SAN FRANCISCO (Reuters) - Uber has agreed to pay up to $100 million to settle a class-action lawsuit which resolves a major challenge to its business model by allowing the ride-hailing service to keep its California and Massachusetts drivers as independent contractors.

An Uber car is seen parked with the driver's lunch left on the dashboard in Venice, Los Angeles, California, United States July 15, 2015. REUTERS/Lucy Nicholson

The lawsuit had claimed that Uber [UBER.UL] drivers are employees and thus entitled to reimbursement of expenses.

The case against Uber had been closely watched in Silicon Valley, as other companies in the on-demand tech economy share Uber’s reliance on independent contractors. The class action had been scheduled for a trial in San Francisco federal court in June.

“We realize that some will be disappointed not to see this case go to trial,” said Shannon Liss-Riordan, an attorney for drivers.

However, Liss-Riordan said the plaintiff drivers faced significant risks of losing if the case moved forward, particularly because a federal appeals court had recently agreed to review an order allowing Uber drivers to sue as a group.

Nothing about the settlement prevents a future court, or U.S. labor authorities, from deeming Uber drivers as employees, she said in a statement.

DRIVER DEACTIVATION

Out of the $100 million proposed payment, $84 million is guaranteed to drivers. Uber could also pay an additional $16 million, but only if the company’s valuation grows by 150 percent above its December 2015 financing round within a year after any initial public offering.

Uber was valued at $62.5 billion in that December funding round.

Uber agreed to some changes in its business practices, including the institution of a policy for deactivation of drivers, chief executive Travis Kalanick said in a blog post about the settlement. Some drivers had long complained that Uber arbitrarily terminated users from its platform.

Uber is “pleased” that the deal “recognizes that drivers should remain as independent contractors, not employees,” Kalanick said in the post.

The company also agreed to help create a drivers’ association in both states. Liss-Riordan said that while such groups are not officially a union, they can act like a union in bringing grievances to management’s attention.

The settlement is similar to a separate agreement announced with Lyft drivers earlier this year, though the Uber agreement is much larger given that Uber has many more drivers.

Over 450,000 U.S. drivers currently use the app each month, Kalanick said in the blog post.

The Uber deal must be approved by U.S. District Judge Edward Chen in San Francisco.