Why it matters

Uber announced a settlement agreement in the high-profile litigation challenging the classification of drivers as independent contractors in late April with the possibility of a $100 million payout. Drivers in California and Massachusetts sued the company over its employment practices, claiming the ride-sharing app improperly characterized them as independent contractors when they were actually employees, entitled to additional payments and benefits.

Pursuant to the settlement terms, Uber will continue to classify drivers as independent contractors and not employees. However, the estimated 385,000 drivers will receive a payout and beneficial changes to Uber policy. The company will help with the creation of "drivers associations" in both states and clarify its policy on how and why drivers are "deactivated" from driving for the service. Uber also promised to pay $84 million to the drivers, with an additional $16 million added to the settlement fund if the company holds an IPO and the average valuation of the company increases to one and a half times that of its last financing round ($62.5 billion as of December 2015). The deal still requires approval from the federal court judge overseeing the litigation, but if it gets the go-ahead, it could set the tone for similar deals in other states. It also establishes that Uber will not be budging on its stance that drivers are not employees.

Detailed discussion

While ride-sharing apps like Lyft and Uber Technologies have seen enormous growth over the last few years, the companies have also faced significant employment issues. Drivers in several states have sued the companies alleging they were misclassified as independent contractors instead of employees, seeking additional wages or reimbursement.

Facing a putative class action in California federal court, Lyft recently reached a deal with drivers. The company agreed to make changes to its terms of service to provide drivers with greater protections and pay $12.25 million to the class but refused to alter the classification of drivers to employees going forward.

Uber reached a similar agreement, albeit on a larger scale. The company was facing consolidated class actions filed in California and Massachusetts where the drivers had successfully moved for class certification. But after three years of litigation and with trial scheduled to begin on June 20, the parties put on the brakes.

The deal includes both policy changes and a monetary payout by Uber. The approximately 385,000 drivers in the two states will receive portions of an $84 million settlement fund that could be bumped up to $100 million if the company holds an IPO and the average valuation of the company increases to one and a half times that of its last financing round, $62.5 million as of December 2015. Awards will be based on the number of miles driven, with those logging 25,000 or more miles receiving in the range of an estimated $8,000.

Policywise, Uber agreed to provide more details about how and why drivers are "deactivated" from the service and clarify policies on tips, as well as helping with the creation of a drivers' association in both states. Specifically, the company said riders will be informed that tips are not included in the fare and drivers will be permitted to put signs in their cars stating that "tips are not included, they are not required, but they would be appreciated." Uber also provided a list of the reasons why a driver may be deactivated, ranging from using drugs and alcohol to carrying a firearm to unsafe driving.

Perhaps most significantly, Uber will not change its business model pursuant to the deal, and drivers will continue to be classified as independent contractors. The company still faces litigation in other states (including Arizona, Florida, and Pennsylvania) on the issue, and the legal question of the appropriate characterization of drivers for ride-sharing apps remains unanswered.

To read the motion for preliminary approval of the settlement agreement in O'Connor v. Uber Technologies, click here.