A U.S. judge denied a motion for preliminary approval on the grounds that Uber's $100 million settlement with its drivers is not sufficient.
U.S. District Judge Edward Chen determined that the "settlement as a whole is not fair, adequate, and reasonable," according to a Thursday filing. The court ordered both sides to meet and discuss how they would like to proceed. It has also said that a joint status report is due on Sept. 8 and that a status conference will be held on Sept. 15.
Uber spokesman Matt Kallman said, "the settlement, mutually agreed by both sides, was fair and reasonable." He said that the company is disappointed in the ruling and is evaluating its options.
The case was brought before U.S. District Court in Northern California on behalf of Uber drivers, alleging that the company had incorrectly classified its drivers as independent contractors rather than employees. If Uber drivers were considered employees, they would be entitled to other benefits that would increase operating costs.
The ride-hailing company has argued that because it doesn't dictate the hours or schedule of its drivers, they are not employees. The proposed settlement would have allowed Uber to continue to regard its drivers as contractors.
The $100 million settlement is made up of an $84 million payment to the roughly 385,000 drivers involved in the cases. A second payment of $16 million will be handed out if Uber goes public and the valuation of the company increases one and a half times from its December 2015 financing valuation within the first year of the initial public offering.
The plaintiffs also alleged that Uber told its customers that there was no need to tip drivers because it was included in the fare, when they did not receive their fair portion of that gratuity.
Shannon Liss-Riordan, the attorney representing the drivers, told Reuters that the two parties could reach a new agreement that satisfies he judge's concerns. But she added that if there isn't a settlement agreement, the number of drivers included in the case would drop to about 8,000, according to Reuters.
In the proposed settlement, Uber said it would change some of its terms and conditions for drivers including:
- Provide drivers with more information about their individual ratings, which are chosen by the users, and how it compares to their peers.
- Fund the creation of a drivers' association in California and Massachusetts and meet them quarterly to discuss "the issues that matter most to driver"
- Publish a "driver deactivation policy" which explains why some drivers are taken off and barred from the platform
- Agree not to deactivate drivers who regularly decline trips when they are logged onto an app. A driver gets a request for a job and it is their decision to accept or reject it. Previously a driver could face deactivation if they declined a certain amount of trips. Uber is loosening this policy
- Create an appeals process in both states for drivers who disagree with decisions about their account being deactivated
— CNBC's Arjun Kharpal and Reuters contributed to this report.