Uber drivers settle with ride-hailing company in labor dispute

Uber Technologies Inc. has warded off a serious legal threat to its highflying business model with a settlement that may end the debate over whether its drivers should be counted as independent contractors or employees.

The ride-hailing company said Thursday it has settled two closely watched class-action labor disputes covering 385,000 drivers in California and Massachusetts that will let Uber continue classifying drivers as contractors.

Under the terms of the settlement, Uber agreed to pay up to $100 million to these drivers in two states and revise its practice of deactivating drivers from the popular app without much warning or recourse. The company will also have to explain its decisions to terminate drivers, and in most cases must give warnings before removing drivers from the service. Drivers will also be allowed to post signs in their cars soliciting tips from riders.

The agreement, which must be approved by U.S. District Judge Edward Chen, would spare the company from a jury trial in San Francisco that had beenset for June.

Shannon Liss-Riordan, the attorney representing the Uber drivers, cast the settlement as a victory for drivers. “We realize that some will be disappointed not to see this case go to trial,” she said in a statement. “We believe the settlement we have been able to negotiate...provides significant benefits—both monetary and non-monetary—that will improve the work lives of the drivers and justifies this compromise result.”

For a company that has raised more than $10 billion in debt and equity, the payment is a small concession relative to the larger triumph of preserving the high-margin business of connecting passengers to freelance drivers. Losing these cases at trial could have forced the company to reclassify drivers as employees, leading to potentially billions of dollars in additional costs, such as health benefits and auto expenses, and jeopardizing its long-term prospects for profitability.

The settlement, if approved, doesn’t set a legal precedent and leaves the status of contract workers unclear. But it may deter similar lawsuits against the growing number of on-demand services that depend on a pool of freelance workers who clean houses, run errands and perform other menial tasks.

Concerns over the status of gig workers have caused tech investors and entrepreneurs to become more cautious about on-demand businesses. Some startups such as home-cleaning service Homejoy Inc. have been unable to secure new funding and were forcedto shut down, while others, such as grocery-delivery service Instacart Inc. and valet-parking app Luxe Valet Inc., have moved tore classify some of their workersas employees.

Homejoy has said lawsuits over worker classifications hurt their chances of raising more money. Instacart has suggested that employees are better “shoppers” than contractors, and Luxe has said the move gives them greater control over employees’ schedules and training.

Other lawsuits currently naming on-demand firms such as Uber’s main U.S. rival, Lyft Inc., and home-services provider Handy Technologies Inc.—address similar questions, but haven’t received the high level of scrutiny as the cases against Uber, the largest on-demand company. The firms maintain that workers prefer the flexibility of being independent contractors and disagree that they should be reclassified.

Approval for the two cases being settled, O’Connor v. Uber Technologies Inc. et al. and Yucesoy v. Uber Technologies Inc. et al., is by no means assured. Two weeks ago in a similar case, a federal judgerejected a settlementbetween Lyft and California drivers. The judge said the settlement amount of $12.25 million shortchanged drivers’ mileage expenses, and a revised proposal could be filed by the end of May. Lyft said it believed the agreement was fair and is evaluating next steps.

The plaintiffs suing Uber had argued they should be treated as employees because the company exerts significant control over their work, sets compensation and enforces vehicle standards.

Uber has maintained that the vast majority of its drivers prefer the flexibility that being an independent contractor affords. The company has said more than a million drivers offer rides on the service at least once a month globally; more than 450,000 of those drivers are in the U.S.

Many firms, including Uber and its rival Lyft, prefer to use independent contractors over employees, in part because they aren’t covered by certain legal and tax liabilities and can cost firms less in pay and benefits. Employees are generally covered by protections such as minimum-wage and antidiscrimination statutes, workers’ compensation and union-organizing rights, while independent contractors have no such protections.

And while the number of people finding part-time work on digital platforms is growing, only a small portion rely on these jobs as their sole income, according to a study of bank transactions by the J.P. Morgan Chase Institute released in February. The average monthly income for someone who provided labor via platforms including Uber and Airbnb Inc. was $533, representing a third of their total income, while the share of active participants earning 50% or more of their monthly income has fallen since the summer of 2014, the study found.

The settlement fee will go to reimburse any person who has driven for Uber in California or Massachusetts up until the date of when the court grants preliminary approval of the settlement. The payouts per individual will be prorated based on the number of miles they have driven for Uber. Given the number of drivers covered, many will receive only nominal payments, but Ms. Liss-Riordan estimated that some drivers could receive upward of $8,000.

The company also agreed to pay an additional $16 million to drivers if it holds an initial public offering and, within one year, its valuation goes above $93.75 billion. Uber was valued by investors at about $62.5 billion in a round of funding last December. The company hasn’t disclosed any plans to hold an IPO.

One clear victory for drivers in the settlement is a plan to revise Uber’s policy for deactivating them from the service. As part of the case, Uber was forced to release a series of internal emails on driver termination to the court, showing that drivers could be “deactivated” for passenger ratings that fall below 4.5 on a five-point scale.

Across the U.S., the company now plans to roll out new procedures for warning drivers when they have received a high number of complaints and being more transparent with the ones it kicks off the app.

“We don’t have a policy explaining when and how we bar drivers from using the app, or a process to appeal these decisions,” Chief ExecutiveTravis Kalanicksaid in a blog post announcing the settlement. “At our size that’s not good enough. It’s time to change.”

In California and Massachusetts, Uber said it will begin testing a new peer-review appeal process to let drivers be the judge of other drivers who say they have been deactivated unfairly. A similar process is already being tested in Seattle. The company said it will consider expanding this nationwide.

(THE WALL STREET JOURNAL)