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Uber will pay up to $100 million to settle a lawsuit that could have killed its business

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Uber CEO Travis Kalanick.
Steve Jennings/Getty Images for TechCrunch

Late yesterday, Uber announcement settlement of two lawsuits that posed a significant threat to its on-demand business model. Drivers will get more clarity about when they can be terminated, as well as a new appeals process if drivers feel they've been terminated unfairly. They'll also get some cash. In return, Uber has neutralized two big threats to its existing model for managing drivers.

This probably isn't the end of the story, though. The settlements only affect drivers in two states, and they don't actually settle the legal question at the heart of the lawsuit. So litigation in one of the other 48 states could eventually force Uber to change how it handles its relationship with drivers.

The legal question: Are drivers employees or contractors?

Drivers in California and Massachusetts had sued Uber arguing that they should have been legally classified as employees rather than independent contractors. If they'd won their lawsuit, they could have been entitled to a variety of legal rights, from overtime pay to reimbursement for expenses.

If the drivers had won the lawsuit, it could have forced Uber to dramatically change its business model. Under the current model, drivers are free to work when and where they want, and they get paid based on the number of rides they actually complete. That freedom could have been curtailed in a world where drivers are legally employees and are guaranteed a minimum wage and other legal benefits.

Instead, Uber has reached a settlement that features clear benefits for drivers but lets the company retain its core business model.

Uber drivers don't fit in either labor law category

Labor law in California (and other states) draws a fundamental distinction between employees and independent contractors. Employees have a direct, long-lasting relationship with their employers, and as a consequence they are eligible for a number of benefits and legal protections.

Independent contractors, on the other hand, are service providers with an arms-length relationship to their customers. For example, if you hire a plumber or electrician to do work on your house, that person might be classified as an independent contractor. It wouldn't make sense for the law to treat everyone who pays for outside help on their house as an employer.

Whether a worker is an employee or an independent contractor is an issue that's decided by regulators and the courts. Employers can't opt out of the legal requirements of labor law merely by getting employees to agree to call themselves independent contractors.

Labor laws were written in an era when nothing quite like an on-demand car service existed. So Uber drivers don't fit comfortably on either side of the divide between employees and independent contractors.

There are a number of ways that Uber drivers seem a lot like conventional employees. Uber drivers must undergo a lengthy application and background checking process before they can begin work. Many drivers treat Uber as a full-time job, working 40 or more hours per week for months at a time.

Uber sets a wide variety of rules governing how drivers should provide services to Uber passengers. Drivers' fees are fixed by Uber, and Uber sometimes provides drivers with bonuses, minimum earning guarantees, and other forms of compensation that don't come directly from customers.

But Uber pointed to important ways that drivers seemed more like independent contractors. Normally, employers set their employees' schedules, requiring them to work a minimum number of hours and often dictating when and where to report for work. By contrast, Uber drivers set their own schedules. They can work as much or as little as they want. They also have total freedom to decide where to work.

Employees generally use equipment supplied by their employers, while independent contractors usually supply their own tools. Uber has cited the fact that drivers supplied their own vehicles as evidence that they are independent contractors. Uber argued that it merely provided a kind of online marketplace — like an eBay for transportation services — connecting independent ride providers with customers who wanted to purchase their services.

Making drivers employees could have been bad for everyone

Some of Uber's critics — especially those connected to the labor movement — believe Uber is making things unnecessarily complicated. In their view, Uber is a rich company that could afford to provide workers with the benefits of conventional employment if they wanted to.

But it's not clear shifting to an employee-employer model would be good either for Uber or for its drivers. The key problem here is about scheduling.

In a normal employment relationship, the employer exercises control over the employee's schedule. If the employee works long or inconvenient hours, it's often because the employer requested it. Labor law's scheduling rules are built on this assumption. Workers must receive time-and-a-half compensation if they work more than 40 hours in a week. Some states, including California and Massachusetts, also mandate that workers be provided with breaks and meal times.

But these rules don't make much sense on a platform like Uber where work hours are entirely under the control of the driver. Drivers can take breaks whenever they want, and they're never forced to work more than 40 hours per week. If Uber were subject to a time-and-a-half rule, it might simply prohibit drivers from working more than 40 hours per week, which would be bad for drivers.

A similar point applies to the minimum wage. If Uber drivers were classified as employees in California, they'd be entitled to make at least $10 per hour — and $15 per hour by 2022.

More money is obviously nice for workers, but the tricky thing here is that it would force Uber to exert more control over where and when workers put in their hours. Right now, drivers have a natural incentive to work at times and places where demand is high — like near bars on Friday and Saturday nights. If drivers were guaranteed $10 per hour, they'd no longer have to worry about that so much. They'd be more inclined to work at times and in places that are convenient for the drivers, even if those are not times when many customers needed rides.

So a minimum wage would effectively force Uber to start telling drivers when and where they can work. That would mean drivers could lose one of the best things about being an Uber driver: the freedom to set their own hours and decide which parts of town to drive in.

The Uber settlement addresses some of drivers' biggest grievances

By itself, settling with Uber drivers in California and Massachusetts doesn't accomplish that much for Uber. The company operates in dozens of other states, and drivers there are free to sue. The key to the settlement is the compromises Uber is making to try to address drivers' concerns and make them less interested in seeking the status of employees.

The key demand focuses on transparency and due process for worker terminations. Uber has finally published a formal policy on driver deactivation, spelling out the circumstances in which a driver would be terminated from Uber. These include drug and alcohol use, persistently low ratings, and a high rate of ride cancellations.

And while Uber drivers will not be represented by a union or subject to collective bargaining, Uber has agreed to create a driver representative organization — in effect a trade association rather than a union — and give drivers a process for appealing termination decisions.

It's not obvious that either of these changes strengthens Uber's argument that drivers are not employees in a narrow legal sense. Nevertheless, Uber's willingness to work with its drivers may make a favorable impression on judges who oversee similar lawsuits in other states. If Uber can convince judges (and legislators) that it is addressing key driver grievances under the existing legal framework, they might be less likely to force Uber to treat drivers as employees instead.