NerdWallet has just exposed how unrealistic and unsustainable Uber’s business model really is. The website crunched a few numbers and discovered that it could cost the service $5,500 a year to provide benefits for a driver in six major American cities if those people became full-time employees.
To make matters worse for the service, it would probably owe the average driver thousands more in mileage reimbursement. NerdWallet noted that drivers would be owed paid holidays, health insurance benefits under Obamacare, and more, including unemployment insurance. In other words, it could quickly cost Uber a fortune if it started having to treat its drivers as employees rather than “independent contractors.”
There were around 162,037 Uber drivers in the United States that completed four or more trips in December 2014, according to an Uber driver data report quoted in Fortune. If Uber had to pay each of those drivers $5,500 a year, the total would be $89,120,530, or $89.1 million for simplicity’s sake.
Note that this is just an estimate because Uber has never revealed how many drivers it actually has in the U.S. or how many hours they actually work. One has to wonder if Uber is keeping that information secret to keep analysts from seeing how much it might actually lose.
Uber Could Owe Drivers Tens of Millions of Dollars
Okay, some Uber fans will say isn’t Uber worth $51 billion, so can’t it afford to pay that money? The problem with that logic is that the $51 billion is simply an estimated potential value for Uber; the number has nothing to do with the revenue the company actually earns. Since Uber is a privately-held company, nobody knows exactly how much money it actually makes.
One also has to wonder, will the investment bankers be rolling out their checkbooks for Uber when they discover that the company could be on the hook for tens of millions? My guess is the Wall Street crowd will run, not walk, away from Uber if its drivers get declared employees all over the country.
Something else we must point out is that NerdWallet’s experts think that each Uber driver could be owed several thousand more in mileage reimbursement if he or she were declared an employee. That means Uber could end up owing each of its American employees $10,000 or more. It could suddenly have to come up with $162 million in cash.
Therefore it is real easy to see why Uber panicked when state governments and Florida and California declared Uber drivers employees. Those individuals suddenly have a real good legal case against the networked transportation company. They and tens of thousands of others could presumably sue Travis Kalanick straight into bankruptcy.
Uber’s Credibility Gap
Once again the credibility gap between the reality of Uber and the claims made by its supporters has been exposed. Instead of being a money machine, Uber is looking more and more like a money pit that will only enrich lawyers, not investors and certainly not Uber drivers.
After all, in May, hedge fund boss Michael Novogratz went on Wall Street Week and said a former Uber Chief Financial Officer had admitted to him that gouging the drivers was the only way the company could make money. The Washington Post reported that the real take home pay of the actual Uber driver was far below the $74,000 a year the company was claiming in February.
The Post noted that the average Uber driver would have to work 80 hours a week to earn that amount. Most American workers are eligible for overtime after 40 hours a week. That would certainly qualify the driver for overtime, which would double his salary. That means Uber might end up having to pay some drivers $28 an hour or pay out tens of millions in back pay.
The average American Uber driver’s pay is around $19 an hour, a study prepared by Uber itself and Princeton economist found, a Washington Post Wonkblog story indicates. That amount is simply the cash Uber pays the driver; the cost of the car and insurance is not included.
Uber’s Business Model Is Not Sustainable
It looks as if Uber’s business model is not sustainable in the United States. If drivers get declared employees, Uber will have to shut down in the United States.
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Uber needs to come clean and say what it plans to do to deal with this situation and what it will do if its contractors are declared employees. If the company refuses to do that, its business model is unsustainable, and it is time to pull the plug on it.
It is also easy to see why Uber is so interested in developing its own self driving car. That might be the only way this company could actually make money in the real world.