SAN FRANCISCO — Uber has long been embroiled in a debate over the status of its drivers: Should they be independent contractors or full-time employees?
Uber says that as independent contractors, its drivers get flexibility. Their freelancer status also lets the company sidestep the costs of full-time employees, including paying minimum wage and the employers’ share of Social Security. But labor groups and lawyers have argued that Uber drivers should be classified as employees to receive worker protections.
On Thursday, Uber moved a step closer to getting its way. The company reached a settlement in a pair of class-action lawsuits in California and Massachusetts that will let it continue to categorize drivers in those states as independent contractors — a landmark agreement that could have lasting implications for the long-term viability of the ride-hailing service.
Under the settlement, filed in the United States District Court in the Northern District of California, Uber will pay as much as $100 million to the roughly 385,000 drivers represented in the cases. The company also agreed to several concessions to appease driver concerns, including giving more information on how and why drivers are barred from using the app, as well as aiding in creating new “drivers associations” in both states.
“Importantly, the case is being settled — not decided,” Shannon Liss-Riordan, the attorney representing the drivers in the suit, said in a statement.
“This case, however, with this significant payment of money, and attention that has been drawn to this issue, stands as a stern warning to companies who play fast and loose with classifying their work force as independent contractors,” Ms. Liss-Riordan said.
The settlement is a significant victory for Uber on the matter of its drivers’ status. By keeping its drivers as contractors, the San Francisco-based company can keep its costs low. And while the settlement applies only to two states and is nonbinding elsewhere, the agreement and the changes that Uber is adopting may influence regulators in other places where the issue has surfaced.
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The agreement, which is subject to approval by Judge Edward M. Chen, who is presiding over the cases, says Uber must pay $84 million to the plaintiffs represented in the case. Uber will dispense an additional $16 million if the company holds an initial public offering and the average valuation of Uber increases to one and a half times that of its last financing round. In December 2015, Uber was valued at $62.5 billion, making it the most valuable private technology company in the world.
The class actions that are being settled were originally filed in 2013 and became the biggest suits in terms of the number of drivers represented. Uber still faces litigation about driver status in other states, including similar lawsuits in Florida, Arizona and Pennsylvania. Last June, the California Labor Commissioner’s Office said Barbara Ann Berwick, a former driver for Uber, should have been classified as an employee, not an independent contractor. That case, which does not apply to drivers other than Ms. Berwick, is being appealed by Uber.
The settlement’s changes are aimed at reducing points of contention for drivers. In the past, Uber has been able to boot drivers from its platform with little explanation, something that Uber said it would no longer be able to do. The company published a lengthy document detailing all the reasons a driver may be deactivated, from unsafe driving and carrying a firearm — which is prohibited — to using drugs and alcohol.
Uber said it would also provide drivers with more information about their ratings system — a measurement based upon individual scores from passengers — and how ratings were calculated. The company is exploring creating an appeals process for Uber drivers who have been deactivated because of a low rating.
Uber also agreed not to deactivate drivers who regularly decline to accept requests for rides from passengers, a practice that previously would contribute negatively to a driver’s overall standing with the company. Instead, drivers may be temporarily logged out of the app and unable to accept new requests if they are “consistently not accepting trip requests.”
“We know that sometimes things come up that prevent you from accepting every trip request, but not accepting dispatches causes delays and degrades the reliability of the system,” the company said in its newly published driver deactivation policy.
Uber refers to a trip declined by a driver as a cancellation. Each city will have a maximum cancellation rate based on the average cancellation rate of the drivers in the area, the company said. It could eventually deactivate those who persistently exceed the rate.
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Yet many of the policy changes Uber announced as part of its settlement — particularly changes to its protocol on deactivating drivers over their cancellation and acceptance rates — appear designed to defuse the plaintiffs’ arguments that Uber drivers should be classified as employees rather than independent contractors, as the company maintains.
“This is Uber relinquishing a small amount of control in two areas where critics have argued that the Uber-driver relationship looks like hiring and firing,” said Seth Harris, a former deputy labor secretary in the Obama administration and co-author of a recent paper arguing that Uber drivers occupy an ambiguous middle ground between contractor and employee.
“It’s a tweaking of the relationship to move the classification closer to the factors that define independent contractor and a little bit further away from factors that define employee.”
Other legal experts said that Uber drivers would appear to retain many of the characteristics of employees even under the company’s proposed changes.
For example, the fact that drivers whose acceptance rates are too low could be shut out of the app for short periods of time, and that those with unacceptably high cancellation rates could eventually be deactivated from the platform, may suggest a level of control that is normally reserved for employees rather than contractors.
“Ultimately this is a deterrent to drivers actually refusing to accept trips,” said Rachel Bien, an employment lawyer at Outten & Golden LLP who has litigated similar cases. “If it’s the kind of business that needs a driver to be at a certain place at a certain time regularly, it’s not a business that’s suitable for independent contractors, who should have the freedom to choose which jobs they want to do and when they want to do them.”
Ms. Bien also points out that unlike what is frequently the case with true contractors, Uber drivers will not be able to negotiate the price of the service they provide customers. They will also continue to be deactivated if their ratings from customers are low and don’t improve.
The proposal to create an association of drivers in California and Massachusetts that would meet with company officials quarterly to discuss issues of importance to drivers also raised eyebrows in some quarters.
“If Uber is going to be genuine about this, I think it’s a very, very good move forward,” said Joesph Sandoval DeWolf, president of the California App-based Drivers Association, an organization that claims to represent more than 2,500 ride-sharing drivers in Southern California.
But he expressed skepticism that this would be the case, saying that whenever the association has asked to meet with Uber to discuss drivers’ concerns in recent years, it has been told that Uber will only meet with individual drivers, not any association representing them, which he said was not effective.