"[T]he Court concludes that the Settlement as a whole is not fair, adequate, and reasonable," Chen wrote.

Classifying drivers as contractors is key to the ride-hailing company's business model, helping it grow fast while not having to provide drivers benefits such as health insurance and fuel reimbursements that would cut into its bottom line. But the roughly 385,000 current and former drivers in California and Massachusetts who are party to the suit argue that Uber had enough control over their work activities that they should be considered employees.

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The drivers would have remained classified as contractors if the settlement, proposed in April, was approved. But they would have received a collective payout of between $84 million and $100 million depending on whether the company goes public. Uber had also agreed to change policies to reduce its control over drivers.

Uber spokesman Matt Kallman said that the company is considering its options in the wake of the settlement offer, which he said was "mutually agreed by both sides was fair and reasonable." Kallman did not elaborate on the options Uber is weighing.

In a statement, the drivers' attorney Shannon Liss-Riordan told The Washington Post that she was also disappointed. "It is possible the parties could reach a revised agreement that satisfies the court’s concerns," she said. In June, competitor Lyft gained approval for a $27 million settlement in a similar suit after a court had rejected an earlier $12.5 million settlement offer.

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But if no agreement is reached, Liss-Riordan said, she expects to continue the case in the courtroom.

A victory for drivers in the case could be a big problem for Uber, which may be required to start treating drivers like employees and pay a hefty statutory penalty. But the number of drivers covered by the case could be dramatically rolled back because the ride-hailing company is appealing Chen's certification of the drivers as a class. If Uber succeeds, the vast majority of drivers would have to settle their claims through individual arbitration — a private form of mediation — thanks to a clause in the company's service agreement.

"We are prepared to start bringing these claims individually," Liss-Riordan said, adding that more than 1,000 drivers had already signed on to bring individual claims if necessary. "Other drivers who want to be included would need to contact us."