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To Be or Not To Be an Uber Employee: That Is [and will Remain] the Question

Federal judge probes deep on Uber’s proposed deal with drivers in 2 states as drivers in the other 48 sue, yet ride-sharing giant appears set to avoid trial on merits of misclassification issue

If you are waiting for an answer to the question of how workers in the “gig economy” should properly be classified, you probably should not hold your breath.

As the ride-sharing tech company Uber has grown into a megacorporation, on-demand workers have kept up a steady pace of lawsuits against it (and against its competitor, Lyft) on the theory that they are employees misclassified as independent contractors. While there is disagreement among courts, agencies, legal scholars and practitioners on the issue, most might agree on one thing: the traditional framework of employee vs. independent contractor does not account for today’s new tech-driven gig economy. Neither classification is a good fit for work performed on demand through a smartphone app that controls price and other operating standards. Yet a new, more fitting worker classification from Congress is highly unlikely. In effect, classifying workers in the gig economy will continue to present a legal quagmire for years to come.

From Uber and Lyft’s perspective, a legal quagmire (i.e., the status quo) appears to be the preferred course. After all, despite high litigation costs, the company has grown exponentially in recent years, expanding into 449 cities since it officially launched in 2011 and amassing a value most recently estimated at $68 billion. This success is attributable in part to Uber’s lucrative business model. The company avoids the costs of an employment relationship with millions of drivers while profiting from the service they provide via its smartphone app. It connects supply with demand (i.e., people who need rides) by providing a hassle-free platform for the transaction to take place. And by setting the price and imposing other usage requirements and “suggestions” for drivers using its app, Uber has developed a relatively uniform and reliable standard of service that has built brand trust from customers. On the flip side, it offers a relatively flexible means for almost anyone with a driver’s license and a car to earn additional income.

To maintain this advantageous operating model, Uber is trying to keep the misclassification issue from going to a jury. This means settling two class actions with some 385,000 California and Massachusetts drivers involving claims for business expenses and gratuities. Its proposed $100 million settlement to resolve both actions has been pending before the federal court in the Northern District of California since late April 2016. The court recently sent the parties scrambling to provide additional information which the court said it needs to determine whether the settlement is fair. To pre-approve the deal, the court has to conclude it is fair to all unnamed class members—i.e., all drivers in California and Massachusetts who have used the app since August 16, 2009. The court noted that a more probing inquiry is warranted here because the settlement seeks to (1) apply to drivers previously excluded from the class and (2) encompass claims not previously asserted in the case, but asserted and still pending in other lawsuits.

Under the settlement agreement, Uber would provide monetary and non-monetary relief, but it would not reclassify drivers. Specifically, Uber would pay out $84 million, and an additional $16 million if Uber’s future value (at its initial public offering) reaches 1.5 times its most recent valuation. Of the $84 million, $8.7 million would be taxable as wages. After shaving off sums for class administration, attorneys’ fees, and to compensate the named and contributing class members, the remaining fund would be split, with $5.5-$6 million going to Massachusetts drivers and $56-$66.9 million to California drivers. Drivers who drove the most would receive a few thousand dollars payout, while most drivers would receive a few hundred.

The settlement would not resolve the ultimate issue of whether Uber drivers are employees or independent contractors. Rather, it would allow Uber to continue operating in its current business model treating drivers as independent contractors. Yet at the same time, the settlement includes certain operational changes that would provide drivers with more job security than most at-will employees enjoy. For one, Uber agreed to write a comprehensive deactivation policy whereby it would only deactivate drivers from the app for sufficient cause, and it would share this list of reasons with drivers. Uber would also provide drivers with at least two advance warnings before they are deactivated from the app, with certain exceptions such as if a driver engages in illegal conduct. Uber also promises to provide the reason(s) for deactivation and develop an appeals process for drivers who believe they have been deactivated unfairly. Further, Uber agreed to recognize and fund a “drivers’ association” to enable dialogue between the company and its drivers. Uber also agreed to other measures such as providing more information about its rating system and making clear to customers that tips are not included in its fare price.

If the court denies approval of the settlement, this would be a major blow to the ride-sharing company. In the current proceedings, it would require Uber to offer more, else go to trial. The court’s refusal to approve this deal would also set a precedent for courts in subsequent class actions against Uber, such as one recently filed in Illinois federal court, where other judges may be inclined to take a similar approach to any proposed deal with other classes of drivers. Further, a finding that the proposed deal is not fair to unnamed class-members could embolden more drivers to sue and could tilt the scales in future settlement negotiations with other plaintiffs.

Even if the court in California approves this deal, Uber has a long road ahead. While this settlement may provide a temporary stopgap in California and Massachusetts, it creates an incentive for drivers elsewhere to sue. Less than two weeks after Uber proposed this $100 million settlement with the two states’ drivers, the company was hit with another putative class action – this time with drivers from the remaining 48 states. The new lawsuit filed in Illinois federal court likewise concerns worker classification and claims for tips, overtime, and expenses.

Meanwhile, Uber’s competitor Lyft recently achieved pre-approval of its settlement with California drivers in the federal class action of Cotter v. Lyft, Inc.—but only after it appeased the judge by increasing the value of the settlement from $12 million to $27 million. In addition to higher payouts for mileage reimbursements and other expenses, the settlement includes operational changes. Similar to Uber, Lyft agreed to changes that give drivers more job security, such as providing a finite list of reasons for a driver’s deactivation. Other changes give drivers more control over when, where, and for whom they drive, which makes the arrangement more reflective of a classic independent contractor relationship. The Uber court cited to Cotter in its recent order, and may continue to measure Uber’s proposed deal against this benchmark.

Uber’s implementation of arbitration clauses in its driver agreements should help it dodge a future of many more large-scale class actions by drivers of every other state. In Maryland and Florida, for example, two other attempted class actions with similar claims against Uber are going to arbitration. Even so, the classification of workers in the gig economy will remain a hot-button issue for the foreseeable future, and Uber seems poised to remain at the center of it.

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