Can Uber survive if it has to play by the rules?

A key labor ruling in San Francisco could be far more damaging to Uber than the other controversies that have surrounded the company in recent years. 

This was not a good week for Uber. In California, we learned that the start-up sweetheart of America's urban go-getters has been slapped with a potentially damning ruling. And on the other side of the continent, it was revealed that New York City has impounded nearly 500 Uber cars for picking up street fares.

Which raises many important questions, but the most important is: can Uber survive if it has to play by the rules?

DRIVERS ARE EMPLOYEES, UBER IS NOT A TAXI

On Tuesday, the public learned about a ruling from the California Labor Commission, which determined that Uber drivers are, in fact, employees, not contractors. (The state of Florida found similarly in a separate case.) The ruling was handed down on June 3, but wasn't made public until Uber filed an appeal earlier this week.

The case was rooted in a claim filed by an Uber driver, who sought the recovery of about $4,000 in expenses related to the driver's work. Uber refused to pay the sum, insisting that its drivers are contractors, so they're responsible for vehiclemaintenance, fuel, and other costs. If, however, the CLC's ruling stands, Uber could be required to pay for those expenses itself -- not to mention Social Security, workers' compensation, and other items. That could take a real bite out of Uber's bottom line.

Time and again, Uber has described itself as a humble, neutral network that allows individuals who meet certain requirements to register as drivers and pick up fares. In California, the CLC disagreed, arguing that Uber has a great deal of control over its drivers and the equipment they use, and that the company frequently terminates workers if they fail to meet high customer satisfaction standards.

Meanwhile, in New York City, some 496 Uber cars were impounded between April 29 and June 15 for picking up fares off the street. In New York and elsewhere, cabs employed by companies monitored by the Taxi and Limousine Commission are the only ones licensed to respond to street hails. Uber drivers can only pick up passengers who've pre-arranged trips.

THE END OF THE RIDE?

These two incidents are just the latest problems for Uber, which has faced growing criticism in recent years. In Europe, cab drivers have united and laws have been passed to maintain the taxi status quo. Closer to home, the company has had to deal with increased public scrutiny in the wake of pedestrian deaths, sexual assault charges, and its harshly criticized surge pricing policy.

But as serious as those issues are, the ruling in San Francisco could have a far more damaging effect on Uber's future. That's because it represents policy reversal in California, where in 2012, the same CLC found Uber drivers to be contractors, not employees. 

This time around, the CLC took a step back and considered the case from a broader perspective. If the new ruling stands, it could slash Uber's profit margin in California, and it could cause other states to re-evaluate their own thoughts about the company.

It's unlikely that Uber would simply eat the costs associated with being a true employer. It would pass them on to drivers and, ultimately, consumers. That, in turn, would jack up the price of Uber rides, giving traditional cabs a serious advantage. And there goes Uber.

Stay tuned.