Only two weeks after a federal court judge in California rejected a proposed $12.25 million independent contractor misclassification settlement between Lyft and its drivers in California because it “shortchanged” the drivers and the State of California, Uber announced late yesterday, April 21, that it had reached a proposed settlement with its drivers in two IC misclassification lawsuits in California and Massachusetts. Facing a potential trial this summer over whether its drivers are independent contractors or employees under California and Massachusetts law, Uber agreed to settle both lawsuits for a combined $84 million. Will it be approved by the judges presiding over those cases?

The lead counsel representing the Uber drivers are the same attorneys who represent the 155,000 Lyft drivers in California. The judge presiding over that case referred to the proposed settlement negotiated on their behalf by counsel for the drivers as “unreasonable” and “arbitrary.” One would expect, however, that those same lawyers, in negotiating a settlement with Uber, have now plugged the holes exposed in the proposed Lyft settlement. Nonetheless, it is expected that the judge overseeing the Uber case will be no less judicious than the judge who rejected the Lyft settlement. In other words, approval of the proposed settlement agreement is anything but certain. O’Connor v. Uber Technologies, Inc.,No. 3:13-cv-03826-EMC (N.D. Cal. Apr. 21, 2016).

What are the key details of the proposed settlement?

The proposed settlement agreement, if approved by the court overseeing the case, offers the same inducement to Uber that Lyft was offered by class counsel – the opportunity to retain its independent contractor model. Presumably, Uber would not have even considered settlement without that key feature. In addition, of course, Uber will receive waivers and releases of the drivers’ claims. What did the drivers obtain in return?

First, money. There are reportedly 385,000 Uber drivers covered by the California and Massachusetts cases. The settlement guarantees them $84 million; that number must be reduced by the legal fees that could amount to up to $21 million (25%), leaving the drivers $63 million less the costs of administering the settlement and a small payment to the State of California, leaving the drivers around $60 million to split up among them. That amounts to an average of well under $200 per driver. The papers filed in court by the lawyers for the drivers indicate that drivers who drove more than 25,000 miles will receive at least $2,000.

An additional $16 million may be added to the settlement if Uber goes public and its valuation increases one-and-a-half times from its December 2015 financing valuation within the first year of an initial public offering. The lawyers will be entitled to up to 25% of this extra contingent amount.

Second, protection from “deactivation”. Like the proposed Lyft settlement, Uber agrees to make a number of changes to its business practices including deactivation – the functional equivalent of a driver being terminated. Specifically, Uber will only be able to deactivate drivers from the Uber platform for sufficient cause, and drivers will be provided with at least two warnings prior to many types of deactivations, will be given a written explanation of the reasons for any deactivation, and will be afforded an appeals process overseen by fellow drivers for certain types of deactivations. Should a driver not be satisfied with the result of the appeals process, the driver may arbitrate his or her claim at Uber’s expense

Third, the establishment of a “non-union” association of drivers. Uber will fund and facilitate the creation of a Driver Association, comprised of elected driver leaders. Uber agrees to meet quarterly with the elected leaders of this association to discuss and, in good faith, try to address driver concerns. This is not a union but rather a “non-union” association of drivers. 

Fourth, clarified tipping literature. Uber will clarify its messaging with respect to tipping, specifically the fact that a tip (while not required or expected) is not included in the fare. Drivers will, however, be able to post a sign in their vehicle that tips are nonetheless appreciated.

Analysis

While Uber certainly had a decent chance of succeeding at trial, settling this lawsuit for up to $100 million (if the additional $16 million contingency arises) is plainly a sound financial decision for a company whose latest valuation in December 2015 was $62.5 billion – especially where it gets to retain its independent contractor business model.

Whether it is a good deal for the drivers, though, remains to be seen. It is expected that there will be some drivers that will file objections. It is also expected that the Teamsters union, which filed objections in the Lyft case, will file objections to the proposed Uber settlement as well – especially because of the establishment of the Drivers Association, which is likely to be regarded as an affront to the union. The Teamsters’ principal objections, though, were not given much weight by the judge in the Lyft case.

Takeaways

As we noted when commenting on the proposed Lyft settlement, we previously stated in a prior blog post that most companies using ICs to service customers, including those in the sharing or gig economy, have not structured, documented, and implemented their IC relationships in a manner that maximizes compliance with state and federal IC laws – and those businesses would be wise to restructure, re-document, and re-implement such relationships to meaningfully enhance their compliance. As part of the proposed settlement reached between Uber and the lawyers representing the drivers, that is precisely what Uber appears willing to do to a limited extent – assuming the court approves the proposed settlement.

Yet, even if these changes are implemented in California, Massachusetts, and all of the other states where Uber operates, they may not, by themselves, be sufficient to forestall new lawsuits or insulate the company from IC misclassification liability.

In the court’s decision to deny summary judgment to Uber, the Judge Edward M. Chen, the presiding judge, not only focused on Uber’s unbridled right to terminate or deactivate drivers, but also on a number of other facts that favored employee status. For example, he pointed to the Uber “Driver Handbook,” which instructs drivers, among other things, to “dress professionally,” send the client a text message 1-2 minutes from the pick-up location, “make sure the radio is off or on soft jazz or NPR,” to “make sure to open the door for your client,” and to “have an umbrella in [their] car for clients to be dry until they get in your car or after they get out.” Judge Chen also noted that there is evidence that Uber monitors its drivers’ performance to ensure compliance with Uber’s many quality control standards by requesting that passengers give drivers a star rating on a scale from 1 to 5 after each completed trip based on the driver’s performance.

Just as we noted in connection with the proposed Lyft settlement, while the changes Uber will make under the terms of the settlement agreement will move the drivers closer to independent contractor status, it would be prudent for Uber to address the other concerns expressed by Judge Chen as well as dozens of other factors bearing on the issue of independent contractor status. Moving the needle in the right direction may not be sufficient. As the co-publisher of this blog, Richard Reibstein, was quoted in a Los Angeles Times article by Tracey Lien when commenting on the Lyft settlement, while the settlement may put to rest one or more lawsuits, “it doesn’t mean [the company] is in the clear. In fact, many states have more stringent tests for independent contractor status than California, and there’s nothing stopping another lawyer from filing a similar lawsuit in [the future in] California”. The article continued: “‘[The company] would be well-served to reevaluate its structure and documentation,’ Reibstein said, ‘because just because you exit one lawsuit does not mean that there won’t be another coming right down the pipe tomorrow.’”

How can companies stress-test their level of IC compliance? One way is through IC Diagnostics™, a process that examines the level of compliance with applicable IC laws and then restructures, re-documents, and re-implements IC relationships in a manner that minimizes IC misclassification exposure. This process can be applied in a customized fashion consistent with a company’s business model. Whether Uber takes steps to voluntarily undertake further structural changes may determine whether IC misclassification cases will only be a thing of the past, or whether it will see class action IC misclassification lawyers once again on its doorstep.