Papers were filed in court today formally opposing the deal that Lyft agreed to with the lawyers representing over 100,000 Lyft drivers in their class action brought in the federal court in San Francisco. The objectors were five Lyft drivers and two Teamsters union councils that are seeking to represent certain of the class members, if they are ruled to be employees. The Lyft class action settlement, which is subject to judicial approval by federal judge Vince Chhabria, would require Lyft to pay its drivers in California and their lawyers $12.25 million, yet would allow Lyft to maintain its independent contractor business model. Will the federal court judge overseeing this class action nix the deal based on the objections filed today? A fairness hearing on the proposed settlement is scheduled for March 24, 2016, but approval of the proposed settlement is hardly a sure thing, as noted in the “Analysis” below.
The background of the lawsuit against Lyft was summarized in our March 12, 2015 blog post that focused on the court’s denial of Lyft’s motion for summary judgment seeking dismissal of the class action lawsuit. Lyft’s motion was based on its argument that the drivers are independent contractors as a matter of law. The court held that because some facts supported IC status whereas other facts supported employee status, the ultimate issue of the drivers’ status as either employees or independent contractors was an issue of fact, not law, and would have to be decided by a jury.
Instead of expending millions of dollars trying the case before a jury and litigating it for years, Lyft chose to mediate its dispute with the lawyers representing the proposed class. This was a different strategy than the one taken by Uber, which is preparing for a lengthy trial this coming summer, as we commented in a recent blog post. Ultimately, the mediator facilitated a settlement between Lyft and the drivers’ counsel that many in the industry have praised as a good deal for Lyft – if it is approved by the court. But, as we discuss in our “Takeaways” below, it may be a too good deal for Lyft unless it takes further steps to enhance its independent contractor compliance.
The Settlement Terms
The principal terms of the settlement are set forth in court papers filed by the lawyers for the class of drivers. Those terms include:
- Payment of $12.25 million to the drivers and their counsel, who will be paid 30% of the proceeds. The average payment to drivers will be modest, less than $1,000 per driver to cover their out-of-pocket car expenses, allegedly unpaid tips, and any unpaid overtime and minimum wages.
- Lyft will no longer be able to deactivate drivers at will, for any reason, and instead will only be able to deactivate drivers for specific reasons or after providing notice and an opportunity to cure. Drivers deactivated will be able to arbitrate their deactivation, with Lyft paying for the fees of arbitration. (Evidently, the drivers may have to pay their own legal fees if they choose to hire counsel to represent them at the arbitration.)
- Lyft will provide additional information about potential passengers to drivers prior to the driver accepting any ride request, which presumably will assist drivers in deciding whether to accept a ride request.
- Lyft will create a “favorite” driver option where drivers who are designated by riders as a “favorite” are entitled to certain benefits.
- In exchange for the above, all class members (except those who “opt out” of the settlement) will waive all existing claims they may have against Lyft arising from their alleged misclassification as independent contractors. This appears to include claims for periods prior to the time covered by the lawsuit.
- In further exchange, all class members (except those who “opt out”) will be enjoined from maintaining or commencing a legal proceeding in another forum regarding their independent contractor status. This may include all claims for unemployment insurance and workers’ compensation benefits.
The Opposition Filed Today
The objections filed today state that the Teamsters unions are currently involved in organizing and seeking to represent Lyft drivers and other transportation workers in the “gig economy.” They argue that the settlement “threatens to interfere with the Teamsters’ current representation of Lyft drivers.” The Teamsters refer the court to the unfair labor practice charge it filed with the National Labor Relations Board, where the unions claim that Lyft is denying drivers their right to organize and exercise their rights under federal labor law. In addition, the objectors contend that the proposed settlement is inadequate in terms of monetary relief to the class and to the State of California for certain penalties Lyft would be subjected to if it were found to have misclassified drivers as independent contractors.
In sum, they argue that “[i]n exchange for modest payments to individual drivers, the settlement leaves, approves, and authorizes the ongoing and continuing violation of California and federal labor law, namely, the misclassification of drivers who are regularly engaged to drive Lyft’s customers, while seeking judicial approval of illegal waivers of drivers’ statutory rights.” Cotter v. Lyft, Inc., No. 3:13-cv-04065-VC (N.D. Cal., Mar. 15, 2016).
The overwhelming number of proposed class action settlements are approved by the presiding judge. But the objections filed today raise significant legal issues – quite different from those typically raised by objecting parties.
Yet, they do not raise as many questions as did the court itself in a February 11, 2015 order. There, Judge Chhabria required the drivers’ counsel to respond to a number of his specific concerns, including:
- the amount each driver would receive, on average, under the settlement versus the amount each class member would be eligible to recover for his/her reimbursement of expenses claim, on average, if the plaintiffs prevailed at trial, using the Internal Revenue Service’s standard mileage reimbursement rate;
- the disparity between the proposed settlement, which would “move the drivers closer to independent contractor status”, whereas the lawsuit was plainly intended to change their status to employees;
- whether there are any factors specific to Lyft’s business model that precluded it from classifying drivers as employees or from providing drivers with some of the protections employees receive under California law.
Based on the new objections and the court’s own concerns, the result of the hearing scheduled for March 24, 2016 on the fairness of the proposed settlement is anything but certain. The court could approve it, require the parties to modify the terms, or reject it. The odds of approval appear to be considerably less than what they would be in a typical class action fairness hearing.
[Publishers’ Note (March 24, 2016): At the fairness hearing on this date, the drivers’ counsel confirmed to the court that the drivers would be eligible to receive at trial as much as $126 million if they prevailed, using the IRS’s standard mileage reimbursement rate. Judge Chhabria reportedly expressed concern at this hearing that the proposed settlement arrangement may be inadequate in terms of the financial recovery for each driver.]
[Publishers’ Note (May 11, 2016): Following Judge Chhabria’s rejection of the proposed settlement, stating that the $12.5 million settlement figure “shortchanged” the drivers, Lyft increased its settlement proposal to $27 million.]
The structural changes that Lyft seems prepared to make to its independent contractor relationship with drivers will undoubtedly “move the drivers closer to independent contractor status,” as the court itself recognized.
We previously stated in a prior blog post that most companies using ICs to service customers, including those in the sharing or gig economy, have not structured, documented, and implemented their IC relationships in a manner that maximizes compliance with state and federal IC laws – and those businesses would be wise to restructure, re-document, and re-implement such relationships to meaningfully enhance their compliance. As part of the proposed settlement reached between Lyft and the lawyers representing the drivers, that is precisely what Lyft appears willing to do to a limited extent, without bankrupting the company – assuming the court approves the proposed settlement.
Yet, even if these changes are implemented in California and the other states where Lyft operates, they may not, by themselves, be sufficient to forestall new lawsuits or insulate the company from IC misclassification liability.
In the court’s decision to deny summary judgment to Lyft, Judge Chhabria not only focused on Lyft’s unbridled right to terminate or deactivate drivers, but also on a number of other facts that favored employee status. For example, he pointed to the Lyft “Rules of the Road,” which gave drivers a list of “rules to live by.” These included “No talking on the phone (unless it’s the passenger)”; “Greet every passenger with a big smile and fist bump”; “Do not request tips”; and “Go above and beyond with good service such as helping passengers with luggage or holding an umbrella for passengers when it’s raining”. Although Lyft replaced its “Rules of the Road” with “FAQs”, the court noted that they still instructed drivers about such things as the cleanliness of their vehicles, the use of GPS navigation while driving, not smoking in their vehicles, and not asking passengers for their telephone numbers. The judge also found that Lyft’s monitoring of its drivers’ performance and solicitation of ratings from passengers about the drivers’ performance also favored employee status.
While “mov[ing] the drivers closer to independent contractor status” is certainly a positive step by Lyft, it would be prudent to address the other concerns expressed by Judge Chhabria as well as dozens of other factors bearing on the issue of independent contractor status. Moving the needle in the right direction may not be sufficient. As the co-publisher of this blog, Richard Reibstein, was quoted in a Los Angeles Times article by Tracey Lien, while the settlement may put to rest one lawsuit against the company, “it doesn’t mean Lyft is in the clear. In fact, many states have more stringent tests for independent contractor status than California, and there’s nothing stopping another lawyer from filing a similar lawsuit in [the future in] California”. The article continued: “‘Lyft would be well-served to reevaluate its structure and documentation,’ Reibstein said, ‘because just because you exit one lawsuit does not mean that there won’t be another coming right down the pipe tomorrow.’”
One way in which companies can stress-test their level of IC compliance is through IC Diagnostics™, a process that examines the level of compliance with applicable IC laws and then restructures, re-documents, and re-implements IC relationships in a manner that minimizes IC misclassification exposure. This process can be applied in a customized fashion consistent with a company’s business model.
Businesses like Lyft that can wisely turn legal IC skirmishes, such as the present lawsuit in California, into positive changes in its IC relationships can be the envy of others in the sharing economy that use ICs – but that is far more likely if Lyft undertakes a number of other steps to further enhance its IC compliance.
Written by Richard Reibstein.