Why Uber Should Be Regulated?

In 2017, a top European Union court has ruled that since Uber’s drivers provide transport services to customers, it should be treated as a transport company. This is against Uber’s stance that it is a technology company. There was good reason that Uber wanted to be seen as a technology company. The biggest reason is the fact that transport service providers are closely regulated in many countries across the world. Whereas on the other hand, there is absolutely no regulation on technology companies.

It is true that Uber is providing innovative solutions that many of its customers swear by. However, it is also true that Uber has been built on the principles of tax and regulation avoidance. If Uber is allowed to continue without any regulation, it is likely that there may be some repercussions for the larger market.

In this article, we will have a closer look as to why companies like Uber need to be regulated.

The Need for Government Intervention

Firstly, it needs to be understood that the earlier argument of regulation for taxis is no longer valid in the information age. The basic reasons given behind regulation of taxis across the world is that there is a problem of information asymmetry. This means when tourists get into a car with a cab driver, they do not know the background of the driver. Tourists have no way to determine whether a cab driver is genuine or a criminal. Governments believe that they issue licenses only after verification of drivers. Hence, their system assures safety to the passengers.

The reality is that this is an outdated argument. Ride sharing companies like Uber and Lyft allow passengers to leave ratings for their drivers. Hence, if there is any rogue driver, he/she will be immediately identified and removed from service. According to the millennial consumers, government regulations artificially limit the number of taxis in operation. This leads to higher demand, lower supply and ends up artificially inflating the price.

Flooding the Streets with Cars

There are other reasons which necessitate government intervention in the business model of ride sharing companies. For instance, consider the fact that Uber and Lyft have been flooding the streets with cars. They have found a way to circumvent the licensing requirements of most cities. This has led to congestion and traffic jams in most cities.

The number of trips being taken by customers of ride sharing apps has gone up by 100% in 2017. It rose again by 70% in 2018 and is expected to continue to rise at an average of 40% for the next few years. If the government does not step in to stop this increase, it could mean that Uber and Lyft will continue to flood the streets with cars thereby making the lives of ordinary citizens even more difficult.

Cars Running Empty

The problem is that Uber and Lyft’s business model is based on flooding streets with cars. Since their own capital is not invested in buying and maintaining cars, they are not concerned about the efficiency of the entire operation.

There have been studies conducted which show that Uber cars only have a paying customer about 58% of the time. This means that 42% of the time, the cars are either running empty or are parked close to business districts. Both these outcomes aggravate the traffic situation in the city.

Hence, even if the supply of Uber and Lyft vehicles were restricted, they wouldn’t really lose out on business. Instead, the regulation will simply force them to become more effective in the way that they utilize their resources.

Exploitation of Drivers

The manner in which Uber treats its employees is also a matter of grave concern for many governments. Firstly, it needs to be understood that Uber does not consider its drivers to be its employees. It considers them to be independent contractors. Using this technicality, Uber has been getting out of paying minimum wage as well as benefits which are due to employees.

Since Uber classifies its drivers at contractors, it does not provide medical insurance or other social security benefits. This is a problem for the state since if later any of these people were to fall ill, Uber will have to take care of them.

It is for this reason that it is recommended that governments should bring in some regulation which make it mandatory for Uber to provide certain benefits to its drivers.

Service Tax Evasion

Uber is also known for avoiding taxes using loopholes in the law. For instance, in most of Europe, Uber does not pay service tax because the tax is applicable to the drivers all of whom have businesses whose turnover is too small to be liable to pay service tax! Once again, there is a need for some sort of regulation which prevents Uber from getting away without paying any taxes.

The bottom line is that ride sharing companies like Uber and Lyft do need some regulation. However, this regulation needs to be different than simply restricting the number of vehicles and bringing in the old medallion taxis. Users are happy with Uber’s business model. The government just needs to use regulation to fine tune some of the excesses that Uber is able to get away with because it has a lot of bargaining power.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.

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