Ride-sharing giant Uber Technologies announced by way of a filing today with the U.S. Securities and Exchange Commission that it has reached agreements to resolve the independent contractor (IC) classification claims of a large majority of the 60,000 drivers in the U.S. who have filed arbitration demands or indicated an intention to file such demands. The company estimated that the cost of such individual settlements will be between $146 to $170 million, inclusive of legal fees.
This disclosure was filed earlier today, just one day before its initial public offering. Earlier this year, on March 11, Uber announced that it has settled its IC misclassification cases with 13,600 drivers in California and Massachusetts who had “opted out” of arbitration for $20 million. Uber’s announcement enunciated its longstanding position that drivers are ICs. It has prevailed in some court cases, arbitration, and administrative cases; it has lost some of those legal battles; it has settled some others; and it continues to vigorously dispute the remaining legal challenges.
What exactly did the SEC filing say today?
Here is what Uber said in relevant part in its SEC disclosure filed today:
The independent contractor status of Drivers is currently being challenged in courts and by government agencies in the United States and abroad. We are involved in numerous legal proceedings globally, including putative class and collective class action lawsuits, demands for arbitration, charges and claims before administrative agencies, and investigations or audits by labor, social security, and tax authorities that claim that Drivers should be treated as our employees (or as workers or quasi-employees where those statuses exist), rather than as independent contractors. We believe that Drivers are independent contractors because, among other things, they can choose whether, when, and where to provide services on our platform, are free to provide services on our competitors’ platforms, and provide a vehicle to perform services on our platform. Nevertheless, we may not be successful in defending the independent contractor status of Drivers in some or all jurisdictions. Furthermore, the costs associated with defending, settling, or resolving pending and future lawsuits (including demands for arbitration) relating to the independent contractor status of Drivers could be material to our business.
In addition, more than 60,000 Drivers in the United States who have entered into arbitration agreements with us have filed (or expressed an intention to file) arbitration demands against us that assert similar classification claims. As of May 8, 2019, we have reached agreements that would resolve the classification claims of a large majority of these Drivers. Under the agreements, certain Drivers are eligible for settlement payments, subject to a threshold number of the covered Drivers entering into individual settlement agreements. We anticipate the aggregate amount of payments to Drivers under these individual settlement agreements, together with attorneys’ fees, will fall within an approximate range of $146 million to $170 million. As of December 31, 2018, we had reserved $132 million for this matter.
What does this mean going forward?
The settlements announced today do not end all lawsuits pending against the company and do not apply to any regulatory and administrative proceedings. The settlements will not prevent drivers covered by the proposed settlements from bringing additional legal challenges against Uber in the future, and will not prevent those drivers who have not brought legal claims against Uber from doing so. Nonetheless, one should fully expect Uber to continue to vigorously defend any pending cases, arbitrations, and administrative proceedings, and to just as vigorously defend any new cases that may be filed against it.
What are the takeaways from today’s announcement?
Uber’s disclosure today should not serve as an indication that Uber is backing away from its IC business strategy. Indeed, the proposed settlements do not require Uber to change its IC business model, which will remain intact. Further, Uber reportedly estimated that the filing fees alone to defend 12,000 arbitrations would have cost it close to $20 million in filing fees, exclusive of its own legal fees to defend the cases. All 60,000 arbitrations presumably would have cost the company close to $100 million just to process.
Other companies who operate an IC business model should not read into today’s SEC disclosure by Uber that an IC business strategy is any less viable than it was before the announcement. While some state law tests for IC status, particularly in California, and Massachusetts, make the IC structure more challenging to comply with, those IC tests are the exceptions, not the rules.
Many companies that seek to enhance their compliance with IC laws yet maintain their IC business model have taken steps to restructure, re-document, and re-implement their IC relationships in a customized and sustainable manner. As part of the re-documentation, many companies that use ICs have put into place state-of-the-art arbitration agreements with class action waivers.
Written by Richard Reibstein