Lyft’s Lawsuit: Settling Ride-Share App Employment Status

The ride-share company Lyft has settled a lawsuit which sought to determine whether its drivers were employees or independent contractors to the tune of $27M.  This is double the amount Lyft had initially agreed to after the judge in charge of the case called the initial settlement offer far short of fair compensation. It’s not surprising that Lyft would want to nip this one in the bud as a ruling calling their drivers employees could put them out of business.

Ride-share companies, and on-demand services in general, have taken the world by storm. Companies like Lyft and Uber, while relatively new businesses, are already valued at tens of billions of dollars.  Their success hinges in great part on their business model–a business model that only works if their drivers are independent contractors. The settlement has three important effects for Lyft.

First, they obviously have to pay out a lump sum to the drivers who sued them. Second, the drivers who use the Lyft mobile app agree, under the settlement agreement, to continue to act as independent contractors.  Finally, and possibly most importantly for Lyft, a court will not make a final ruling on the issue of Lyft driver employment status.  To understand why, it’s important to explain both the difference between independent contractors and employees and how it impacts the business model of on-demand apps like Lyft.

Independent Contractors vs. Employees

Independent contractors make contracts with a business to perform a specific type of work, usually for a limited period of time. Employees work under the direct control of an employer, with the employer controlling the terms, conditions, and tasks of the employee.  Independent contractors are not protected by most employment laws–including minimum wage, workers’ compensation, collective bargaining (read unionization) requirements and overtime laws. Employers are also not required to give independent contractors meal breaks, rest periods, or reimbursement for necessary business expenses.

The tests to determine whether somebody is an employee or independent contractor vary substantially throughout the country and sometimes have as many as 21 different factors to consider. However, the tests all boil down to the same thing–the level of control the potential employer has over the would-be worker.  The tests look to who decides how, when and where a person does their work.

In California, establishing employee status is a two-part process. First, the plaintiff employees must show they provide services for the benefit of their alleged employer.  Once this is shown, they are presumptively employees and the would-be employer must refute their claim by showing, through a 12 factor balancing test, that the person suing is properly treated as an independent contractor.

In support of their being employees, Lyft drivers point to the fact that Lyft can terminate their ability to act as a driver at any time without notice, dictates their pay, driving routes, and even how they behave with the people they pick up. Lyft counters that the employees provide their own cars and materials, make their own hours, and choose which rides to accept (although they are required to accept a certain portion of rides).

The evidence could be considered to lean either way, although Lyft does seem to control a great deal of how their drivers work–if not where or when. However, ambiguity in the facts puts the case in a jury’s hands, as facts need to be clear cut to have a case decided by a judge. This is a terrifying prospect for companies like Lyft, so terrifying that it almost forced a settlement.

The Lyft Settlement

Lyft’s settlement only applies to drivers within California and doesn’t close the door on future lawsuits with a final ruling. California doesn’t even apply the strictest test in the nation in determining independent contractor status, so Lyft may have even more trying litigation in its future.  However, paying out this enormous sum has probably saved Lyft’s business.  It has given them the opportunity to update their employment policies to make their drivers look more like independent contractors–an opportunity that their attorneys have publicly said that Lyft fully intends to take advantage of.

The settlement requires Lyft to remove their ability to deactivate a drivers’ account “for any reason.” Instead, they must have reasons and give notice before deactivating an account. However, this change is just the tip of the iceberg.  Lyft will almost certainly make much more drastic changes to avoid lawsuits like this in the future.  These policies will likely roll out nationwide soon.  What’s more, the policy changes agreed to as part of the settlement are nationwide changes despite the case being restricted to California.

How bad could a ruling that Lyft drivers are employees really be, you ask? Surely not worth $27 million. The answer is in how Lyft’s business model works.  The current ride-share business model that apps like Uber and Lyft use is pretty sweet deal for the companies.  They are responsible for none of the expenses of the drivers and simply need to pay to maintain the employees at their San Francisco headquarters while taking a 20-30% cut of every ride.  Their business isn’t the rides themselves but making the connection between driver and rider.  This is an incredibly innovative business model, but also the most successful example of a business shifting costs to its employees in decades.  Were ride-share businesses to have to start treating their drivers like employees, economists believe that their costs would increase by nearly a third.

What’s more, as independent contractors, most of the potential liability for anything that might go wrong rests on the drivers. If the drivers are employees, Lyft or Uber take on that liability, forcing them to be prepared to deal with many more lawsuits and purchase expensive insurance.  They’d essentially lose much of the advantage they have over conventional taxi services.

Ride-Share Lawsuits Going Forward

Lyft is not alone in its struggles. Less than a month ago, the judge in charge of a nearly identical case against Uber rejected a whopping $100 million settlement agreement as unfairly low–arguing that it was less than 10% of what the plaintiff asked for. The settlement included similar changes to policy that the Lyft settlement agreed to enact.  Then, about a week ago, that same judge sent the parties to arbitration to figure out a more equitable settlement.

Uber has previously seen a lawsuit in California which ruled that one specific driver was an employee and not an independent contractor. Uber has appealed the decision. The appeal has yet to be determined, but could lead to actual binding precedent one way or another–either affirming or destroying the rideshare business model.  Florida has similarly ruled a single ex-Uber driver to be an employee.  Five states have concluded that ride-share drivers are independent contractors.  Federal lawsuits are ongoing as to the employment status of ride-share.

On-demand businesses are becoming more common, providing everything from delivering groceries and food to butlers and maids. All of these companies could be in hot water once a final case ruling comes out on the issue of on-demand employee status.  It’s unlikely these companies will be able to settle away a decision on employee status forever.  Eventually, and probably soon, on-demand apps will either be in the clear or scrambling to find a new business model.