Uber's $100M settlement over drivers as contractors may not be enough

UPDATE: Sept. 7, 2016, 4:41 p.m. EDT

A ruling in a different case on Wednesday, Sept. 7 may have changed the course of Uber's fight over its use of contractors.

An appeals court ruled that drivers suing over background check practices must fight their cases separately, rather than in a class-action suit. That's because the court upheld an arbitration agreement in the drivers' contracts.

The ruling could be used to disband the class-action case in O'Connor v. Uber.

Without the power of a large class-action suit, Uber drivers will be unlikely to win any changes to their status as contractors.

A $100 million settlement Uber was ordered to pay to drivers in a class-action lawsuit may not be enough, a judge said Thursday.

Uber had agreed to pay $100 million to drivers in California and Massachusetts who sued over their status as contractors, rather than employees.

Keeping drivers as contractors, not eligible for benefits or other protections for full-time workers, has been instrumental in Uber's astronomical growth and business model. Settling class-action lawsuits over the issue for $100 million allowed Uber to move forward with its business model intact.

The case has also been closely watched in Silicon Valley due to the possibility that the case will impact the broader on-demand economy.

But a judge hinted in June that the settlement might not be enough on Uber's part. And on Thursday U.S. District Court Judge Edward Chen rejected the settlement deal.

Chen cited a prior ruling from the California Labor Commission that said that Uber had to treat a driver as a full-time employee.

Uber could be in line for a bigger financial hit as long as the ruling is upheld and the case moves forward. Chen said in his ruling that the $100 million settlement — $16 million of which was projected based on a future IPO from Uber — was not enough.

He pointed to a few reasons, noting that he did believe that "the change to tipping policy will result in 'substantially increased income'" that had been promised.

Chen also noted that the $16 million for the IPO could not be considered a reasonable sum as "there is no information on the likelihood that this contingency will be triggered."

But it's possible the lawsuit could collapse and Uber would walk away without paying the 385,000 drivers anything, as Bloomberg pointed out.

Uber drivers had previously been under an "arbitration agreement" that meant any lawsuit filed against Uber would be mediated not in a court but rather in arbitration, a private process that is usually quicker and often favors companies.

Chen threw out the arbitration agreement, allowing the lawsuit to proceed in court. Uber has appealed that decision, and if it wins, could face a far smaller class-action lawsuit. The lawyer for the drivers has said this would be disastrous for their case and give Uber the upper hand.

The judge acknowledged that risk, but did not find it strong enough to uphold the settlement.

"In addition to this risk to maintaining class action status, as this Court has previously noted, Plaintiffs face risks on the merits of the case. The fundamental question of whether Uber drivers are employees or independent contractors is not a simple one," the judge wrote.

The ruling comes on the same day Uber said it would roll out its first driverless cars in Pittsburgh. And they won't be able to sue.

When reached for comment, an Uber spokesperson emailed the following statement: "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."

This post was updated to reflect the new case ruling that may impact the original story.

See the full ruling below:

  Uber O'Connor overturn