More Guidance Needed On “Gig Economy” Questions

The class action litigation involving drivers for the ride-booking company Uber has enormous implications not just for those in the “gig economy” but for all companies that use the services of independent contractors.  In O’Connor et al. v. Uber Technologies, Inc., in the Northern District of California, a class of Uber drivers in California and Massachusetts claimed that they were misclassified as independent contractors and denied reimbursement of necessary business expenses as well as gratuities.  In April, Plaintiffs’ counsel requested that the Court approve a classwide settlement agreement that was widely publicized.

Last week Judge Edward Chen rejected this proposed settlement, which he said was, “not fair, adequate and reasonable.”  Judge Chen’s rejection underscores the challenges and complexities of large employment-related class actions.

The proposal was for a minimum of $84 million to the class with the potential to go up to $100 million if Uber’s initial public offering (IPO) hit a certain level.  Judge Chen found the settlement for the unreimbursed expenses and tips claimed by the plaintiffs to be adequate, albeit modest (about 10% of potential recovery). However Judge Chen found one provision to be particularly problematic: a proposed $1 million payment to settle claims under the California Private Attorneys General Act (PAGA – which allows private citizens to pursue fines that would normally only be available to the State of California).  Plaintiffs’ counsel brought this private claim on behalf of the State of California and had estimated it to be worth up to $1 billion in damages, an estimate that the California Labor and Workforce Development Agency confirmed. The Court found the $1 million proposed settlement — one-tenth of one percent of the value of the claim — was not fair and adequate. In addition, Judge Chen expressed concern about an arbitration provision that would have required waiver of the plaintiffs’ rights to bring PAGA claims in court.

On Oahu, where it’s reported that more than 5,000 people signed up to work for Uber, the Honolulu City Council passed new regulations related to the company.  According to Pacific Business News, “taxi and ride-hailing drivers will have to pay a fee to obtain a city certificate to operate, will need to submit to a national criminal background check and will need to have a Hawaii driver’s license. Cars used for ride hailing will be required to have permanent decals identifying them as for-hire vehicles. The legislation will go into effect on Jan. 15.”

As lawsuits like this continue to move through the courts, companies should expect continued litigation concerning whether a worker is an employee versus an independent contractor. In the meantime, employers must continually scrutinize their documents and practices to ensure compliance with federal and state laws. These issues are often fact-intensive (especially with respect to whether a company “directs and controls” an independent contractor). Therefore, although we expect further court decisions providing guidance, it is unlikely there will be clear bright lines providing answers to this issue.