Court ruling deals blow to 385,000 Uber drivers

FILE - In this July 15, 2015 file photo, Uber driver Karim Amrani sits in his car parked near the San Francisco International Airport parking area in San Francisco. A federal judge on Thursday, Aug. 18, 2016, rejected a legal settlement that would have divided up to $100 million among about 380,000 Uber drivers to resolve claims the ride-hailing service has been exploiting them by treating them as independent contractors instead of employees. (AP Photo/Jeff Chiu, File) less FILE - In this July 15, 2015 file photo, Uber driver Karim Amrani sits in his car parked near the San Francisco International Airport parking area in San Francisco. A federal judge on Thursday, Aug. 18, 2016, ... more Photo: Jeff Chiu, Associated Press Photo: Jeff Chiu, Associated Press Image 1 of / 3 Caption Close Court ruling deals blow to 385,000 Uber drivers 1 / 3 Back to Gallery

A federal appeals court dealt a severe blow Wednesday to an attempt by 385,000 drivers for the ride-hailing company Uber in California and Massachusetts to sue for employment status. The ruling apparently requires virtually all of them to take their individual claims to private arbitrators rather than joining in a class-action lawsuit.

The court did not shield Uber from potentially huge penalties if its treatment of the drivers violated California labor laws. But the ruling appears to strengthen the company’s hand in negotiations for a future settlement, after a previous agreement of between $84 million and $100 million was rejected by a federal judge as inadequate.

Ruling in a separate suit by drivers who challenged Uber’s system of background checks, the Ninth U.S. Circuit Court of Appeals in San Francisco said they were bound by arbitration agreements in contracts they signed with the company in order to keep working. U.S. District Judge Edward Chen of San Francisco had ruled that the arbitration clause was unclear and one-sided, but the appeals court said the contract language “clearly and unmistakably” entitled an arbitrator, rather than a judge, to decide whether the agreement was enforceable.

“One who signs a contract is bound by its provisions,” Judge Richard Clifton wrote in Wednesday’s 3-0 ruling, quoting language from an earlier decision.

The ruling, if it stands, would also apply to the larger suit by drivers in California and Massachusetts who claim Uber misclassified them as independent contractors rather than employees, thus denying them minimum wages, overtime pay, meal and rest breaks, workers’ compensation and other employment benefits.

The company says all 385,000 drivers, except a few hundred who opted out, signed the agreements in 2013 and 2014 that required them to take all grievances to arbitration and prohibited collective action. Under Wednesday’s ruling, only those who opted out, probably too few in number for a class-action suit, could proceed with their claims in court.

The ruling “is not good for the class,” said Shannon Liss-Riordan, lead attorney for the drivers. She said the court “endorsed Uber’s attempt to use its arbitration agreement to avoid a systemic challenge to its classification of drivers as employees.”

"Arbitration is a fair, speedy and less costly alternative to class-action litigation,” said Uber’s attorney, Theodore Boutrous. “We’ve always believed our optional arbitration agreements should have applied in this case, and we’re pleased with the court’s decision.”

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The ruling “strengthens the argument for all employers that class-action waivers are still a viable argument in the Ninth Circuit,” said Alden Parker, a management-side attorney in Sacramento who is not involved in the case.

One issue that a group of drivers could still pursue in court, however, is Uber’s responsibility for complying with California labor laws, which impose financial penalties for violating employees’ rights.

Uber contends it has properly classified its drivers as contractors, noting that they drive their own cars and set their work schedules. But Chen, in past rulings, said the relationship also had some things in common with employment, such as Uber’s detailed rules for the drivers’ interactions with passengers and its ability to fire them at any time.

If the drivers went to trial and proved their employment status, Chen said, the penalties under state law could amount to $1 billion or more, with 75 percent going to the state and the rest to the drivers. He cited the potential penalties in his decision Aug. 18 that rejected the $84 million-plus settlement that Liss-Riordan had negotiated with Uber.

The appeals court ruled Wednesday that drivers who had signed the 2013 agreement but left before the next contract in June 2014 — about 8,000 drivers, according to court documents — could still seek the labor law penalties in court.

One driver would sue as a representative of the drivers and the state. Any penalties would be shared by all drivers in the case — including, Liss-Riordan said, the 385,000 who filed the original suit. She said she expects Uber to challenge that interpretation if the case gets that far.

Bob Egelko is a San Francisco Chronicle staff writer. Email: begelko@sfchronicle.com Twitter: @egelko