By: Diane Ring
A major question in the sharing economy is the status of workers – are they employees or independent contractors? Of course, no single answer would apply across the entire sector but the debate has been most prominent in ridesharing. At the center of this debate are two litigations against Uber in California and Massachusetts (in January 2015 the Massachusetts case was transferred to the Northern District of California). The suits, brought on behalf of Uber drivers in the two states, “alleged [among other claims] that Uber misclassified its drivers as independent contractors rather than employees.” Reclassification as an employee would entitle drivers to various protections and potential compensation under state labor law. Three years into the litigation, the plaintiffs agreed on a settlement with Uber, which would provide for monetary relief of $84 million (plus an additional $16 million contingent on an initial public offering). The bulk of this payment would be split into two funds, with approximately $5-6 million for Massachusetts drivers, and approximately $56-66.9 million for California drivers. Payouts to drivers would be based on miles driven under a formula.
Additionally, the settlement would provide nonmonetary relief in the form of various Uber commitments to drivers and restructuring of certain Uber practices. For their part, the plaintiffs would agree to release “all claims based on or reasonably related to the employment misclassification claim.” Thus, the parties were agreeing to let stand the current Uber practice of classifying drivers as independent contractors. Although such a settlement would not eliminate the debate over Uber driver status in all arenas—certainly the federal tax classification issue would remain open for the IRS to consider—it would nonetheless have marked a potentially important shift in the debate. However, on August 18, 2016, the U.S. District Court for the Northern District of California rejected the settlement. Why did the court say no, and what might this mean for Uber driver classification?
In a 35 page opinion, Judge Chen outlined the grounds on which the court denied the plaintiffs’ motion for preliminary approval of the settlement. In particular, Judge Chen commented on the broad scope of drivers who would be bound by the settlement, the claims on which they would be bound, and the significant dollar value such potential plaintiffs would forgo. Specifically, the settlement would cover “the claims of both the certified class members and drivers who fall outside the class definition and thus have not been certified” including “all Massachusetts drivers and California drivers who drove for a third party transportation company or drove under a corporate name.”
Under the proposed settlement “all claims related to misclassification, including many which had not been brought in [the] case,” would be released by these drivers. The sacrifice of these claims was possibly significant even though the legal question of driver status was uncertain. The court observed that “[t]he fundamental question of whether Uber drivers are employees or independent contractors is not a simple one” and bolstered this statement by outlining the arguments supporting each side. However, the court ultimately objected to the fact that, pursuant to the settlement, the plaintiffs sought to “formally add the PAGA [Private Attorney General] claim to the suit and settle it for $1 million, despite having previously argued that the . . . claim could result in penalties over $1 billion.” The PAGA claim would allow drivers as private plaintiffs to recover civil penalties from labor code violations and share the recovery with the government. Although the opinion details other concerns with the settlement (including Uber’s driver deactivation policy, tipping policy, and new December 2015 arbitration agreement), the worker classification issue played a central role. So where does the case (and the classification question) go from here?
In mid-October, the parties will return to court for a status conference to determine how to proceed with the case (which has a pending motion, and an appeal pending in the Ninth Circuit regarding Uber’s arbitration clauses with drivers). One possibility is that the parties will renegotiate the settlement. But a revised agreement is unlikely to cede the big issue and treat drivers as employees, though it might provide a larger monetary payment. Alternatively, the parties could head to trial, especially if the Ninth Circuit upholds Uber’s arbitration clause and requires most drivers to arbitrate their claims. Either way, this Uber litigation will eventually make a mark on the Uber driver classification conflict. But, as many industry commentators have observed, Uber’s best strategy for ending driver litigation and the controversy over worker status may be its effort to eliminate drivers entirely with the introduction of the driverless Uber car.