Why it matters

The parties in the putative class action alleging that Uber drivers are employees and not independent contractors are back to square one after the judge overseeing the litigation refused to sign off on the proposed $100 million settlement. Just prior to trial, the parties reached a deal that would allow Uber to continue to classify drivers in California and Massachusetts as independent contractors. In return, the estimated 385,000 class members would receive a payout of $84 million, plus an additional $16 million if an IPO for the ride-sharing company moves forward, as well as policy changes such as clarification about when a driver can be deactivated. But the court was not impressed. The $16 million add-on payment was illusory, the court said, finding the $84 million insufficient as it represented just 10 percent of the full value of the non-Private Attorneys General Act (PAGA) claims, which the court estimated at around $854.4 million. In addition, the drivers agreed to waive their PAGA claims in the agreement, which posed a host of policy problems, the court explained, and the other nonmonetary relief was modest, at best. The rejection of the proposed settlement agreement leaves the parties facing trial, a risky proposition for both sides.

Detailed discussion

As ride-sharing companies like Lyft and Uber have skyrocketed in popularity in recent years, the companies have faced significant litigation across the country, particularly on the issue of whether drivers are employees or independent contractors.

Both companies tried to settle the lawsuits. Lyft agreed to make changes to its terms of service to provide drivers with greater protections and pay $12.25 million but refused to alter the classification of drivers to employees going forward.

Uber tried a similar approach, albeit on a larger scale. Earlier this year, the company reached a deal with drivers in California and Massachusetts just before trial was set to begin. The approximately 385,000 drivers in the two states were to 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 would be based on the number of miles driven, with additional weight given to those drivers that opted out of arbitration agreements with the company. For example, if all of the 243,320 California drivers filed claims, the 122,297 drivers who drove between 0-750 miles would receive an average distribution of $24, with the 42,074 drivers who drove between 750-2,000 miles receiving an average of $89, and the 7,534 drivers who drove more than 25,000 miles would receive an average of $1,950.

The agreement also included changes to policy, including more details about how and why drivers are "deactivated" from the service and clarification on Uber's tipping policy. The company additionally promised to help drivers with the creation of a drivers' association in both states. Most significantly, Uber would not change its business model, and drivers would continue to be classified as independent contractors.

But U.S. District Court Judge Edward M. Chen declined to grant judicial approval. "While recognizing sizable settlement sum and policy changes proposed by the Settlement Agreement and the significant risk that drivers face in pursuing this litigation … the Court concludes that the Settlement as a whole is not fair, adequate, and reasonable," he wrote.

The court acknowledged the risks to both sides in denying his approval (such as the uncertain outcome of a jury trial and the issue of the validity of arbitration provisions pending before the Ninth Circuit Court of Appeals) but expressed concern about all aspects of the settlement, from the monetary recovery to the policy changes to the breadth of the claims released by the drivers.

Considering only the $84 million (because "there is no information on the likelihood that [the $16 million] contingency will be triggered"), the court said it constituted roughly 10 percent of the full verdict value of the non-Private Attorneys General Act (PAGA) claims, which he valued at $854.4 million—a "substantial discount" of 90 percent.

As for the policy changes, "much of this non-monetary relief is not as valuable as the parties suggest, limiting their worth in considering the amount being offered in settlement," Judge Chen wrote. Unconvinced that changes to the tipping policy would result in substantially increased income for drivers as suggested, he noted the deactivation policy still allowed Uber to log drivers out based on low star ratings.

He also expressed concern about the "eleventh hour" settlement that "fold[ed] in new claims and class members at the expense of litigation pending in other courts, while attributing almost no value to those claims, in order to induce Uber to settle the cases at bar," as well as numerous objections to the deal, even at the preliminary stage of the proceedings.

The final straw for the court: the inclusion of a waiver of PAGA claims as part of the settlement, a change that altered "the Court's assessment of the fairness and adequacy of the settlement as a whole." The plaintiffs proposed to formally add a PAGA claim to the suit and settle it for $1 million—despite having previously argued that the claim could result in penalties over $1 billion, an amount the state's Labor and Workforce Development Agency agreed with.

"This $1 billion amount makes up more than half of the total verdict value of the case," the court said. "Plaintiffs propose settling the PAGA claim for 0.1% of its estimated full worth." While noting that such a huge verdict would likely be reduced, the court said the parties provided no rationale for allocating $1 million to the PAGA claim that "justifies settling the PAGA claim for such a relatively meager value."

"It is important to note that where plaintiffs bring a PAGA representative claim, they take on a special responsibility to their fellow aggrieved workers who are effectively bound by any judgment," Judge Chen said. "[W]here, as here, the compensation to the class amounts is relatively modest when compared to the verdict value, the non-monetary relief is of limited benefit to the class, and the settlement does nothing to clarify the status of drivers as employees versus independent contractors, the settlement of the non-PAGA claims does not substantially vindicate PAGA. In these circumstances, the adequacy of the settlement as a whole turns in large part on whether the PAGA aspect of the settlement can stand on its own."

The 99.9 percent reduction did not adequately reflect the parties' risks, the court said, particularly considering the PAGA claim would not be subject to the arbitration risk that justified in part the 90 percent discount in the verdict value of the non-PAGA claims.

"Plaintiffs appear to treat the PAGA claim simply as a bargaining chip in obtaining a global settlement for Uber's benefit, even though the PAGA claim alone is worth more than half of the full verdict value of all claims being released," the court wrote. "Even if the PAGA claim were not separately scrutinized, viewing all the claims combined (PAGA and non-PAGA), the Settlement Agreement yields less than 5% of the total verdict value of all claims being released."

To read the order in O'Connor v. Uber Technologies, Inc., click here.