Popular on-demand service apps like Uber and Lyft and their counterparts in other fields are supposedly paving the way for a new "sharing" economy. Certainly, investors believe in the growth of on-demand service apps and are willing to back their opinions with capital. Uber alone has reached the impressive market valuation of $50 billion — approximately the same market cap as General Motors (NYSE:GM) as of this writing.
What can stop the on-demand apps and the sharing economy? Regulations and lawsuits are the most likely candidates.
Uber is no stranger to the courtroom, having already settled a wrongful death lawsuit in San Francisco. While driving around and waiting for a ride request, a former Uber driver struck and killed a six-year-old girl who was crossing the street. Uber argued that they were not responsible since the driver was not carrying an Uber passenger, but the case was settled before judgment. As a result, some state laws are now in effect that force Uber and other services to supply liability insurance for their drivers even when they are working but not carrying a passenger.
Uber and similar services have also dealt with lawsuits and regulations in cities such as Portland, Oregon, and Las Vegas that have kept them from operating legally within the city. In both of those cities, Uber finally prevailed but at a significant cost.
However, the biggest legal threat to on-demand companies springs from the classification of their workers. Most on-demand companies classify their workers as independent contractors, avoiding the need to provide benefits and giving them significant tax advantages over traditional competitors.
Lawsuits have been filed arguing that on-demand workers should be classified as employees because of the level of control the company has over the worker. Should worker lawsuits succeed, on-demand companies will likely be forced to reclassify their workers and lose a lot of their inherent economic advantage. In Uber's case, a federal judge in San Francisco ruled in September that a lawsuit brought by three drivers may be considered a class-action lawsuit. Lyft faces a similar case with a ruling scheduled for September.
Boston labor lawyer Shannon Liss-Riordan has led the charge in lawsuits against on-demand companies, with eleven filings so far. Aside from the Uber and Lyft filings, she has also targeted the on-demand laundry service Washio, food services GrubHub, Caviar and DoorDash, the grocery delivery service Instacart, home cleaning/maintenance services Homejoy and Handy, and delivery services Shyp and Postmates.
Even without a class-action status resolution, lawsuits have an effect on on-demand startups because a pending lawsuit makes it difficult to raise money from investors. Startups with less funding or other issues have already begun to cave.
Homejoy already went under claiming the suits were a "deciding factor", although they arguably had greater concerns than the pending legal action. Instacart and Shyp have begun to reclassify some workers. Other on-demand companies such as the car-parking service Luxe are pre-emptively reclassifying workers, and the food delivery service Munchery and the home chore and personal assistant company Alfred Club already classify their workers as employees.
The popularity of many on-demand companies probably means that the larger and better-funded ones will survive the onslaught of lawsuits and adapt to any rulings, but smaller on-demand services with less growth potential and/or shakier business plans may be in trouble. It is not enough just to be the "Uber of x," whatever field x turns out to be. You have to provide a useful service that truly fills a niche, and a suitable income stream to match.
Photo ©iStock.com/Deborah Cheramie