UBER isn’t merely a digital middleman linking passengers and drivers, but rather an actual transportation service, the European Court of Justice ruled on Wednesday, in a pivotal move that may spill over into the broader ride-hailing industry and the future of the on-demand economy.

The decision opens the door for European cities to impose stricter regulations on the ride-hailing company as a taxi operator. That means Uber will have to abandon services, such as UberPop, the equivalent of UberX in the United States, that use non-professional drivers and instead abide by local rules governing taxis.

Uber said it operates in most European markets with certified drivers and won’t change things much for them. But some experts say the company and smaller competitors that see themselves mainly as digital platforms may soon be faced with new, government-imposed obstacles, which may stymie their growth.

“The ruling certainly dampens the enthusiasm that any platform has for offering transportation service in Europe,” said Arun Sundararajan, a professor at New York University’s Stern School of Business. “European regulators don’t seem to be willing to adapt their structures to accommodate new digital business models.”

Uber is perhaps the most prominent company in the on-demand economy, with a valuation of $68 billion and operations in 600 cities worldwide. This new type of business model relies on the ubiquity of cellphones, and allows consumers to summon a broad array of services at the touch of a button, from local transportation to food delivery, housework and home repair. The on-demand economy has transformed the way consumers seek out services and has freed start-ups from the substantial costs of paying a vast network of employees. It’s also created a market for workers who, for instance, need a flexible work schedule or supplemental income.

But the on-demand economy has also allowed firms to circumvent long-standing regulations and to avoid the responsibilities generally associated with employers, like providing steady pay with benefits.

In recent months, the British delivery service Deliveroo, and the California-based home rental platform Airbnb, have also drawn scrutiny in Europe. A British tribunal is examining whether Deliveroo workers should be granted employment rights, and the Paris city council ruled that short-term renters on Airbnb must first register their properties with the town hall.

Tech industry critics have argued that powerful platform companies, such as Uber, Lyft and TaskRabbit have skirted their responsibilities to the public and to their workers. “Jurisdictions are becoming more assertive and realising they don’t have to take Uber the way it presents itself,” said Tom Slee, author of the book “What’s Yours Is Mine,” a critique of the sharing economy. “I think it’s a very healthy step towards a better relationship between the law and technology companies, and particularly Uber. It’s going to be a boost to efforts to get gig economy companies to recognise employment rights,” he said.

While the ruling only affects markets in the European Union, it could prompt regulators elsewhere to take a closer look at the issue, as they evaluate what to do about contract work, experts say.

Some see a missed opportunity for Europe. Sundararajan said the court could have urged parliament to chart a new path for ride-hailing services, recognising that the classic employer-employee relationship might not work for innovative business models. What’s more, for European cities that have capped the number of professional drivers or that mandate costly requirements for driver certification, the ruling could harm consumers seeking high-quality, low-cost rides, he said. Tighter regulations could also adversely affect other ride hailing start-ups, he added, which lack the resources to shoulder additional costs.

For European cities that have capped the number of professional drivers or that mandate costly requirements for driver certification, the ruling could harm consumers seeking high-quality, low-cost rides, he said. Tighter regulations could also adversely affect other ride hailing start-ups, he added, which lack the resources to shoulder additional costs.

While the ultimate consequences of the Uber ruling remain unclear, industry observers say governments have yet to address the massive societal shift toward independent work, and away from the traditional full-time employment model.

According to a McKinsey study published last year, 20 to 30 percent of the working-age population in the United States engage in some kind of independent work. But industry observers say that Americans are effectively penalised for working outside a typical 9-to-5 job arrangement. “For a country that has such a strong narrative about supporting entrepreneurship, our tax system and our labour market don’t deliver on that promise or that narrative,” said Diane Mulcahy, author of “The Gig Economy.”

Mulcahy emphasised that platform companies like Uber make up only a fraction of the gig economy, which can encompass consultants, independent contractors, freelancers, part-time and on-demand workers.

She highlighted the larger question that the Uber ruling did not directly address but remains of significant importance: How will societies secure benefits for workers historically tied to employment, like health insurance, workers’ compensation, vacation and sick leave.

“The day of reckoning is still coming,” she said. “We still have to grapple with this question of how do we do deal with a workforce that isn’t made up of full time employees and full time jobs.”

Bloomberg/The Washington Post Service

Published in Dawn, The Business and Finance Weekly, December 25th, 2017