Earlier today, Uber was dealt yet another setback in its efforts to settle the IC misclassification lawsuits brought against it by Uber drivers in California and Massachusetts. As readers of this legal blog will recall from our post of April 22, 2016, Uber entered into a proposed settlement with counsel for the drivers that would pay them $84 million at a minimum with the potential of up $100 million, and afford them additional protections from unilateral termination by the company of their status as Uber drivers. Despite the large size of the proposed settlement, numerous objections were filed by proposed class members, by unions seeking to represent the drivers, and by other interested persons and entities. On August 18, 2016, Judge Edward Chen issued a 35-page Order denying the motion filed by the drivers’ counsel and supported by Uber that sought approval of the proposed settlement. Judge Chen expressed concerns about a number of provisions of the proposed settlement, but one reservation about the terms of the proposed settlement overwhelmed all others: Judge Chen found that the proposed payment of $1 million by Uber to settle the claims brought by the drivers under the California Private Attorneys General Act (PAGA) was only one-tenth of one percent of the value of that claim.

Analysis of the Court’s Decision

A claim under the California PAGA law is a private action on behalf of the State. The PAGA claim had been estimated by the drivers’ counsel to be worth up to $1 billion in damages. In order to determine whether the estimate was genuine, the Court had asked the California Labor and Workforce Development Agency (LWDA) to provide its estimate of the potential penalty that Uber would face if the LWDA sought to enforce its penalties against Uber for alleged misclassification of employees – and the LWDA confirmed that the $1 billion amount was accurate. In their negotiations of the proposed settlement, both counsel for the drivers and Uber appeared to shortchange the State of California by allocating only $1 million to the PAGA claim. According to Judge Chen, “the court cannot find that PAGA settlement is fair and adequate . . . .” Rather, Judge Chen concluded that the 99.9% reduction in the amount of the proposed penalty to Uber “has no rational basis.” In a rather harsh comment, the judge stated that “Plaintiffs appear to treat the PAGA claim simply as a bargaining chip in obtaining a global settlement for Uber’s benefit.”

Judge Chen also expressed concerns about the sweeping scope of the waiver and release that was part of the proposed settlement. He found that it covered workers who were not part of the class, covered claims that were not part of the lawsuits, and may adversely affect the prosecution of a number of other cases brought against Uber. While he found that the average amount of recovery for unreimbursed expenses and tips to be modest – only $24 for California drivers and $12 for Massachusetts drivers who drove under 750 miles for Uber, and $1,950 for California drivers and $979 for Massachusetts drivers who drove over 25,000 miles for Uber – the judge concluded that such amounts, although low, were about 10% of their potential recovery and therefore legally “adequate.”

On more a technical issue, the judge expressed concern that the proposed settlement would require him to vacate his prior decision finding the arbitration agreement that Uber sought to impose on drivers to be unenforceable because it contained a waiver of the drivers’ rights to bring a PAGA claim in court and was issued under circumstances that did not adequately explain the nature of the arbitration agreement to the drivers.

The Significance of the Court’s Decision

What exactly does all this mean? First, the parties may seek to negotiate a higher amount of a proposed settlement. As illustrated recently in the case involving Uber’s ride-sharing competitor, Lyft, the parties in that case substantially increased the amount of the settlement following a rejection by a court of the initial proposed resolution. As we noted in our blog post of July 6, 2016, the increase from $12.25 million to $27 million, along with non-economic advantages for the drivers, led the court to eventually approve that settlement following its initial rejection. However, here in the Uber case, the PAGA claim would have to be increased to $100 million to reach the same 10% figure that the judge found minimally adequate with respect to the non-PAGA claims. Uber may have little interest in essentially doubling its offer. It is expected, therefore, that the parties may seek to increase the PAGA claim to $25-50 million and take a shot that the court will approve it.

Second, at the end of the court’s decision, it terminated its order prohibiting Uber from seeking to have drivers enter arbitration agreements. Thus, it is expected that Uber may promptly require drivers to sign a new arbitration agreement, presumably without waiving their right to litigate their PAGA claims in court, and allowing the drivers to opt-out if they wish to bring their claims in court. It has been estimated that as few as 8,000 of the hundreds of thousands of Uber drivers in California may remain in the class action if that occurs. However, Uber would be required to arbitrate thousands of cases of IC misclassification.

Third, Uber may simply wish to try the case to a jury. While few companies find that option to be worthwhile, it is by no means unheard of. FedEx tried a case to a jury in an IC misclassification case and won a jury verdict, as the overwhelming number of FedEx Ground drivers wanted to remain their own bosses. Although the verdict in that case was overturned on appeal due to faulty jury instructions, Uber claims that the overwhelming number of drivers want to be their own bosses and not Uber employees.

A court conference in this case is scheduled for September 15, 2016. Presumably, the parties will tell the court then how they wish to proceed.

How Can Other Companies Avoid Being “Uberized” by an IC Misclassification Class Action?

As we have stated in an earlier blog post commenting on the legal challenges confronting Uber, many companies that use independent contractors have resorted to IC Diagnostics™ to enhance their level of compliance and determine whether a group of 1099ers would pass the applicable tests for independent contractor status under governing state and federal law. That proprietary process also offers a number of practical, alternative solutions to enhance compliance with those laws, including: restructuring, re-documenting and re-implementing the independent contractor relationship; reclassifying 1099ers as W-2 employees; and redistributing 1099ers – as more fully described in our White Paper on the subject. While no company can guarantee itself that some IC and his/her lawyer will not bring an IC misclassification lawsuit against the business, those companies whose IC compliance is elevated are far less likely to have to defend themselves against IC misclassification class actions.

Companies that wish to retain an independent contractor business model generally elect to restructure, re-document, and re-implement their independent contractor relationships. While not all companies can eliminate most control and direction over workers treated as 1099ers, the overwhelming number can effectively restructure their independent contractor relationships to comply with federal and most state laws. The IC Diagnostics™  process provides the means to stress-test the independent contractor relationship. If it can be effectively restructured to comply with such laws, the next step in the process is re-documentation.  What seems like a simple act of dotting your i’s and crossing your t’s, though, is anything but; indeed, many independent contractor statutes and most judicial and administrative decisions in this area are often counter-intuitive.

As we noted in our August 29, 2014 blog post entitled “Earthquake in the Independent Contractor Misclassification Field,” we concluded that FedEx Ground lost a key case because of its misplaced reliance on an independent contractor agreement and its policies and procedures that were good, but not good enough.  Plainly, FedEx is a savvy company, but close scrutiny by a court found one fallacy after another in the very documents FedEx created – sufficient in degree to lead the court to rule against FedEx. As we noted, “IC agreements and policies and procedures that are not drafted in a state-of-the-art manner, free from language that can be used against the company, can cause businesses that use ICs to face class action litigation or regulatory audits or enforcement proceedings they may be able to otherwise avoid.”

Lastly, the implementation of a legitimate IC relationship is essential. As shown in the Uber case, even when its contractual provisions were drafted in a manner intended to be consistent with independent contractor laws, evidence was introduced by the drivers in Uber’s motion for summary judgment that it failed to strictly follow in practice the contractual limitations on direction and control it had put into its independent contractor agreements.  There is no reason, however, why a company committed to complying with independent contractor laws cannot, when exercising both rigor and restraint, implement and carry out in practice an enhanced independent contractor relationship.