Uber settles two suits by drivers wanting employee status

Uber will pay up to $100 million to drivers who had sought to be classified as employees, settling two lawsuits that posed a threat to the company’s on-demand business model, which relies on independent contractors.

The San Francisco ride-hailing company announced it will pay an initial sum of $84 million to settle cases in California and Massachusetts to some 385,000 drivers. Uber, which is valued at $62.5 billion, said it will pay the drivers an additional $16 million if the company’s valuation reaches 1.5 times its current value after it goes public or if it gets bought.

The company also agreed to policy changes that reduce its control over drivers, shifting to be more in line with an independent contractor relationship.

The settlement brings to a close what employment experts believe was the biggest existential threat to the fast-growing startup. Uber built its high valuation on a system that uses independent contractors, enabling the company to avoid covering driver expenses such as gas and mileage, or providing benefits such as health insurance, Social Security, overtime or sick days.

Recognizing its drivers as employees would have bitten into its margins — and potentially slowed its global expansion and raised fares.

Attorney Shannon Liss-Riordan brought the lawsuit against Uber and 11 other on-demand companies that use similar models (those companies are not included in the settlement). The case against Uber in California was filed in 2013; drivers in the Massachusetts case filed their suit in 2014.

In addition to the monetary settlement, Uber will institute several changes in the way it disciplines drivers.

The company will no longer be able to deactivate drivers’ accounts at will. Drivers will now receive warnings and have an opportunity to correct any issues before they are cut from the service. The company will also stop deactivating drivers who turn down rides frequently.

Uber will create appeal panels and help drivers form an association so they can contest terminations.

If drivers are unhappy with the result of their appeals, they can bring their claim to an arbitrator at Uber’s expense.

The company will also institute an internal escalation process to handle disputes regarding driver pay.

Finally, Uber will make it clear to riders that tips are not included in Uber’s fares. Drivers will be permitted to solicit tips from passengers — a policy that competitor Lyft has long offered. Unlike Lyft, Uber will not be adding a tipping feature to its app.

In a prepared statement on Uber’s website, chief executive Travis Kalanick said the majority of Uber drivers prefer to remain independent contractors, which is “why we are so pleased that this settlement recognizes that drivers should remain as independent contractors, not employees,” he said.

The deal settles the two largest lawsuits Uber faced, counted by the number of drivers involved. It still faces similar suits in several other states, including Arizona and Florida.

This story was originally published April 22, 2016 at 6:23 PM with the headline "Uber settles two suits by drivers wanting employee status."