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Uber's Millions Buy Temporary Peace, But Not Protection In The Gig Economy

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POST WRITTEN BY
Jack Schaedel
This article is more than 7 years old.

In the story “Brewster’s Millions,” popularized in a 1985 film adaptation starring the immortal Richard Pryor, the hero is delighted to learn he will inherit $300 million from a long-lost relative, but quickly flabbergasted by the condition that he must first spend $30 million in one month, with strict limitations on how to spend it and without telling anyone else about the arrangement.

When observing Uber’s April 21, 2016 settlement of a class action alleging the misclassification of 385,000 drivers in California and Massachusetts for $84 million, one cannot help but notice that the number reaches the sensational $100 million mark if the company’s net worth increases by 50% to position itself for sale.  As Brewster’s friends (and critics) learned only belatedly, there was method to Brewster’s spending madness.  Similarly, that 50% increase from a current estimated market value of $63 billion Uber seeks by extinguishing its misclassification liability is worth about $31.25 billion, or roughly 2,000 times the cost of the settlement.

Like the famous Montgomery Brewster, Uber’s seemingly profligate spending might actually be a shrewd investment, at least in the short term.  But Uber, like Brewster, has villains out to undo it: A closer review reveals at least three risks that may prevent Uber from reaping the rewards of its deal.  Also like Brewster, Uber alone stands to benefit. The other players in the gig economy, which as described in this space on February 24, 2016 are being held back because California’s legal system is lagging behind its most innovative companies when it comes to classifying workers as employees or independent contractors, will not.

The first danger for Uber is that the proposed settlement is subject to court approval.  Just as Brewster was unaware that a lawyer from the firm overseeing him had been bribed to ensure he did not spend the money, Uber’s settlement depends on the approval of a single judge.  This is by no means a foregone conclusion, as Uber’s rival Lyft learned earlier in April when Judge Chhabria rejected its $12.25 million settlement of a similar class action.  Among other reasons given for the rejection, the amount Lyft would pay was “glaringly” inadequate monetarily, did not provide sufficient payment to the State of California under the Private Attorney General Act claim, and the non-monetary relief, which did not meet one of the lawsuit’s primary goals of reclassifying drivers as employees, was insufficient to overcome these problems.  The money worked out to $53.02 on average for a part-time driver and $676.19 for a full-time driver.

The proposed Uber settlement ($84 million for 385,000 drivers) works out to an average of $218.18.  Similar to the rejected Lyft deal, the proposed Uber settlement notably does not reclassify drivers as employees.  Based on these factors, if Judge Edwin Chen follows the lead of Judge Chhabria, Uber’s peace will be short-lived.

Second, just as Brewster faced legal threats from mayoral candidates he was spending money to defeat, Uber may continue to face legal threats even if Judge Chen approves the settlement, because the settlement is not binding on non-parties, such as the State of California.  This means that individuals can pursue claims on behalf of others under the Private Attorney General Act.  It is also not binding on unions such as the International Brotherhood of Teamsters, which continues to attempt to organize Uber drivers in California and in the State of Washington, or on the U.S. Department of Labor and the National Labor Relations Board, which have made clear their skepticism of the independent contractor model and intention to allow organization by misclassified employees.

Third, even those who benefited from Brewster’s spending in the movie nearly undid his bid to spend it all by trying to give him gifts. The very drivers who would get paid out of the Uber settlement funds are releasing claims only through the effective date of the settlement and can file another claim or lawsuit next year, arguing again that they are misclassified and should be employees.

It is quite possible that Uber willingly has accepted these risks, because converting its drivers from independent contractors to employees could cost it in excess of $4 billion per year.  This is based on over $2.5 billion in reimbursement for drivers’ expenses such mileage under applicable IRS rates, tolls and fuel, over $600 million in payroll taxes such as Social Security, Medicare, Obamacare and state assessments (employers and employees typically split these taxes, but independent contractors pay the full share), over $500 million in workers compensation insurance premiums (to say nothing of potential claims), and over $100 million in health insurance costs.  Add to this potential exposure to employee lawsuits over issues like meal and rest periods, harassment discrimination, and potential exposure to third-party lawsuits against drivers, and one begins to see that without a legislative update to what Judge Chhabria called an “archaic” law, Uber may well have concluded that it cannot afford to classify its drivers as employees, but it could not afford the risk of an adverse ruling in the O’Connor matter.  In this light, Uber’s $100 million settlement is cheap, but it’s getting what it’s paying for.

As a final point, consider that Brewster finally spent down the $30 million by running a mayoral campaign for “none of the above.”  His “candidate” won, which meant that a new election had to be held the final year.  In this regard, Uber’s settlement is quite like that election.  Brewster rode off into the sunset with his $300 million, and Uber may have bought enough peace to enrich itself by over $30 billion, but for the rest of the gig economy and its participants (i.e., everyone), the Uber settlement is a considerable disappointment.  Those seeking a conclusive update of California’s employee-versus-independent contractor rules for the 21st Century will simply have to wait for a sequel.

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