Lyft, the on demand ride-sharing company will have to pay out more cash if the company wants to avoid going to trial over its drivers’ status as independent contractors. The company had reached a settlement agreement in February that allowed it keep its drivers classified as independent contractors.
Last week a federal judge in San Francisco rejected the deal Lyft and plaintiffs’ lawyers had proposed saying the dollar amount was too low. The settlement was for a class-action claim filed by drivers who want to be employees. Lyft had agreed to pay the settlement, and in exchange the drivers would remain independent contractors. The settlement would also have provided them with additional rights. For example, Lyft would no longer have been able to fire drivers at will.
However, that settlement was not reasonable in the eyes of Judge Vince Chhabria. He wrote, “Most glaringly, counsel for the plaintiffs pegged the $12.25 million settlement figure primarily to the estimated value of the drivers’ claim for mileage reimbursement. But the lawyers estimated the value of the reimbursement claim to be $64 million, when in fact, using their own methodology, it is worth more than $126 million. The drivers were therefore shortchanged by half on their reimbursement claim alone.”
A number of drivers had criticized the deal because it failed to grant them employment status as they had demanded. Employee status would have entitled them to benefits such as overtime pay and reimbursement for driving expenses which they don’t get as independent contractors. But Chhabria wrote he would not require Lyft to reclassify its drivers as part of the settlement. He gave the lawyers an opportunity to up the dollar amount and try again, suggesting he’d approve the deal if its monetary value met his expectations.
This is the latest salvo in the ongoing debate of whether on-demand drivers and couriers are independent contractors or employees. In this Presidential election year it is a hot-button issue. Many 1099 economy startups use the contractor business model to gain flexibility and cut down on labor expenses.
Lawyers for the Lyft drivers had calculated the original settlement amount based on estimating that they could have won up to $70.58 million at trial. They discounted that amount, ultimately arriving at the $12.25 million amount, based on the challenges they expected to face in litigating the case. The problem was that calculation was based on driving mileage data Lyft provided from 2012 through June of last year. More recent data showed the number of miles traveled by Lyft drivers doubled, which caused the judge to reevaluate the settlement figure. The plaintiffs could have won $126 million on their expense reimbursement claim alone, plus additional damages for other employment claims.
To put this settlement in perspective, Lyft drivers would have received an average of $56 each under the rejected deal. The payouts would have been calculated on a sliding scale based on hours worked.
As the Lyft case demonstrates, there are risks in engaging independent contractors. The good news is these risks can be mitigated by working with an independent contractor compliance and engagement expert to make sure it is being done correctly. At TalentWave our compliance experts are actively monitoring these developments as they will influence the broader regulatory and civil litigation environments for our enterprise clients who engage flexible workers. In the short-term it is likely that 1099 economy companies like Lyft and Uber will have to carefully evaluate their business models, and how they engage their services workers. Longer-term we can expect to see more regulatory and legislative activity that will attempt to better define and govern these flexible workers with the goal of collecting proper employment taxes and providing worker protections similar to what traditional employees receive.