Federal Judge Rejects Proposed Uber Settlement with Drivers
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Federal Judge Rejects Proposed Uber Settlement with Drivers

Uber was seeking to settle two suits contending that drivers should be classified as employees

August 19, 2016

A proposed $100 million settlement of two class-action suits between Uber and 385,000 current and former drivers has been rejected by a federal judge, reports The Wall Street Journal (WSJ).

San Francisco-based U.S. District Judge Edward Chen ruled that the settlement, proposed in April, is not fair, accurate, or reasonable for drivers. The settlement was intended to preclude a court case from developing out of two class-action suits in California and Massachusetts. Now the parties must come together again to determine the next steps before returning to court on September 15.

The case is defining for companies with business models that treat workers as contractors rather than as employees. The suits contend that Uber should treat its drivers as employees instead of freelancers and provide benefits and protections such as reimbursement for expenses and gas. Former drivers were also frustrated that they received little warning or explanation before being terminated.

Under the terms of the settlement, Uber was to revise some of these business practices and pay drivers $84 million, adding an additional $16 million if the company were to become public. It would have had to explain to drivers why they were terminated and, in most cases, warn them before removing them from the service. In addition, drivers would be allowed to put up signs in their vehicles requesting tips, a stipulation that Judge Chen felt would not do enough to get them paid more.

However, the settlement may have benefited the company more than the drivers.

"For Uber, a settlement would ward off a serious legal threat to its business model that has helped persuade investors to value the company at $68 billion," says WSJ. "A $100 million payment is relatively minor compared with the more than $13 billion in equity and debt Uber has raised from investors and the potentially billions of dollars in costs incurred if it had to pay health benefits and auto expenses."

Drivers, meanwhile, have filed objections to the settlement, alleging that it would shortchange them or deny them the opportunity for a jury to decide on their legal status and other essential points.

Veena Dubal, an associate professor of law at the University of California, Hastings, filed a legal memorandum representing those drivers. "The monetary terms were minuscule as opposed to what [the drivers] could have gotten at trial, and it was leaving the drivers' employment status undecided," she told WSJ.

While Judge Chen acknowledge the strength of the arguments on both sides in his ruling, he objected to the $1 million part of the settlement that would be allotted to claims relating to a law in California allowing the plaintiffs to pursue violations of the labor code on the state's behalf and then split the award. The value of those claims had been estimated at $1 billion by the drivers' attorneys, though most often the plaintiffs receive only a fraction of the possible maximum amount.

Although the settlement may have benefited Uber more than its workers, Judge Chen's ruling means that it is now possible that drivers will end up receiving little or no recompense from the company. Before the settlement was proposed in April, the Ninth Circuit Court of Appeals agreed to review Judge Chen's decision that declared the arbitration clause in Uber's driver agreement to be unenforceable, which had made it possible for the cases to go to court rather than arbitration. Although those appeals were stayed, a similar one is going forward in another case against Uber, and the panel indicated in June that it was sympathetic to the company's position.

"If the court declares that Uber's arbitration clause holds, Uber may choose not to renegotiate the current settlement and instead take the chance of going to trial with a much smaller class of drivers to be covered by any decision," says WSJ.

Uber is not the only company that could be affected by the outcome of this case. The founders and investors of similar startups such as rival Lyft and grocery delivery service Instacart say that labor costs will be increased by at least 20% if they have to reclassify their freelancers as employees. This will lead to changes in these companies' pricing models, ultimately raising prices.

Uber claims that its workers prefer the flexibility inherent in freelancing, allowing them to work only a few hours per week or at odd hours. If the workers became employees, they would likely have to adhere to more stringent requirements.

The drivers involved in the suits, however, allege that the demands made on them by the job, such as receiving instructions from an app and adhering to strict vehicle standards, ought to make Uber classify them as employees and help them pay for expenses like tolls and fuel.

The entire case may turn out to be moot in the end, unfortunately for drivers. Uber has been working on a long-term fix for the question of driver classification: driverless vehicles. The company is planning to test these vehicles in Pittsburgh as early as this month.