It has recently been reported that Uber is in the process of settling most of the arbitration claims that have been filed by its drivers. According to the reports, the settlements will total between $146 million and $170 million. Most of the claims have been based on employment misclassification of the drivers as “independent contractors” versus “employees.” Here in California, the drivers’ claims were strongly enhanced by last year’s Dynamex decision by the California Supreme Court.

There are some interesting legal and practical lessons to be learned from the Uber case. First, Uber, like many big consumer service companies, has insisted that any and all employee claims be resolved through arbitration and through one-on-one arbitration. Normally, that is “good” for a business since most employees and consumers will not have the wherewithal or the desire to file an individual arbitration claim. Arbitration is generally less expensive than court cases, particularly where a company can prevent class action lawsuit through the use of mandatory arbitration. Class action lawsuits tend to be very expensive. Very likely, Uber expected the arbitration requirement and the ban on class action arbitrations to cause most of its driver to avoid suing.

However, Uber has had over 12,500 arbitration claims filed against it in the last year or so. See report here. As an aside, this is a large number of arbitration requests, but still well short of all the claims that could have been filed (about 60,000 or so). In any event, the number has created a financial disaster for Uber because Uber agreed to pay all the fees aside from the initial $250 payment by the claimant. The reason that Uber agreed to pay the fees was because many courts, including California courts, routinely refused to enforce arbitration unless the business agreed to pay the fees. Legally, this is an issue of substantive due process. The argument is that forced arbitration is unfair to consumers and employees because it is so expensive. Arbitration is not free; the litigants pay for the services of the arbitrators and the fees are often as high as $1,000 an hour. So, during a trial day, the arbitration fees might be $8,000-$10,000 per day. Furthermore, the initial fee to begin the arbitration is $1,500 (non-refundable).

To ensure that its arbitration agreements were enforceable, Uber agreed to pay the fees. However, the number of arbitrations filed has become financially disastrous. Just the $1,500 filing fee (times 12,000) means $18 million just to get the arbitrations started. If each case required a three-day trial, each trial would have cost something like $25,000 in fees. That per-trial amount times 12,500 claimants would have been potentially an expense exceeding $312 million. Further, there are potentially 40,000 additional drivers who could submit claims — death by 60,000 cuts, as one article suggested. See here.

As can be seen, simple math shows it is better financially to settle the arbitrations for $146-170 million. Uber can save a lot of money.

From this, two practical lessons can be discerned:

• It may actually be less expensive to allow cases to proceed in traditional courts
• It may actually be better/less expensive to allow class action arbitrations

At minimum, the Uber situation suggests that some strategic re-thinking may be needed, at least in situations of this kind of scale.

Contact San Diego Corporate Law

For more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard has been named as “Best of the Bar” by the San Diego Business Journal for the last four years. Mr. Leonard has extensive experience in drafting employee policies, employee handbooks, employment contracts, and all other contracts and agreements necessary for running your business. Mr. Leonard can be reached at (858) 483-9200 or via email. Like us on Facebook.

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