A federal judge has rejected a legal settlement that would have divided up to $100-million (U.S.) 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.

U.S. District Judge Edward Chen declared the deal unfair in a decision issued late Thursday, complicating Uber's efforts to remove the legal threat of having its drivers classified as employees.

That distinction would give Uber's drivers more rights and benefits. That would in turn force the San Francisco company to change its business in ways that would cause its expenses to soar and potentially undercut its plans to eventually sell its stock in an initial public offering.

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Uber expressed its disappointment with Chen's ruling in a statement that said the company will consider its options. The alternatives include taking the case to trial, awaiting rulings in two appeals that would bolster Uber's cause, or negotiating a revised settlement with the drivers in an attempt to appease Chen.

In another case earlier this year, Uber rival Lyft initially had a similar settlement with its drivers rejected by a different judge. Lyft raised its initial offer from $12.5-million to $27-million, good enough to win preliminary approval from U.S. District Judge Vince Chhabria in June.

Shannon Liss-Riordan, the lead attorney representing the Uber drivers, said she thinks a revised settlement is possible in this lawsuit, too. If not, she is prepared to take the case to trial, she told The Associated Press in an email. In that event, the case could be whittled to about 8,000 drivers because of binding arbitration clauses that Uber holds.

"I am disappointed the judge did not approve the settlement, but I understand and I have heard him," Liss-Riordan wrote.

The agreement would have required Uber to pay at least $84-million to drivers in California and Massachusetts who had been picking up riders who requested them through the company's service dating back to August 2009. Uber would have paid another $16-million to the drivers if the company's market value increased by 1.5 times within the first year of its IPO.

If everyone covered in the lawsuit had filed for payments, the California drivers would have received an average of $10 to $1,950 apiece and the Massachusetts drivers would have received an average of $12 to $979.

Uber is currently a privately held company backed by venture capitalists and other investors who have valued the business at more than $60-billion, though some analysts question the reliability of that figure.

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Chen also is skeptical of Uber's prospects in an IPO, saying in his decision that he based his conclusions that the company would only end up paying the drivers a minimum of $84-million.

Most of the money would be designated to settle claims that Uber had been cheating them by refusing to reimburse them for mileage and phone usage while also refusing to pay them for overtime and prohibiting passengers from tipping them. Had the case gone to trial and the drivers prevailed on them, they might have won estimated $854-million, based on estimates from the drivers' attorneys.

Given the risks facing the drivers had they not won those specific claims in a trial, Chen concluded the $84-million would have been a "fair and adequate" amount.

But Chen was troubled that the settlement also would have prevented the drivers from pursuing claims on a variety of other employment issues that could have generated another $1-billion in a trial verdict favouring their arguments. Lumping in those potential liabilities, the proposed settlement would be paying the drivers less than 5 per cent of what they could win in a trial – a sum that Chen concluded "is not fair, adequate or reasonable."