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Uber Reaches Settlement of Independent Contractor Misclassification Lawsuits in California and Massachusetts

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R. Douglas Taylor
BKK Business Law Newsletter
May 2016

Last week, Uber, the on-demand ride-hailing service, reached a settlement of two class action lawsuits pending against it in California and Massachusetts. These were filed by Uber drivers who claimed that the company had misclassified them as independent contractors instead of employees. The settlement is pending approval by the federal district judges overseeing the cases. The California and Massachusetts lawsuits reportedly cover more than 385,000 Uber drivers. Similar class action law suits remain pending against Lyft, Uber’s main competitor.

What the Law Suits Were About

The drivers alleged that Uber, by misclassifying them as independent contractors, had deprived them of the legal protections of state and federal anti-discrimination, overtime and leave laws, which are only applicable to employees. Uber’s alleged misclassification also left the drivers to pay their own payroll withholding taxes and employment-related expenses. The lawsuits have been closely watched, as other entities in the technology economy utilize independent contractors, using a business model similar to Uber’s. The settlement by Uber follows a $228 million settlement by FedEx of a lawsuit filed by its home delivery drivers who also made claims of misclassification as independent contractors.

What’s in the Settlement?

For the Drivers: For the drivers, the settlement appears to be primarily about the money. Under the settlement agreement, Uber is obligated to pay the drivers a minimum of $84 million. In addition, Uber could be obligated to pay the drivers up to an extra $16 million if the value of the company increases by 150% over its December 2015 financing valuation during the first year following an initial public offering. While the settlement numbers are significant after reductions for attorneys’ fees, settlement administration costs, and other expenses, most of the drivers could end up receiving as little as $200, although others who logged significant mileage for Uber could receive as much as $2,000. Lead counsel for the drivers, trying to put the settlement in context, explained that the drivers faced a significant risk of losing had the case moved forward.

Uber is also required under the settlement agreement to help fund and assist in the creation of a “drivers’ association.” While the drivers’ association has some of the attributes of organized labor – drivers elect association leaders, and Uber has agreed to meet with association leaders quarterly about drivers’ concerns – it is not a union.

For Uber: For Uber, the primary benefit coming out of the settlement with its drivers is that it allows the company, with a few minor adjustments, to retain its current independent contractor business model. While the settlement agreement resolves the company’s independent contractor dispute with its drivers for now, it is worth noting the resolution does not preclude state or federal labor authorities or other courts from making a determination in the future that Uber’s driver are, in fact, employees.

The Takeaway

The consequences for a business that misclassifies its workers as independent contractors, especially on a large scale, can be disruptive and financially debilitating. Moreover, it seems unlikely that Uber’s settlement with its drivers will do anything to diminish what in recent years has become increasingly aggressive enforcement by the U.S. Department of Labor. Nor does the settlement diminish the attractiveness of large scale misclassification litigation for plaintiffs’ lawyers. Businesses should continue to exercise great care when making decisions about how to characterize their relationships with workers.