Judges in California will likely soon issue rulings affecting two ride-sharing companies, Uber and Lyft. Those connected with the Lyft case will be pleased because it is expected that a federal district court judge in San Francisco will formally approve a $27 million settlement in an independent contractor misclassification case against Lyft. In contrast, both the plaintiffs’ counsel and defense counsel involved in the Uber case pending in a state court in Los Angeles will have to accept a judicial setback when the judge handling that case is expected to formally disapprove of a $7.75 million settlement of so-called PAGA claims asserted on behalf of hundreds of thousands of Uber drivers.

The Lyft Settlement Being Approved

Lyft had originally entered into a proposed agreement to settle its drivers’ IC misclassification claims for $12.25 million, but Judge Vince Chhabria rejected that settlement as inadequate, as more fully detailed in my March 15, 2016 blog post.  Following the rejection of that proposed settlement, the parties returned to Judge Chhabria with a proposed settlement of $27 million.

Objections to the higher proposed settlement were filed by a few class members, a Teamsters local, and the “Uber Lyft Teamsters Rideshare Alliance,” nicknamed ULTRA. Those objections were principally aimed at the fact that the settlement allows Lyft to maintain its classification of the drivers as independent contractors and not reclassify them as employees. If the drivers were reclassified, federal labor laws would permit the Teamsters to unionize the drivers; otherwise, as independent contractors, they remain ineligible for union representation.

According to Shannon Liss-Riordan, the lead counsel for the drivers, those that drove the most will be receiving thousands of dollars. So far, approximately 95,000 Lyft drivers have reportedly elected to participate in the settlement.

In addition to the financial terms of the settlement, the principal terms include:

  • Lyft will no longer be able to deactivate drivers at will, for any reason, and instead will only be able to deactivate drivers for specific reasons or after providing notice and an opportunity to cure. Drivers deactivated will be able to arbitrate their deactivation, with Lyft paying for the fees of arbitration. (Evidently, the drivers may have to pay their own legal fees if they choose to hire counsel to represent them at the arbitration.)
  • Lyft will provide additional information about potential passengers to drivers prior to the driver accepting any ride request, which presumably will assist drivers in deciding whether to accept a ride request.
  • Lyft will create a “favorite” driver option where drivers who are designated by riders as a “favorite” are entitled to certain benefits.
  • In exchange for the above, all class members (except those who “opt out” of the settlement) will waive all existing claims they may have against Lyft arising from their alleged misclassification as independent contractors.

The settlement will cover all Lyft drivers who made at least one trip for Lyft in California between May 25, 2012, and July 1, 2016. The case is Cotter v. Lyft Inc., No. 13-cv-04065 (N.D. Cal.).

[Updated 3/17/17:  On March 16, 2017, Judge Chhabria approved the parties’ $27 million settlement.]

The Uber Settlement Being Rejected

Uber has been the object of lawsuits in cases around the country, including California. The principal case in that state is the O’Connor case, which is pending before Judge Edward Chen in federal court in San Francisco. O’Connor v. Uber Technologies, Inc., No. 3:13-cv-03826-EMC (N.D. Cal.). That case seeks damages for allegedly unreimbursed automobile, cell phone, and other expenses and includes a claim under the California Private Attorney General Act (“PAGA”).  Under PAGA, private litigants sue in place of the State and seek recovery for monies that would have been owed to the State if the government had conducted the lawsuit instead of private litigants. In a PAGA lawsuit, the private litigants keep a smaller portion of the recovery while the State receives the larger portion.

Another California case against Uber is pending in Los Angeles Superior Court before Judge Maren E. Nelson.  Price v. Uber Technologies Inc., No. BC554512 (Super. Ct. Los Angeles County). That lawsuit also asserts PAGA claims that overlap with those being sought in the federal case pending in San Francisco. Counsel for Uber and the class representatives in the Los Angeles case had submitted to the judge a proposed $7.75 million settlement of the PAGA claims.

Judge Nelson is likely to formally reject the proposed settlement, reportedly noting (among other concerns) that she wished to make sure the settlement in her Los Angeles case would not adversely affect the rights of drivers in the San Francisco case. Many Uber drivers have filed objections to the proposed settlement, which may pay each of the many hundreds of thousands of Uber drivers only a few dollars each, after payment of their attorneys’ fees.

Judge Nelson also reportedly told the lawyers for the drivers and Uber that she needed more information about the financial fairness of the proposed settlement, and was also seeking information on the PAGA claims from the California agency in charge of such claims.

Notably, lawyers for plaintiffs in other PAGA lawsuits against Uber have made known their objections to the proposed settlement in court filings. Those lawyers cite issues as to both the modest amount of the settlement and the impact of the settlement on their lawsuits against Uber.

In the San Francisco case, Judge Edward Chen last rejected a $100 million proposed settlement. As noted in my August 18, 2016 blog post, Judge Chen rejected that  settlement in large part because of his objections to the amount allocated to the PAGA claims.  He mentioned that the State agency in charge of such claims had estimated the value of the PAGA claims at $1 billion.

As I have noted in prior blog posts, Uber has received mixed results in legal challenges brought against it around the country, winning and losing some cases brought by individual drivers before administrative agencies and arbitrators.

Analysis and Takeaways

Uber and Lyft have dominated the headlines in defense of their independent contractor relationships with drivers and efforts to settle a bevy of class action lawsuits brought against them. Both companies had hoped to win their California class actions by making motions for summary judgment. But two separate federal judges denied their motions and set down those cases for trial. No trials have been held in either of those cases, both of which have now been the subjects of proposed settlements.

As I noted in my September 18, 2014 blog post entitled “Silicon Valley Misclassification,” I observed that tech companies that use the 1099 “on demand” business model were at risk if they “do not take care to structure, document, and implement their independent contractor relationships in a manner consistent with federal and state IC laws.”

That does not mean, however, that on-demand and other companies using independent contractors cannot prevail on IC misclassification claims.  To the contrary, the court’s decision in the Uber summary judgment opinion pointed to two recent cases where courts in California found workers to be independent contractors as a matter of law.  As Judge Chen noted, even though some factors may have “cut in favor of employee status,” courts will still find IC status when “all of the factors weighed and considered as a whole establish that [an individual] was an independent contractor and not an employee.”

So, how does a company avoid class action IC misclassification cases or, if sued, prevail in the lawsuit and secure a judgment that its 1099ers are legitimate ICs?

While Uber and Lyft can afford to defend costly class action settlements, most other on-demand start-ups can’t. And investors don’t wish to pour money into business models of new start-ups that are future targets of class action lawyers and workforce agency regulators.  As I noted in my March 12, 2015 blog post on the courts’ denial of the motions for summary judgment by Uber and Lyft, many new and existing companies have resorted to a process such as IC Diagnostics™ to enhance their level of IC compliance and determine whether a group of 1099ers would pass the applicable tests for IC status under governing state and federal law.  That type of process offers a number of practical, alternative solutions to enhance compliance with those laws, including: restructuring, re-documenting and re-implementing the IC relationship; reclassifying 1099ers as W-2 employees; and redistributing 1099ers – as more fully described in my White Paper on the subject.

Companies that wish to retain an IC business model generally opt for restructuring, re-documenting, and re-implementing their IC relationships. While not all companies can eliminate their control and direction over workers treated as 1099ers, the overwhelming number can effectively restructure their IC relationships to comply with federal and most state IC laws. A process such as IC Diagnostics™  provides the means to stress-test the IC relationship. If it can be effectively restructured to comply with IC laws, the next step in the process is re-documentation.  What seems like a simple act of dotting your i’s and crossing your t’s, though, is anything but; indeed, many IC statutes and most judicial and administrative decisions in this area are often counter-intuitive.

In my August 29, 2014 blog post entitled “Earthquake in the Independent Contractor Misclassification Field,” I noted that FedEx Ground lost a key case because of its reliance on an IC agreement and its policies and procedures that were good, but not good enough.  As I stated in that blog post: “IC agreements and policies and procedures that are not drafted in a state-of-the-art manner, free from language that can be used against the company, can cause businesses that use ICs to face class action litigation or regulatory audits or enforcement proceedings they may be able to otherwise avoid.”  For most businesses using ICs as part of their business model or to supplement their workforce, it is never too late to restructure and re-document their IC relationships.

The implementation of a legitimate IC relationship is also essential. Even when a company’s contractual provisions are drafted in a manner intended to be consistent with IC laws, a company’s alleged failure to strictly follow contractual limitations on direction and control can lead to an adverse ruling. There is no reason, though, why a company committed to complying with IC laws cannot, when exercising both rigor and restraint, implement and carry out in practice an enhanced IC relationship.

Written by Richard Reibstein.