Lyft has agreed to pay $12.25 million and offer new termination protections to settle a proposed class action lawsuit. The ride-hailing company's drivers will not, however, be classified as employees.
Drivers sued Lyft claiming they were misclassified as independent contractors instead of employees, and that they were entitled to benefits like expense reimbursement and overtime.
Lyft's larger rival Uber is facing a similar class-action lawsuit this June in San Francisco.
Though they are still independent contractors under the proposed agreement, Lyft drivers will gain some new benefits. Previously, Lyft was able to terminate drivers without notice for any reason. Under the new terms of service, the company can only fire drivers for specified reasons. A judge still has to approve the settlement.
"While the settlement does not achieve everything we had hoped for - namely a reclassification of the drivers as employees ... it will result in some significant changes that will benefit the drivers," said Shannon Liss-Riordan, an attorney for the drivers.
Related: GM invests $500 million in Uber rival Lyft
The legal battle of whether or not on-demand workers are independent contractors is being closely watched in Silicon Valley. It could have larger implications for the startups that rely on these types of "gig" laborers. Employees are more costly than independent contractors and require more benefits and protections under the law.
To avoid costly litigation, many on-demand startups including Instacart and Shyp have started moving from contract labor to employees.
Liss-Riordan is also heading up the Uber class-action lawsuit and says there are some notable differences between the two companies. She says she receives many more more complaints from Uber drivers about mistreatment, such as cutting fares.
"We have not been hearing so many concerns from Lyft drivers, which leads us to believe that Lyft is treating its drivers with more respect than Uber is treating its drivers," said Liss-Riordan.
Lyft did not immediately respond to a request for comment.
Related: Uber isn't the only on-demand firm being sued
Lyft's $12.25 million settlement fund will benefit the more than 100,000 California Lyft drivers who have driven at least once for the company. Their exact payout will depend on how many hours they worked for Lyft.
The company has also agreed to make changes to its ride-hailing system. It will give drivers additional information about potential passengers before they agree to a pick-up. Lyft will also add a new "favorite driver" feature so that drivers can receive some benefits for being popular with riders.
