A $100 million settlement in a lawsuit claiming Uber misclassified drivers as independent contractors was rejected Thursday by US federal Judge Edward Chen.
The deal would have settled one of the most noteworthy independent contractor misclassification lawsuits. Uber and plaintiffs attorneys brought forward the settlement — which would cover California and Massachusetts drivers — in April.
It’s a case that has been closely watched in the contingent workforce community.
“Rulings like this highlight how the new work models of the 21st century are creating headaches for a regulatory structure designed shortly after the industrial revolution,” said Bryan Peña, senior VP, contingent workforce strategies at Staffing Industry Analysts. “The unfortunate side effect of this will be the stifling of innovation and creating uncertainty for enterprise buyers as they consider taking advantage of these new technologies and varied contingent worker types.”
Under the deal, Uber agreed to pay $84 million plus $16 million contingent on an initial public offering. Uber also agreed to several changes as part of the settlement, including deactivating drivers only for sufficient cause and forming a drivers association.
It would not have made the California and Massachusetts drivers employees instead of independent contractors.
However, Chen cited a concern that claims in the lawsuit brought under California’s Private Attorney General Act would be settled for only $1 million, or 0.1% of their potential $1 billion value.
“The compensation to the class amounts is relatively modest when compared to the verdict value, the non-monetary relief is of limited benefit to the class, and the settlement does nothing to clarify the status of drivers as employees versus independent contractors, the settlement of the non-PAGA claims does not substantially vindicate PAGA,” he wrote.
California’s Private Attorneys General Act allows private plaintiffs to recover civil penalties otherwise recoverable by the state, according to the ruling. Because it is a substitute for governmental action, a judgment binds all those that would be bound by a government action — including nonparty employees.
Chen also discounted the $16 million contingent payment as part of the settlement because there is no information on the likelihood of an IPO for Uber.
Private Attorney General Act claims are one part of the case. The value of claims not filed under the Private Attorney General Act portion of the case total $854.4 million, according to the ruling. They include expense reimbursement for mileage and phones, tips and overtime. A majority, $700 million, would be for mileage.
The settlement would have also released all claims related to misclassification, according to Chen’s ruling. It would also cover claims brought in at least 15 other lawsuits pending in federal and California court, effectively terminating those lawsuits.
Chen noted there is a risk if drivers go to court in that the Ninth Circuit Court of Appeal could uphold binding arbitration provisions in Uber contracts, potentially reducing the class size in the case to 8,000 drivers.
If the case goes to trial, it would be up to jury to decide whether drivers are employees or independent contractors, and there would be no certainty.
The proposed settlement had raised several concerns, and was criticized by a named plaintiff  in the lawsuit.
However, Uber defended the deal. “The settlement, mutually agreed by both sides, was fair and reasonable,” Uber spokesman Matt Kallman, told The New York Times . “We’re disappointed in this decision and are taking a look at our options.” The Times also said Shannon Liss-Riordan said she is prepared to take the case to trial, if necessary.