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A federal judge has rejected a $100 million deal to settle Uber drivers' claims that they were misclassified as independent contractors under California and Massachusetts law. The closely watched California case began in 2013, when drivers accused the ride-hailing service of short-changing them on certain benefits that are only afforded to employees.The California Labor Code requires businesses to pay employees minimum-wage and overtime pay and to reimburse them for reasonable business expenses, such as gas and vehicle maintenance. Independent contractors, on the other hand, are responsible for their own expenses. The proposed settlement would have covered approximately 300,000 drivers, including Massachusetts drivers represented in a separate lawsuit that asserted similar claims.However, Judge Edward Chen of the U.S. District Court for the Northern District of California said in an Aug. 18 order that the settlement wasn't fair, adequate and reasonable."The bottom line for the parties in this case is that Chen's order doesn't deny them the right to try again to get a settlement approved," said Tamara Devitt, an attorney with Haynes and Boone in Costa Mesa, Calif. "But they would have to go back to the table, and in order to obtain approval, it appears they would need to make some changes to the settlement."The case continues to be a reminder for businesses that, if someone looks like an employee, he or she should be treated like an employee, said Jim Evans, an attorney in Alston & Bird's Los Angeles office.
Degree of Control
At the heart of the dispute is whether Uber exercised enough control over its drivers to create an employment relationship. Uber has argued that the drivers were properly classified as independent contractors because they set their own hours, drove their own vehicles and decided what geographical area to cover.The drivers, however, argued that Uber retained the right to control many aspects of their work. The Uber Driver Handbook, for example, set the expectation that drivers would accept all ride requests and instructed drivers to dress professionally and play certain types of music while passengers were in the vehicle.Uber also retained the right to deactivate drivers' accounts if they had low customer ratings, the drivers argued.In March 2015, Chen held that a jury would have to decide whether the drivers were employees or independent contractors. However, in April 2016, just before the trial began in the California case, the parties reached the settlement agreement at issue.Uber agreed to pay $84 million to the California and Massachusetts drivers and said it would pay an additional $16 million if the company went public and its valuation increased by a certain amount. The settlement called for Uber to change some of its policies, but the drivers would have remained independent contractors.
In his order rejecting the settlement, Chen recognized that both sides face significant risks if the litigation continues. The drivers risk a jury finding that they were properly classified as independent contractors.Moreover, the parties are awaiting a decision by the 9th U.S. Circuit Court of Appeals as to whether arbitration agreements the drivers signed are enforceable.Chen had determined that the arbitration agreements are not enforceable, but Uber appealed the decision.A finding by the 9th Circuit that the arbitration agreements are "valid and enforceable would substantially change the scope and course" of the drivers' case, Chen said, "as it would likely require the vast majority of the class to go to arbitration.""The implications of the pending rulings on the enforceability of the arbitration agreement are important to the viability of the case, and it may be that we have to wait and see what the 9th Circuit does," Devitt said.Uber also faces substantial risks if a settlement isn't reached, according to Chen."While Uber has emphasized that drivers are free to pick and choose when they work … this freedom does not preclude a finding of an employment relationship, as the more relevant inquiry is how much control Uber exercises over drivers while they are on duty for Uber," he said.
Inadequate Payment to State
In California, the Private Attorneys General Act (PAGA) allows private citizens to pursue civil penalties on behalf of the state's Labor and Workforce Development Agency. In this case "the amount attributed to the PAGA claim was key to the court's finding that the settlement amount was inadequate," Devitt explained.The drivers agreed to settle the PAGA claim on behalf of the state for $1 million, "despite having previously argued that the PAGA claim could result in penalties over $1 billion," the judge noted. "Judge Chen gave a very thorough review regarding the fairness of the settlement," Evans said. "He basically said that 'but for' the amount of the payment on the PAGA claim, he may have concluded that the settlement met the fairness standard.""PAGA is a statute with a lot of teeth but not much legal guidance," Evans added. "We don't have any clear guidance for lawyers or employers to decide what portion of a settlement should be allocated to the PAGA claims.""Judge Chen's ruling suggests that there may need to be some sort of ratio methodology applied to determine what is reasonable for settlement of a PAGA claim," Devitt said.Courts may start imposing heightened scrutiny on PAGA settlements, which is a negative for employers because the potential penalties are usually much higher than the actual settlement amount, she added. "We can expect this might make it even harder for employers to resolve wage and hour claims."
The cases are O'Connor v. Uber Techs., Inc., N.D. Cal., No. 13-cv-03826 and Yucesoy v. Uber Techs. Inc., N.D. Cal., No. 15-cv-00262.
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