(Reuters) – There is one big reason why Uber drivers have been able to pursue class actions against the company in federal court in California: the state’s one-of-a-kind Private Attorney General Act, which allows employees to sue for labor code violation in the name of the state. As a matter of public policy, according to a 2014 decision from the California Supreme Court, companies cannot compel PAGA claims to be arbitrated. So even though Uber’s contracts with drivers include provisions requiring them to arbitrate disputes with the company individually, U.S. District Judge Edward Chen of San Francisco has held Uber’s class action waivers to be unenforceable because of drivers’ PAGA rights.

Uber and its lawyers at Gibson, Dunn & Crutcher have contested Judge Chen’s interpretation of its arbitration provisions at the 9th U.S. Circuit Court of Appeals, but it’s fair to say that PAGA is responsible for pushing the company into a $100 million agreement to settle the class actions.

But on Thursday, PAGA also killed that proposed settlement, at least for now.

As you’ve probably heard, Judge Chen refused to approve the deal, which would have compensated about 240,000 Uber drivers in California and Massachusetts for unreimbursed expenses, unpaid tips and overtime. Judge Chen’s problem with the settlement was not its size; despite the many objectors who complained about under-compensation for the drivers (and too much money for class counsel), the judge said he was actually “inclined” to consider $84 million adequate recovery, considering the risk that the 9th Circuit will rule that drivers’ individual claims must be arbitrated. (The judge declined to take into account a $16 million portion of the proposed settlement that is contingent on Uber going public.)

What wasn’t good enough for Judge Chen was the $1 million Uber proposed paying to resolve drivers’ PAGA claims. “The court cannot find that the PAGA settlement is fair and adequate in view of the purposes and policies of the statute,” he said. “Plaintiffs appear to treat the PAGA claim simply as a bargaining chip in obtaining a global settlement.”

The interplay between the drivers’ PAGA rights and class action rights was the crucial consideration for Judge Chen. Recovery under both depends on drivers establishing that they are Uber employees, not independent contractors, as Uber would have it. Through the class action, drivers are asserting actual damages. But according to class counsel Shannon Liss-Riordan of Lichten & Liss-Riordan and the California Labor and Workforce Development Agency, PAGA allows drivers to claim statutory damages for violations of the state labor code. In a brief filed last month, the labor department said Uber’s exposure to PAGA penalties could be more than $1 billion – about half of the company’s total exposure in the cases before Judge Chen.

In addition to avoiding PAGA penalties, Uber has another powerful incentive to settle that piece of the drivers’ case. PAGA claims can’t be forced into arbitration, so even if the 9th Circuit eventually decides that drivers cannot claim damages in the class action, Uber still faces the risk that a court will decide via a PAGA case that its drivers are employees. And, according to Judge Chen, “such a PAGA judgment could have an influential and perhaps even binding effect on Uber in arbitration,” allowing individual drivers to claim compensation as employees. I’m sure Uber would challenge the proposition that a PAGA judgment is binding in driver-specific arbitration, but it’s in the company’s interest to avoid a court reckoning of its drivers’ status. Judge Chen said that the proposed settlement’s $1 million allocation for PAGA claims – a mere fraction of the California labor department’s assessment of Uber’s PAGA exposure — didn’t reflect the claims’ value.

The judge acknowledged that he had to weigh different and potentially competing factors – “the adequacy of compensation to the class as well as the adequacy of the settlement in view of the purposes and policies of PAGA” — to reject the entire settlement based on the PAGA proposal. He decided that because the proposed recovery for drivers was on the low end of the acceptability scale, and because the proposal didn’t address public policy concerns, it didn’t pass muster.

“The compensation to the class amounts is relatively modest when compared to the verdict value, the non-monetary relief is of limited benefit to the class, and the settlement does nothing to clarify the status of drivers as employees versus independent contractors,” Judge Chen wrote. As a result, he said, “The settlement of the non-PAGA claims does not substantially vindicate PAGA.”

So now what happens? Uber and class counsel Liss-Riordan both said in email statements that they are looking at their options, which would obviously include Uber paying more money to resolve the PAGA piece of the case. PAGA settlements, as Liss-Riordan’s statement said, have historically represented a small fraction of the theoretical value of the state’s statutory claims. The proposed $1 million settlement in the Uber case would have been one of the highest-ever PAGA payouts, although in its brief last month, the state labor department cited a recent PAGA penalty of nearly $1 million in a case against Staffmark Investment and a nearly $3 million penalty against Lowe’s. Uber and Liss-Riordan warned in a July 15 brief responding to Judge Chin’s questions about the PAGA piece of the settlement that a penalty of much more than $1 million could be considered a violation of Uber’s due process rights, given the historically low PAGA penalties and the company’s supposedly good-faith reliance on its contracts with drivers.

My prediction is that Uber and class counsel will propose a revised settlement with more money allocated for the PAGA claims – but not dramatically more. I doubt that Uber and the class will suggest shifting cash from drivers to the state, since Judge Chen already said the $84 million in assured compensation to class members is just barely acceptable. I’m also sure that Uber won’t budge on the most important public policy principle at stake in the PAGA case, the employment status of its drivers.

But perhaps a few million dollars of the $16 million contingency piece of the proposal will be turned into hard cash on the PAGA side. That would give the state, which keeps 75 percent of PAGA penalties, a record recovery. It would enable the class to collect at least $84 million. And it would allow Uber to avoid a proceeding that would put its business model at risk.

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