On March 16, 2017, U.S. District Judge Vince Chhabria of the Northern District of California issued an order granting final approval of a $27 million settlement between Lyft, Inc. and its drivers. Patrick Cotter, et al. v. Lyft, Inc., Case No. 3:13-cv-04065-VC. In Cotter, former and current Lyft drivers sued the company, claiming that Lyft violated various laws and regulations by classifying drivers in California as independent contractors rather than employees. Judge Chhabria held that, although the settlement agreement is "not perfect," it is "reasonable."
Notably, the Lyft settlement does not resolve the central issue of whether Lyft drivers are independent contractors or employees, nor does it require Lyft to change its classification of drivers as independent contractors.
In addition to paying $27 million to resolve the claims, Lyft agreed to (1) change its Terms of Service to specify the types of actions that could result in deactivation of a driver's account and to provide for the payment of arbitration fees and costs by Lyft; (2) implement an optional pre-arbitration negotiation process to resolve disputes; (3) create a "favorite driver" option that will result in benefits to drivers who are chosen as a "favorite"; and (4) provide drivers with additional information about potential Lyft passengers before drivers accept ride requests from passengers.
Notably, the Lyft settlement does not resolve the central issue of whether Lyft drivers are independent contractors or employees, nor does it require Lyft to change its classification of drivers as independent contractors. In granting final approval of the settlement agreement, Judge Chhabria acknowledged that the status of Lyft drivers under California law remains "uncertain" going forward.
Judge Chhabria had previously rejected a proposed settlement agreement between Lyft and the plaintiffs that provided for a smaller settlement amount of $12.25 million. He found that the proposed settlement amount grossly underestimated the value of the drivers' claim for reimbursement of expenses and was based on an arbitrary treatment of the PAGA penalties. The Teamsters objected to the settlement, arguing that any settlement must include a reclassification of the Lyft drivers. Judge Chhabria rejected this argument, saying that such policy concerns are best directed to the legislative or executive branches, not to the court.
As a result, the legality of the manner in which companies like Uber and Lyft classify those individuals who are providing services in exchange for a fee as part of the on-demand "sharing" economy remains uncertain. While the courts will continue to apply the various tests used to analyze whether individuals should be classified as independent contractors or employees, there is an unmistakable trend among many agencies to designate service providers as employees. As long as companies like Lyft and Uber continue to treat such individuals as independent contractors, they will continue to face lawsuits and agency actions. Companies that are part of the ondemand sharing economy should continue to monitor developments in the law and assess, on an ongoing basis, the risks associated with classifying service providers as independent contractors. Treating them as employees from the outset can help avoid costly legal battles involving claims for unpaid wages, reimbursement of expenses, penalties and interest. Of course, it may well make the preferred business model unprofitable.