In the ongoing legal battles over worker misclassification in the on-demand economy, tech companies are taking different approaches to make the lawsuits go away.

They can fight, as Uber is currently doing in San Francisco’s federal court; the case is expected to go to trial this year. They can give in, as many smaller delivery companies have done, reclassifying their workers as employees instead of contractors. Or, in Lyft’s case, they can settle.

The San Francisco ride-hailing company agreed Tuesday night to pay $12.25 million to settle a worker misclassification class-action lawsuit that was filed in 2013.

The “gig economy” — in which companies dispatch workers via a mobile app to chauffeur customers, deliver groceries, and clean homes and offices — has exploded in recent years. But the lawsuits over worker misclassification highlight growing pains for the burgeoning industry as it navigates arcane state and federal employment laws that challenge a common business model of the on-demand economy: using independent contractors to fulfill core functions of the business.

As part of the settlement, Lyft will change its terms of service so that its treatment of drivers clearly complies with California law governing independent contractors.

The company had previously been tripped up because despite classifying its drivers as independent contractors, the lawsuit alleged it exerted the kind of control over its drivers that is normally reserved for employees, such as reserving the right to terminate drivers at will, without warning.

Although the settlement does not achieve everything that plaintiff attorney Shannon Liss-Riordan had hoped for — namely a reclassification of Lyft drivers as employees, as other on-demand economy companies such as Shyp, Instacart and Luxe Valet have done — she said it “will result in some significant changes that will benefit drivers.”

The financial settlement will be made to an estimated 100,000 Lyft drivers in California. Those who worked less than 50 hours total will receive low payments. The settlement will pay higher amounts to drivers who drive more consistently for Lyft — 30 hours per week or more for at least 50% of the weeks they have driven for Lyft.

“We are pleased to have resolved this matter on terms that preserve the flexibility of drivers to control when, where and for how long they drive on the platform and enable consumers to continue benefiting from safe, affordable transportation,” said Kristin Sverchek, general counsel at Lyft.

The news of the settlement comes as rival Uber continues its fight against a similar lawsuit in San Francisco’s federal court, also filed by Liss-Riordan.

The key difference between the two cases is the Uber lawsuit has already been certified as a class action; on Wednesday, the U.S. Court of Appeals for the 9th Circuit ruled that the case would go to trial before a jury June 20 as previously scheduled.

The Lyft lawsuit was filed as a class action, but the class had not yet been certified by a judge. The company’s drivers were also bound by an arbitration clause preventing them from taking part in any class-action lawsuits.

Liss-Riordan told The Times that the settlement and changes to Lyft’s terms of service are “a good resolution to the case,” particularly given the challenges that Lyft’s arbitration clause presents. She said that she is not in settlement discussions with Uber because she believes the plaintiffs’ odds of winning a trial against Uber “are much stronger.”

“Uber, unlike Lyft, has made clear it wants to fight this battle for the long haul, whereas Lyft was willing to sit down with us and talk and try to figure out a way
to resolve the matter,” she said.

The outcome of the class-action lawsuit against Uber will have no effect on the Lyft settlement, Liss-Riordan said, because they are completely separate cases. The settlement will not serve as precedent in the Uber case, either, because settlements cannot be disclosed to a jury.

Uber declined to comment.

Under Lyft’s new terms of service, drivers’ accounts can no longer be deactivated for any reason without warning. It has to be for a specific reason outlined in the new agreement — and drivers must first be notified and given the opportunity to fix the problem.

Drivers will also be able to take up pay-related issues before a neutral arbitrator at Lyft’s expense if they feel they haven’t been paid properly.

Although it was a California lawsuit, the new terms of service will apply to drivers nationwide. As of the end of last year, Lyft had more than 300,000 drivers actively using its platform.

The settlement and driver agreement changes may put to rest one lawsuit against the company, but labor and employment lawyer Richard Reibstein said 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 California.

“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.”

Reibstein said $12.25 million was a “modest cost” to Lyft, particularly because it got to keep its business model. In settling, Lyft may have avoided a more costly lawsuit.

If the company had lost in court, it would have had to recognize its drivers as employees, potentially putting it on the hook for back wages and expense reimbursements. Labor experts have said recognizing workers as employees can increase the cost of doing business by around 30%.

The settlement is still subject to the approval of the federal court in the Northern District of California.

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