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Judge Rejects $84M Deal Between Uber and Drivers

SAN FRANCISCO (CN) — Uber faces trial on drivers' claims that they are employees entitled to expenses and not independent contractors, after a federal judge rejected $84 million settlement he said is too risky and unfair to both sides.

"The settlement as a whole as currently structured is not fair, adequate, and reasonable," U.S. District Judge Edward Chen wrote in a 35-page ruling Thursday.

Uber unveiled the settlement back in April, agreeing to an initial $84 million payout, plus $16 million if the company's valuation grew by one and a half times within a year of going public.

Class attorney Shannon Liss-Riordan was also expected to recover up to 25 percent of that award — between $21 million and $25 million — but has since reduced her fee request by $10 million.

The settlement would have covered about 380,000 drivers in Massachusetts and California who sued Uber in two separate class actions for misclassifying them as independent contractors required to pay for their own gas, vehicles and maintenance, while controlling them like employees.

Under the agreement, drivers would still be considered independent contractors, but Uber would no longer be able to "deactivate" drivers without cause, or for low acceptance rates. It would also give drivers at least two warnings, a written explanation with reasons for any deactivation, and an appeals process comprising a panel of top-rated drivers for certain types of deactivation.

Drivers unsatisfied with the appeals process could arbitrate with Uber at the company's expense. Uber would also be required to form a drivers association, through which drivers can bring their concerns to management.

Drivers will also be allowed to place signs in their cars telling riders: "Tips are not included, they are not required, but they would be appreciated."

Uber also agreed to a $1 million payout under the Private Attorneys General Act, a California labor law that allows workers to recover fines on behalf of the state.

Chen took particular exception to that part of the settlement, noting that a successful PAGA claim could result in penalties of more than $1 billion.

"Instead of adequately considering these risks to Uber and the full value of the PAGA claim, in settling the PAGA claim herein, plaintiffs appear to treat the PAGA claim simply as a bargaining chip in obtaining a global settlement for Uber's benefit, even though the PAGA claim alone is worth more than half of the full verdict value of all claims being released," Chen wrote.

Chen also had reservations about the non-monetary aspects of the settlement, including the new tipping policy.

"Importantly, while Uber has agreed to 'clarify' its tipping policy to make clear that tips are not included in the fare, it has also actively discouraged tipping, arguing that it is inconsistent with its business model, drivers' interests, and a positive rider experience," Chen wrote. "In other words, Uber may be permitting tipping, but it is also telling riders not to tip, further decreasing the amount of tips that riders are likely to give."

In an email, Liss-Riordan said she was disappointed with Chen's refusal to approve the settlement, but understood why.

"His concern was not so much with the major settlement terms, or with the agreement's resolution of claims brought by the objectors (which he agreed with me had little value)," she said. "Instead, his concern was primarily with the resolution of PAGA claims, because the potential penalties under that statute could theoretically be enormous. It has been routine in California wage and hour litigation for PAGA claims to be settled for a small fraction of their theoretical value, but here the court decided not to approve the settlement largely because of that reduction."

Chen acknowledged the substantial risk for drivers if the case goes to trial, most obvious being the possibility that the Ninth Circuit will uphold the validity of one or both of the 2013 and 2014 arbitration agreements which Chen ruled unenforceable in 2015.

If that happens, it could force the majority of the class into arbitration over their non-PAGA claims, jeopardizing the scope of the case.

"Plaintiffs face a considerable risk that they will not proceed as a class action in any court, or at least be limited to a class action greatly reduced in size," Chen wrote. "Even if the Ninth Circuit were to limit a finding of enforceability to the more recent contracts, and hold only the 2013 arbitration agreement not to be enforceable, this could substantially decrease the class from approximately 240,000 drivers to 8,000 drivers, dramatically lowering any class monetary recovery that plaintiffs might obtain through the class action."

Chen added that the drivers also face the risk of losing on the merits, writing, "The fundamental question of whether Uber drivers are employees or independent contractors is not a simple one."

He said there are factors that support either side. While drivers can choose when and for how long they work, Uber can still terminate them for low acceptance rates.

Uber also risks losing on misclassification, since the burden is on Uber to disprove an employment relationship.

Liss-Riordan said she is prepared to fight Uber in court should new settlement talks fail.

"It is possible the parties could reach a revised agreement that satisfies the court's concerns regarding the PAGA claims," she said. "But if not, as I've said before, I will take the case to trial and fight my hardest for the Uber drivers. Assuming a revised agreement cannot be reached, it now seems very likely that the scope of this case may be drastically reduced to about 8,000 drivers, because of Uber's arbitration clause. That means that drivers who did not opt out of Uber's arbitration clause would need to bring individual claims in arbitration if they want to be a part of this.

"We are prepared to start bringing these claims individually, and more than 1,000 drivers in California have already signed up with us to bring individual claims in arbitration if that becomes necessary, so other drivers who want to be included would need to contact us."

In a statement Uber said, "The settlement, mutually agreed by both sides, was fair and reasonable. We're disappointed in this decision and are taking a look at our options."

The parties are due back in court on Sept. 15.

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