Last November, Uber (NYSE:UBER) scored a victory with the passage of Proposition 22, a California ballot measure that exempted the company and other ride-hailing and delivery platforms from AB5, a state law requiring drivers to be classified as full-time employees.

Uber, Lyft, DoorDash, and other gig economy companies poured $200 million into the ballot initiative to exempt their drivers from AB5 -- which would have provided them with a minimum wage, overtime pay, workers' compensation, and the ability to unionize.

A passenger gets in a car.

Image source: Uber.

However, Alameda County Superior Court Judge Frank Roesch struck down Proposition 22 on Aug. 20, ruling the initiative infringed on the state legislature's constitutional right to regulate workers' compensation claims. Roesch also noted that the inclusion of language discouraging workers from unionizing violated a constitutional provision that limited each ballot initiative to a single subject.

Based on those two violations, Roesch ruled that Proposition 22 was unconstitutional and unenforceable. Uber and its gig economy peers plan to appeal the ruling, but this sudden setback raises fresh questions about Uber's future. Let's see why everyone is talking about Uber again.

Why doesn't Uber classify its drivers as employees?

Uber pioneered the ride-hailing business model, which directly connects passengers to drivers while bypassing traditional taxi services. However, Uber has also faced a growing number of complaints regarding low wages since its initial launch over a decade ago, and many drivers still claim their earnings barely cover their own fuel and vehicle maintenance costs.

Uber has been gradually raising its payment guarantees to address those concerns, and it even guaranteed its U.K. drivers a minimum wage, holiday pay, and pensions earlier this year following a historic U.K. Supreme Court ruling.

However, Uber has repeatedly refused to reclassify its U.S. drivers from independent contractors to full-time employees. Doing so would likely cause Uber's operating costs and fares to surge, then throttle its long-term growth by limiting the maximum number of drivers it can support as employees.

Uber has remained unprofitable over the past two years, even as it tried to streamline its business by divesting its overseas businesses. Last year, it generated $11.1 billion in revenue but posted a net loss of $6.8 billion. On an adjusted EBITDA basis, it still posted a net loss of $2.5 billion.

Those ugly losses indicate that Uber isn't merely reluctant to classify its drivers as employees -- it's unable to do so without breaking its core business.

What are Uber's long-term plans?

Uber's mobility segment, which houses its namesake ride-hailing service, usually squeezes out a slim profit on an adjusted EBITDA basis. However, the ongoing losses from its delivery (Uber Eats), freight, and other segments constantly wipe out those gains.

An autonomous vehicle on a city street.

Image source: Uber.

Uber will likely try to stabilize its business with two main strategies. First, it could buy more companies to boost its scale (as seen in its recent takeover of Postmates). At some point in the future, economies of scale could kick in and gradually reduce Uber's losses.

Second, the company still likely plans to replace its human drivers with autonomous vehicles. Uber previously developed its own self-driving cars through its Advanced Technologies Group unit, but it sold the unprofitable division to the self-driving start-up Aurora this January.

However, Uber also gained a stake in Aurora as part of the deal, and it's likely hoping that autonomous vehicles will resolve its messy labor disputes.

Making headlines for all the wrong reasons

Uber's fight against AB5 last year highlighted how fragile its business model was. It squeezed out a costly victory with the passage of Proposition 22, but the new court ruling threatens to undo all those efforts.

More importantly, other states could follow California's lead and pass similar laws to force Uber to reclassify its drivers as full-time employees. The national PRO Act, which passed the House in March, could also enable gig workers across the U.S. to unionize against their employers.

Uber's revenue declined 14% during the pandemic last year, but analysts expect its revenue to rise 43% this year as people start going out again. That's an impressive growth rate for a stock that trades at five times this year's sales -- but it won't generate a profit anytime soon.

If Uber's appeal against the California ruling fails, it could run into regulatory headwinds elsewhere and never generate a profit. Investors should keep all these threats in mind before they buy Uber's stock.

 
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.