$100 Million Settlement for Drivers Leaves Unsettled Issues for On-Demand Economy

Payroll on Bloomberg Tax is built to get you to the right answer faster and more efficiently. Get all the payroll intelligence you need with Bloomberg Tax expert analysis, perspectives and...

By Michael Trimarchi

In an ongoing worker-status debate over employee vs. independent contractor, the ride-sharing company Uber Technologies Inc. has somewhat settled the issue for the industry: Its drivers are to remain contractors.

Uber and its drivers in California and Massachusetts agreed on a $100 million settlement that would allow the drivers to solicit tips from riders while remaining independent contractors and free of federal and state wage and hour requirements.

The preliminary settlement, which must be approved by the court to take effect, likely resolves the biggest threat to Uber's business. The drivers filed class actions to be treated more like traditional employees, a move that may have broad implications for companies in the on-demand economy.

The settlement is to cover 240,000 drivers in California and 145,000 drivers in Massachusetts. A trial was scheduled to start June 20 in a San Francisco federal court. About 25 percent of the settlement amount would cover attorneys’ fees (O'Connor v. Uber Technologies Inc., N.D. Cal., No. 13-cv-03826, settlement agreement 4/21/16).

The proposed settlement was similar to a case involving an Uber competitor, Lyft Inc., which in January agreed to pay more than $12 million to settle claims of California drivers. Like Uber, the drivers for Lyft would continue to operate as independent contractors. However, the Lyft deal was rejected by a court, which said the payout would shortchange 150,000 drivers. Negotiations continue on a revised settlement.

Questions for Gig Economy, Worker Classification

The Uber case, meanwhile, may have broad implications for companies in the on-demand economy, especially with regard to the classification of drivers. The proposed settlement would leave the company's business model intact and the company would not have to pay drivers minimum wages and benefits accorded to employees, thus keeping its costs low. About 450,000 drivers use Uber's mobile application each month to link up with riders, the San Francisco company said.

Uber also agreed to help create and fund an association for the drivers, made up of elected member leaders who would help promote discussions between the drivers and the company.

“Today, while the number of drivers using our app has grown dramatically, their reasons for doing so haven’t changed,” Uber's chief executive officer, Travis Kalanick, said April 21 in a blog post. “In the U.S., almost 90 percent say they choose Uber because they want to be their own boss. Drivers value their independence—the freedom to push a button rather than punch a clock, to use Uber and Lyft simultaneously, to drive most of the week or for just a few hours.”

For employers, independent contractors are not covered by the Fair Labor Standards Act and its minimum wage and overtime provisions. Independent contractors also are responsible for paying Social Security taxes on their own, without the taxes being withheld from their wages by employers.

On the issue of tips, for which the drivers said they should have been reimbursed, Uber said it would “make good-faith efforts to clarify its messaging with respect to tipping, specifically the fact that a tip (while not required or expected) is not included in the fare,” the settlement agreement said.

“Together, these nonmonetary changes provide drivers real and practical relief with respect to deactivation, tipping and other issues they face every day, as well as a mechanism through which they can seek to create further change by way of the driver association,” the agreement said.

Drivers Surprised, Frustrated

Many drivers said they were surprised and frustrated by the settlement agreement. A survey of about 150 drivers by SherpaShare Blog, a support platform for on-demand workers in several U.S. regions, found that 64 percent said the settlement result was not what they expected. Additionally, 13 percent said they were “satisfied” or “very satisfied” with the result of the settlement.

In short, SherpaShare said the comments expressed “frustration” at the settlement as “not enough,” with the result not doing anything “substantial” for the drivers.

With a settlement rather than a verdict, the issue of employee vs. independent contractor classification essentially remains unresolved. Until then, drivers likely would continue to press their case to seek employee status.

Shannon Liss-Riordan, a Boston labor lawyer who was among the attorneys representing the drivers in the case, told SherpaShare Blog before the agreement that the goal of the lawsuit was to obtain what employees would receive under the wage laws, including reimbursement for mileage under California law and gratuities that the drivers claimed Uber had not shared.

“My hope is that these cases have made companies think much harder about how they treat their workers,” said Liss-Riordan, a partner at the law firm Lichten & Liss-Riordan P.C. “I have been very heartened to see a number of companies make the decision to go the other way and classify their workers as employees and strive to be good employers.”

“By doing this, they not only avoid years of costly legal battles but will have won themselves a more dedicated and committed workforce, which is good for business in the long run,” Liss-Riordan said.

To contact the reporter on this story: Michael Trimarchi in Washington at mtrimarchi@bna.com.

To contact the editor responsible for this story: Howard Perlman at hperlman@bna.com.

Request Payroll