Uber settled two class-action lawsuits with Uber drivers late Thursday in a move that will cost the company up to $100 million. That sum will go to the approximately 385,000 Uber drivers in California and Massachusetts who opted into the states' respective class-action suits against Uber, though in California the settlement still needs approval by a district court judge.

Employees or Contractors?

The lawsuits Uber opted not to fight were both based on a discrepancy that's at the heart of its business model -- along with other app-based contracting services like it, often called the "sharing" or "gig" economy.

It's the question of whether the people working for (or with, depending on which side of the issue you're on) the company should be considered "employees" or "independent contractors." The difference in classification means the difference between workers getting employee benefits and protections, which costs Uber money, or not.

Specifically, in the biggest class action suit in California, about 240,000 Uber drivers claimed they were wrongly classified as independent contractors and sued for reimbursement of expenses and tips.

Uber Settles

The terms of the settlement have Uber paying an initial $84 million to the drivers in the two states, with a possible addition of another $16 million going out to the class-action participants if Uber's market value increases by an additional 50 or more if and when the company goes public.

The settlement will also allow drivers to post signs indicating that tips are not included in the amount charged by Uber, but would be appreciated. One of the drivers' claims was that Uber misled customers to think that tips were part of the total fare. Uber will also create an appeals system for drivers to contest deactivations, which is Uber's equivalent of firing a driver. Uber will also be prohibited from summarily deactivating a driver without offering a reason.

Uber likely settled the lawsuit, even at the $100 million cost, because the penalties it could have been forced to pay if it lost would be in the several hundred million dollar range.

The Question Remains

But likely more important to Uber, settling the lawsuits helps the company avoid a court setting any legal precedent about the classification of workers under its business model.

In dodging a legal contest to its business model, one could see the settlement as a partial victory for the company. According to the Chicago Tribune, Uber CEO Travis Kalanick saw it that way, and expressed his feelings on his blog this week.

"Drivers value their independence -- the freedom to push a button rather than punch a clock, to use Uber and Lyft simultaneously, to drive most of the week or for just a few hours," wrote Kalanick. "That's why we are so pleased that this settlement recognizes that drivers should remain as independent contractors, not employees."

On the other side of the lawsuit, Shannon Liss-Riordan, the lawyer representing the Uber drivers in California, also declared victory and signaled that the employee/contractor question underpinning the suit will continue to be an issue challenging businesses that operate in the new "sharing" economy.

"No court has decided here whether Uber drivers are employees or independent contractors and that debate will not end here," Liss-Riordan said in a statement to Quartz. "This case... stands as a stern warning to companies who play fast and loose with classifying their workforce as independent contractors, who do not receive the benefits of the wage laws and other employee protections."

Related