The biggest threat to Uber’s business is no longer a problem for Lyft

Lyft co-founder John Zimmer.
Lyft co-founder John Zimmer.
Image: AP Photo/Noah Berger
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Lyft drivers will not be reclassified as employees.

That’s the bottom line of a $12.25 million settlement that the ride-hailing company agreed to late on Tuesday (Jan. 27). The settlement still needs to be approved by a judge, but it’s poised to resolve a pending class-action lawsuit in California that could have done serious damage to Lyft’s business.

At issue were the same worker classifications issues that are still plaguing Uber and the broader “sharing” economy. Drivers in the Lyft case argued that they should be employees, though the company treats them like independent contractors. The distinction is important because contractors don’t get the same employment protections as traditional employees—minimum wage, health insurance, social security, etc. They also have to pay their own on-the-job costs, which for someone driving and maintaining a car can add up fast.

The settlement amount is only about a fifth of what Lyft might have owed had the case proceeded to trial as a class action, according to Shannon Liss-Riordan, the lawyer representing drivers in the suit. But Lyft is making a few other concessions as well. Most significantly, it has agreed to greatly restrict its ability to “deactivate” drivers—Silicon Valley-speak for firing them. The law views at-will firing as a very employer-like privilege. As part of the settlement, Lyft will only be able to deactivate drivers for pre-specified reasons; it will have to notify drivers and give them a chance to improve beforehand. Drivers will also be able to contest the decision before a neutral arbitrator at Lyft’s expense.

“While the settlement does not achieve everything we had hoped for—namely a reclassification of the drivers as employees … it will result in some significant changes that will benefit the drivers,” Liss-Riordan wrote in an email.

“We are 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,” Kristin Sverchek, general counsel at Lyft, said in a statement.

What might all this mean for Uber, which is headed to trial this June on the same issues? The stakes for Uber are even higher: Its drivers are more numerous, its operations more sprawling, and its potential liability much greater. Where Lyft’s suit also never gained class-action status, Uber’s was certified by a federal judge last November on an arbitration technicality.

It’s possible that the Lyft settlement foreshadows a similar win by Uber in court. Structurally, the companies’ models are very similar, and it’s hard to see why someone who drives for Lyft would be ruled an independent contractor, but not someone who drives for Uber. On the other hand, Liss-Riordan argues that Uber drivers on the whole feel more mistreated than their Lyft counterparts. ”Far more Uber drivers than Lyft drivers are anxious for us to continue pursuing these misclassification claims,” she says.

That’s not really a legal distinction, but it might matter to a jury this summer.