SAN FRANCISCO — Uber on Monday settled a long-running legal battle with drivers in California and Massachusetts who wanted the ride-hailing company to recognize them as employees, agreeing to pay the drivers $20 million but not changing their status as independent contractors.
As part of the settlement, Uber said, it will also change the way it removes drivers from the service by making the process more transparent. It published a policy that describes how it deactivates drivers and said it would institute an appeals mechanism, as well as classes to teach drivers how to improve ride quality.
The settlement defuses a potentially thorny issue as Uber prepares to go public. Uber, which confidentially filed for an initial public offering in December, is expected to be one of the largest tech offerings in recent years and could be valued at as much as $120 billion. In a move intended to appease drivers and acknowledge their role in building the company, Uber plans to offer them the chance to buy shares at its I.P.O.
In a statement, an Uber spokesman said the company had “changed a lot” since the lawsuit was filed in 2013. He added, “We’re pleased to reach a settlement on this matter, and we’ll continue working hard to improve the quality, security and dignity of independent work.”
Shannon Liss-Riordan, an attorney for the drivers, said in a statement that the settlement was “substantial.”
“We estimate these drivers will receive approximately 37 cents per mile for the miles they have driven for Uber,” she said.
How its drivers are classified has long been a point of contention for the San Francisco-based company. As independent contractors, drivers do not get health care or other benefits from Uber, which saves the company money. Uber has said that drivers gain other perks instead, particularly flexible schedules.
The issue has incited considerable debate and, increasingly, legal action. Uber and other ride-hailing firms have faced class-action lawsuits about drivers’ employment classification. And states such as California have weighed in, largely finding that drivers can be classified as freelancers.
The suit has a long history. After it was filed in 2013, Uber settled it in 2016, offering the drivers $84 million with an additional payment due after its I.P.O. of up to $16 million.
But the agreement was thrown out by a federal judge who said it was unfair to drivers. In September, the United States Court of Appeals for the Ninth Circuit ruled that Uber could force drivers into private arbitration rather than resolve their claims in a public lawsuit. Some drivers are now pursuing the arbitration option, Ms. Liss-Riordan said.