Why it matters

To settle charges in California federal court that its drivers were mischaracterized as independent contractors and not employees, ride-sharing company Lyft has agreed to pay $12.25 million—but refused to alter the classification of its drivers going forward. Requesting preliminary approval of the deal, the class revealed that Lyft also promised to make changes to its terms of service that will provide drivers with greater protections, such as removing the current at-will termination provision and providing that Lyft will bear the costs of arbitration for claims brought by drivers related to certain issues (deactivation of driver status, payment, or employment relationship). The non-reversionary settlement fund will be paid out to class members at different rates, with those who drove for 30 hours or more each week for more than half of the weeks at issue receiving larger payments than those with fewer hours. In a statement, class counsel acknowledged that the deal "does not achieve everything we had hoped for," but said it "will result in some significant changes that will benefit the drivers." Lyft's general counsel said the company was "pleased to have resolved this matter on terms that preserve the flexibility of drivers to control when, where and for how long they drive on the platform and enable consumers to continue benefitting from safe, affordable transportation." Competitor Uber is facing similar litigation, with trial set for June.

Detailed discussion

In 2013, a group of drivers filed suit against Lyft, Inc., accusing the ride-sharing company of violating multiple provisions of California's Labor Code. In addition to misclassifying them as independent contractors and not employees, the plaintiffs alleged, Lyft failed to reimburse them for work-related expenses, pay the required minimum wage, and neglected to furnish accurate wage statements.

The parties engaged in discovery and pretrial motions before mediating the case and reaching a settlement agreement. The deal features a non-reversionary payment in the amount of $12,250,000 as well as forward-looking nonmonetary relief in the form of changes to Lyft's business practices.

Specifically, the employer agreed to remove the current at-will termination provision and replace it with one that allows Lyft to deactivate drivers from its system only for specific, delineated reasons or after notice and an opportunity to cure. In addition, the revised terms of service will provide that Lyft will pay for the arbitration fees and costs unique to arbitration for claims brought by a driver against the employer related to a driver's deactivation, pay-related issues, or alleged employment relationship with Lyft.

Other protections for drivers include the creation of an option that will allow riders to designate their "favorite" driver, a selection that will entitle the driver to additional benefits. "Together, the non-monetary changes provide Drivers a real benefit and a practical mechanism through which they can challenge terminations that they contend violate Lyft's contract and disputes relating to compensation," according to the plaintiff's motion for preliminary approval of the settlement agreement.

As for payment of the fund, the plan of allocation is based on a points system to reflect the amount of work performed by drivers. Each driver that submits a claim will be allocated a number of points reflecting the amount of time he or she was in "Ride Mode," including the time when a driver was en route to pick up a rider, after accepting a ride request, and the time spent actually transporting a rider.

This base number of points will be enhanced under two circumstances: a 50 percent increase for drivers who worked more than 30 hours per week in at least 50 percent of their weeks worked (class members who arguably have the strongest claims on the merits) and a 20 percent bump for those who drove during a specified time period when payments for rides were voluntary.

The decision to settle was based in part upon the risks of continued litigation, the motion noted, including the challenges presented by Lyft's arbitration provision. Approximately 75 percent of the drivers are subject to an arbitration agreement that features an express class action waiver, presenting a "roadblock" in the case and "hurdles" to class certification.

The plaintiffs acknowledged that the settlement did not resolve the central issue of the dispute but argued it offered a positive deal for the drivers. "While the agreement does not require Lyft to reclassify its Drivers as employees, it will provide significant benefits and added protections to Lyft Drivers that they do not currently have, require changes to Lyft's business practices that are more consistent with an independent contractor relationship, and provide monetary relief proportional to both the strength of the Drivers' claims and the amount of time they have driven for Lyft," according to the motion.

To read the motion in support of preliminary approval of the settlement inCotter v. Lyft, Inc., click here.