HR Management & Compliance

Uber settlement keeps independent contractor business model

Drivers for ride-hailing giant Uber will continue to be independent contractors under the terms of a settlement of class-action lawsuits in California and Massachusetts if the settlement receives court approval.

The settlement, announced on April 21, will require the company to pay drivers an initial $84 million and possibly as much as $100 million. Despite the financial hit, Uber is claiming victory in what it calls the key issue in the lawsuits—whether its drivers should be classified as independent contractors or employees. That question is likely to come up again, according to an attorney following developments affecting the use of independent contractors in the “sharing economy.”

“First, it’s worth noting that the settlement still requires court approval, so there is a chance that nothing would end here,” Michael S. Malloy, an attorney with the Brann & Isaacson law firm in Lewiston, Maine, said. “Should the court accept the settlement, though, I think that at most, it is only the beginning of these types of lawsuits. Uber is in many other markets apart from California and Massachusetts, and those drivers would not be affected.”

Malloy, who has written on the independent-contractor-versus-employee controversy for Maine Employment Law Letter, pointed out that a company’s control over workers is a key factor in whether workers are properly classified, and Uber has a business interest in maintaining control over how its drivers provide service. “That control goes to the essence of the employee/independent contractor distinction,” he said. “As more industries participate in the sharing economy, we will continue to have disputes over where the line should be drawn.”

Uber and its smaller competitor, Lyft, maintain that they should be able to use independent contractors instead of employees as drivers, but some drivers as well as regulators question whether the company exercises too much control for the drivers to be considered independent contractors. The U.S. Department of Labor (DOL) has focused for years on what it calls misclassification of employees as contractors.

Like Malloy, Mark I. Schickman, the editor of California Employment Law Letter and an attorney with Freeland Cooper & Foreman LLP in San Francisco, sees potential problems in the business model Uber and other companies use.

The issues raised in the Uber lawsuits go beyond the ride-hailing business. Schickman points to the many “Uber clones” that hire independent contractors to provide a range of services such as shopping, laundry, and housecleaning. Such services are commonly provided by employees, but more and more companies are using contractors instead of employees.

The Uber settlement definitely doesn’t end the debate over employees and contractors, Schickman said, and if a case is ever litigated, he expects Uber’s business model to lose.

Writing in the July 27 issue of California Employment Law Letter, Schickman said, “The inherent problem is that these companies thrive on the basis of their brands and consistency. Uber vehicles must bear the Uber logo, use the Uber app, signal their distance from a fare, use the Uber billing system, and behave according to Uber’s rules. Most of all, the drivers are the backbone of what Uber does, which is a difficult position for those who rely on a stable of independent contractors.”

Settlement terms

The Uber settlement calls on the company to pay the drivers in the class action $84 million. The company will make an additional $16 million payment if it goes public and its valuation increases one and a half times from its December 2015 financing valuation within the first year of going public, according to a statement from the company.

In addition to the payment, the settlement requires the company to provide drivers with more information about their individual rating and how it compares with their peers, the Uber statement said. Also, Uber will introduce a policy explaining the circumstances under which drivers in California and Massachusetts are deactivated.

The company also announced that it will create and help fund a driver’s association in both states and meet with them quarterly to discuss drivers’ issues. Also, as part of the settlement, the company has agreed to create an appeals process in California and Massachusetts for drivers who disagree with its decisions on deactivating drivers.

“Our hope is that this kind of peer review process will improve transparency and accountability and give drivers an additional voice,” the Uber statement says. “If this approach is successful, we’ll look at rolling it out across the U.S.”

Malloy said he doesn’t think the driver associations are anything close to a union and collective bargaining, and while the peer review process “almost seems like a union grievance process, one could also argue that it pits drivers against one another, and there’s no assurance that the company would be bound by these hearings. But it is an interesting attempt to bring peer alternative dispute resolution into a work environment.”

The April 21 Uber settlement follows a January settlement of a proposed class-action lawsuit in California against Lyft. The independent contractor business model also survived that settlement, which required Lyft to pay $12.25 million and provide driver benefits such as giving drivers notice before being deactivated and paying arbitration expenses for drivers challenging deactivation or disputing compensation.