk,” as new driver benefits could attract more drivers, reduce the need for incentives and raise the bar for competition .

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

Uber says it doesn’t expect to increase tariffs due to the driver change. However, Ives believes that increased costs for Uber “will ultimately … be passed on to the consumer”.

The situation in the UK reflects Uber’s struggle with California regulators, who last year tried to classify drivers from Uber and other hail services like Lyft as employees in an attempt to provide them with more employment protection.

However, voters backed an election measure called Proposition 22, which exempted Uber and other gig economy platforms from reclassifying drivers as employees.

Uber advocates a “third way” to classify gig workers that offers them some protection, but still allows them to work flexibly. The company has submitted proposals for such a model to the EU as the bloc is reviewing the working regulations for gig economy platforms.