Uber Technologies Inc. resolved the biggest threat to its business by settling with California drivers suing to be treated more like traditional employees, a move that could have broad-ranging implications for companies across the sharing economy.

The agreement calls for Uber to pay as much as $100 million to drivers in California and Massachusetts and allows them to solicit tips from riders, but keeps them classified as contract workers instead of formal employees, according to statements by a lawyer for the drivers and the company.

With a valuation of $62.5 billion, Uber is the biggest firm in the sharing economy where a fight has been brewing over how companies classify workers. The settlement could guide other companies trying to address worker unrest.

The definitions of employees and contractors have grown blurry in the gig economy, which is caught in a hazy zone of laws and regulations written decades ago. Worker advocates remain divided over whether those who labor in the app-enabled casual workforce demand a new legal category. The California drivers’ lawsuit was one of the biggest and most advanced challenges to Uber’s ride-sharing business model, which is still under attack worldwide by the taxi industry, local governments, unions and even passengers.

‘Adverse Finding’

“Uber avoids the collision and an adverse finding that these folks are employees,” James Evans, a lawyer who defends companies against employment suits, said about Uber’s efforts to settle the matter. “They leave it an open issue, and that’s desirable from their standpoint. This maintains the status quo, without figuring out if these people should be treated differently or not.”

The class-action lawsuit, set for trial June 20 in San Francisco, had grown to cover about 240,000 current and former Uber drivers in California over claims they were wrongly classified as independent contractors and should be reimbursed for expenses and tips. Those claims under state law would have totaled hundreds of millions of dollars if the world’s biggest ride-hailing service lost at trial. Additional penalties against the company might have added several hundred million dollars more to the cost of a losing verdict.

Under the agreement filed Thursday, which requires court approval, Uber will initially pay $84 million to the drivers, with another $16 million contingent on the ride-share service going public and its valuation continuing to grow, according to the company’s statement. A quarter of the payout will go toward attorney fees, according to Shannon Liss-Riordan, the drivers’ lawyer.

Uber said almost 90 percent of drivers choose the company because they like to be their “own boss.”

“Drivers value their independence — the freedom to push a button rather than punch a clock, to use Uber and Lyft simultaneously, to drive most of the week or for just a few hours,” Uber Chief Executive Officer Travis Kalanick said in a blog post. “That’s why we are so pleased that this settlement recognizes that drivers should remain as independent contractors, not employees.”

Liss-Riordan said the settlement will serve as a deterrent to other sharing economy companies unfairly profiting from pools of independently contracted labor.

“No court has decided here whether Uber drivers are employees or independent contractors and that debate will not end here,” Liss-Riordan said in her statement. The litigation “stands as a stern warning to companies who play fast and loose with classifying their workforce as independent contractors, who do not receive the benefits of the wage laws and other employee protections.”

Sliding Scale

Payments to drivers will be made on a sliding scale proportionate to the miles they’ve driven under the terms of the accord. Those who have logged at least 25,000 miles for Uber may receive individual payments of more than $8,000, significantly more than those who have driven fewer miles, according to Liss-Riordan’s statement.

The settlement also allows drivers to post signs in their cars saying that tips are not included in the passenger fare and would be appreciated, though they aren’t required. Drivers alleged in the suit that Uber led customers to believe that gratuities were part of the fare.

“We expect that Uber drivers will receive substantially more pay as a result of riders’ generosity, when riders are no longer under the misimpression that tips are already included,” Liss-Riordan said.

The accord also prohibits Uber from firing drivers without a reason, sets up a two-step process for terminated drivers to appeal their dismissals through peer review and arbitration and recognizes a drivers’ association, according to the attorney’s statement. The organization, which will not be a union, will meet with Uber managers quarterly to discuss issues of concern to drivers.

The settlement covers Massachusetts drivers because Liss-Riordan represented them in a separate class-action against Uber.

19 Cents

Over the first three quarters of 2015, the most recent period available for the private company, the startup lost $1.7 billion on $1.2 billion in revenue. In the U.S., Uber calculated that in February it made 19 cents on each ride.

Liss-Riordan filed the first-of-its-kind case against Uber in 2013. She won a series of rulings in San Francisco federal court that pushed the case to the brink of trial.

Among those was a decision by U.S. District Judge Edward M. Chen that Uber couldn’t enforce a contract provision that prevented drivers from suing and required them to resolve disputes through arbitration. That expanded the case from a few thousand current and former California drivers to almost a quarter million.

Uber also failed to convince the judge that the case wasn’t a good fit for a class action because many of its drivers have no interest in being treated as employees — and might even get fired if bosses at their other jobs found out they were moonlighting.

Arbitration Agreement

The company appealed several of Chen’s rulings and modified its arbitration agreement. Uber gained significant leverage when it won an appeals court review of Chen’s ruling that expanded the case to 240,000 drivers.

With a settlement in hand, the company can pick off disputes one at a time instead of fighting a monolithic class of defendants.

The settlement also leaves the rest of the sharing economy without a verdict on whether whether workers can be classified as employees or independent contractors. A legally binding answer to that question in some other case may yet define the future of Internet-enabled companies dependent on casual labor for services as varied as food delivery and helicopter excursions.

Independent contractors typically aren’t entitled to labor standards such as minimum wage, health and safety guidelines or reimbursements for work-related costs. California lawmakers were considering legislation to give ride-share drivers the right to create a unionlike system for independent contractors, following the passage of a similar citywide ordinance in Seattle late last year.

Uber rival Lyft Inc. in January reached an agreement with California drivers that offered them $12 million and some non-monetary benefits without changing their classification as contractors. A judge in April rejected the deal saying the payout would shortchange a group of 150,000 drivers. The two sides resumed negotiations, with the drivers represented by Liss-Riordan in that case too.

Business Model

Settling the Uber drivers suit neutralizes the most visible threat to the company’s business model, though it and other sharing-economy companies continue to battle a range of legal challenges in the U.S. and internationally.

In March, a Manhattan federal judge rejected Uber’s attempt to dismiss a proposed class-action claiming its algorithm for high surge-pricing fares violates antitrust laws that protect consumers from price manipulation. Also in March, the National Labor Relations Board sued Uber in San Francisco federal court, demanding it obey subpoenas related to five unfair labor practices cases.

The company has also faced accusations by passengers alleging criminal behavior by its drivers.

How gig-economy employers treat their workers will continue to be tested in lawsuits, challenges at the National Labor Relations Board, and other agencies including the U.S. Labor Department, said Charlotte Garden, an associate professor at Seattle University School of Law.

“This issue is here to stay,” she said, saying the stakes in the San Francisco Uber case are important to old and new industries alike.

“There’s a way in which Uber is ‘Meet the New Boss, Same as the Old Boss,’ and that means that workers and employers in industries outside of the apps-based economy would be interested in the outcome of any mis-classification case involving Uber.”

The case is O’Connor v. Uber Technologies Inc., 13-cv-03826, U.S. District Court, Northern District of California (San Francisco).

Topics Lawsuits California USA Legislation Personal Auto Contractors