Uber has settled a pair of class-action lawsuits over how it classifies its drivers, an agreement that could have a huge impact on Uber's business model.
Under the agreement (see below), which settles lawsuits filed in California and Massachusetts, Uber will continue to classify drivers as independent contractors but pay as much as $100 million to the roughly 385,000 drivers involved in the lawsuits. The ride-hailing company also agreed to concessions, including providing drivers with more information about why they are banned from the service and create a "Driver Association" in both states to address drivers' concerns.
The settlement, filed Thursday in US District Court for Northern California, threatened the foundation of Uber's business model. The company has grown dramatically in the past six years by providing a smartphone app that sidesteps taxicabs and provides a connection between people who want a ride and de facto cab drivers who pilot their own vehicles. But their classification as independent contractors upset drivers, because it means the company is not responsible for all sorts of costs, including Social Security, health insurance, paid sick days and overtime.
Under the settlement, which still requires court approval, Uber will no longer be able to terminate drivers at will and will create appeals panels for drivers who feel they have been terminated unjustly. Uber will also make clear to riders that tips are not included in Uber's fares, and drivers will be permitted to post signs reflecting that arrangement.
Uber had always contended that the drivers preferred the arrangement, that it gave them a personal flexibility that allowed them to set their own schedule and 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," Travis Kalanick, chief executive of Uber, said in a company blog post announcing the settlement.
"That said, as Uber has grown -- over 450,000 drivers use the app each month here in the US -- we haven't always done a good job working with drivers," he wrote. "It's time to change."
An attorney for the drivers in the California case called the settlement an "historic agreement" that will increase drivers' income and improve their work lives by fostering a constructive dialogue between drivers and the company.
"We are very proud of this achievement and look forward to these changes being implemented for the benefit of Uber drivers," Shannon Liss-Riordan, attorney for the drivers, said in a statement.
She added that although the drivers were looking forward to taking the case to trial, they also faced a number of serious risks in the judicial system that could jeopardize what the drivers ultimately received. After balancing that risk against a settlement that will improve the working conditions for Uber drivers, plaintiffs decided to settle, she said.
The driver classification lawsuit was originally filed in 2013. Over the past couple of years, Uber has tried to get the case thrown out.
In the wake of this battle, several on-demand companies appear to be rethinking the independent contractor classification. The grocery-delivery startup Instacart said in June that it's switching hundreds of its personal shoppers from contract workers to part-time employees. And house-cleaning startup Homejoy announced in July that it was permanently shutting down after being sued over the classification of its workers. Several similar lawsuits have also popped up against other on-demand companies, including Postmates, Handy, Shyp and Washio.