Uber will pay $100 million to settle the biggest legal threat to its business

The Uber economy is happening.
The Uber economy is happening.
Image: AP Photo/Eric Risberg
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Uber is paying up to $100 million to settle class action lawsuits in California and Massachusetts. Drivers in those states will remain independent contractors rather than becoming employees.

The settlement is pending approval by US district court judge Edward Chen. A hearing could happen as soon as June 2, according to court documents.

Uber has spent the last two and a half years embroiled in a major legal battle over its business model. The company considers its drivers to be independent contractors, but many of those drivers believe they were treated more like employees. Uber drivers were granted class-action status in the case by a federal judge in California last September.

The distinction is critical for both Uber and its drivers. Hiring workers as contractors instead of employees is estimated to save companies as much as 30% on labor costs, because independent contractors aren’t entitled to the same safety nets as traditional employees—i.e., benefits such as health insurance and minimum wage protection. They’re also responsible for paying their own business expenses. For Uber drivers, these include gas and car maintenance, which really add up.

The $100 million settlement is big—especially for a startup that burns money like Uber does. For the first three quarters of 2015, Uber lost $1.7 billion on $1.2 billion revenue, Bloomberg reported. But forcing the company to reclassify its workers as employees would also have been expensive, and would have ended the Uber model as we know it.

Under the deal reached between Uber and the plaintiffs, Uber is paying a guaranteed $84 million to drivers in those states, according to a statement emailed by Shannon Liss-Riordan, the lawyer representing drivers, late on April 21. While the class size was never precisely specified, in California alone it could have covered as many as 160,000 people. Uber will hand over another $16 million should it go public and, within a year of its IPO, multiply its valuation 1.5 times from the $62.5 billion figure that was set during its December 2015 financing.

The most active drivers in the class—those who have driven more than 25,000 miles for Uber during—could receive payouts of $8,000 or more, on average, according to Liss-Riordan. Those who drove fewer miles will receive less.

Uber is also making a few significant concessions to drivers. Most importantly, the company will no longer be able to deactivate—i.e., terminate—drivers at will. Instead, they will have to be terminated “for sufficient cause,” Liss-Riordan writes. Drivers will “receive warnings in most instances and thus opportunity to correct any issues prior to deactivation.” They will also no longer be subject to deactivation for low acceptance rates.

“We believe these to be very significant changes that will improve work conditions for Uber drivers,” Liss-Riordan says.

Uber on Thursday published a detailed breakdown of its US driver deactivation policy on its website for the first time.

“Uber is a new way of working: it’s about people having the freedom to start and stop work when they want, at the push of a button. As we’ve grown we’ve gotten a lot right—but certainly not everything,” Uber CEO Travis Kalanick said on the company’s blog. “This new deactivation policy is an important step forward when it comes to working with drivers.”

While drivers will remain independent contractors, the settlement isn’t a legal ruling on the employment question. It’s possible that Judge Chen could reject the proposed deal entirely—as happened to Lyft earlier this month.

“This case … stands as a stern warning to companies who play fast and loose with classifying their workforce as independent contractors, who do not receive the benefits of the wage laws and other employee protections,” Liss-Riordan says. “As a result of this litigation, many companies have chosen to go the other way and not fight this battle, and instead to classify their workers as employees with all the protections that accompany that classification.”

So far, Uber won’t be one of them.