Yahoo Finance Uber's UK driver changes could cost company $500m
Watch: Uber drivers in UK to get earnings guarantee, holiday pay and pensions
New changes to the way Uber (UBER) treats its UK drivers and historical settlements could cost the ride hailing giant over $500m (£360m), according to experts.
Uber said late on Wednesday that it would reclassify its 70,000 UK drivers as workers. The reclassification doesn't entitle drivers to the same rights as employees but means they will be guaranteed minimum wage, sick pay, holidays, and will be entered into a pension plan. The shift followed a defeat for Uber in the UK's Supreme Court last month.
Uber said the changes were "the right thing to do" and urged rivals to follow suite.
Uber reiterated its earnings guidance on Tuesday despite the change to UK worker benefits. However, the overhaul is likely to lead to a big jump in operating costs for the company. The UK is one of Uber's largest markets outside of North America.
In a research note published on Wednesday, Bank of America analyst Justin Post estimated the changes would push up Uber's UK costs by as much as 9% — equivalent to "$132m in hypothetical costs for FY21, or $105m for the remaining about 9.5 months."
Uber could also be on the hook for a hefty settlement with drivers over its historical practices. Last month lawyers said they intended to file damages claims on behalf of drivers following last month's Supreme Court judgement. Uber had signalled it would likely fight these claims but Tuesday's announcement makes that unlikely.
"The company has reversed on its previous position of claiming that the ruling only applied to a limited number of drivers who had brought the case," said Susannah Streeter, a senior investment and market analyst at stockbroker Hargreaves Lansdown. "Throwing in the towel is likely to come at a significant cost to the company."
Bank of America said "back benefits could exceed $400m depending on number of drivers in settlement."
Uber declined to comment on Bank of America's estimates.
Shares in Uber were trading down 2.5% in the pre-market in New York on Wednesday.
Despite the rising costs, Bank of America still rated Uber's stock a "buy." Uber is likely to "offset that cost with lower driver incentives in the UK (Uber now the only UK ridesharing service paying these benefits)," Post said. Offsetting the rising costs means earnings should be protected.
The decision could also yield some positive, Post said. New benefits could help Uber attract drivers in the UK. If rivals are forced to improve their own driver benefit packages too, then it could make it harder for challengers to enter the market and compete.
"Overall, we view this as a similar outcome to the California Prop 22 classification, and Uber can use the change as an example for other countries (or US states) that don't have a third employment classification," Post wrote.
"The remaining risk we see in the UK is potential need to charge and collect a VAT tax (ruling expected in next few months), which would likely require price increases and reduce price competitiveness vs. taxis."
Michael Newman, a partner in the employment team at Leigh Day, which acted on behalf of Uber drivers in the Supreme Court case, said Uber's decision was "significant, not just for Uber drivers, but for the whole of the gig economy."
Watch: When should I start paying into a pension?
