Uber Drivers Classified as Independent Contractors
April 27, 2016
Online transportation giant Uber recently dodged a bullet that will allow it to continue with its on-demand business model.
Facing a June trial, Uber settled lawsuits in both California and Massachusetts that will let it continue to categorize its drivers in those states as independent contractors. Why is that significant? By not having to reclassify its workers as employees, Uber won’t have to offer employee benefits such as minimum wage, paid sick time and overtime; reimburse drivers for expenses such as gas and/or maintenance; and pay a portion of drivers’ Social Security and FICA.
Under the terms of the settlement, Uber will pay $84 million to approximately 385,000 plaintiffs. Should the company undergo an IPO and increase its valuation 1.5 times the first-year IPO valuation, it will pay the plaintiffs an additional $16 million. In December 2015, Uber was valued at $62.5 billion. The settlement funds will be distributed to drivers in California and Massachusetts based on how many Uber miles they’ve driven. Drivers with more than 25,000 miles may receive an average of $8,000 each.
Uber also agreed to initiate a progressive system in order to deactivate drivers and provide an appeals process for those deactivated drivers. There are approximately 450,000 Uber drivers in the U.S. Uber will also let drivers post signs in their cars indicating drivers can accept tips.
While it’s a big win for Uber, the company still faces similar litigation in Florida, Arizona and Pennsylvania. Recently, a federal judge rejected a similar deal between Uber competitor Lyft and California drivers because the judge felt the $12 million settlement was insufficient. One concern is that ongoing litigation could negatively impact on-demand companies’ efforts to raise additional capital from investors.
Uber was a pioneer in the “gig economy,” where people accept tasked-based freelance work via the web. More than 50 million American found work via the gig economy in 2015.