Last week ride-sharing service Lyft Inc. agreed to pay $12.25 million in order to settle a lawsuit filed by a group of California drivers over their status as independent contractors and the handling of their expenses. Of significant note is the fact that it doesn’t require Lyft to change its business model which is heavily reliant on the classification of drivers as independent contractors rather than employees of the company.

The proposed settlement will be used to reimburse drivers for some expenses, with drivers paid on a point system based on the amount of time they were in “ride mode.” It is estimated that there are more than 100,000 drivers in California who have given at least one Lyft ride.

The settlement, which still needs to be approved by a federal judge, also addresses some of the complaints about how Lyft manages its drivers. For example, the settlement calls for drivers to have additional rights — they will no longer be able to be fired at will, instead Lyft will only be able to deactivate drivers for specific reasons. Lyft will also pay arbitration costs for any drivers who bring claims over their deactivation or regarding pay.

In a prepared statement, Lyft General Counsel, Kristin Sverchek said, “We are pleased to have resolved this matter on terms that preserve the flexibility of drivers to control when, where and for how long they drive on the platform.”

Boston-based employment lawyer Shannon Liss-Riordan, who represented the Lyft drivers in the lawsuit, said, “We believe this is a fair settlement and adequate resolution of the claims we brought, given the risks we faced in the litigation against Lyft.” She estimated the $12.25 million settlement represents just under 20 percent of what drivers would have recovered had they won at trial, and added, “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.”

The “litigation risks” mentioned by the plaintiff’s attorney are the result of an arbitration clause that is standard in Lyft’s driver contracts—which effectively bars Lyft drivers from suing as a group. Such arbitration agreements, which have become increasingly common in the workplace, frequently shut down employment class actions. Without class action status, it’s rarely worth the time and money for individual plaintiffs to pursue litigation alone, nor is it worth the time and cost for class action plaintiff’s attorneys to pursue cases. While Lyft successfully enforced this arbitration clause in a previous case, its biggest competitor Uber has not been able to do the same – a federal judge has ruled Uber’s arbitration agreement is unenforceable and that case is scheduled to go to trail in June.

At the core of this issue is the large amorphous workforce of independent contractors who are absolutely crucial to the success of the 1099 economy and all the individual companies who depend on them to deliver services. Classifying workers as independent contractors is a strategic advantage for the companies but hard on workers because employee status entitles a worker to a broad range of legal protections which cost the employer more. For example, independent contractors are not entitled to minimum wage, overtime, health insurance, workers’ compensation, unemployment, proof of employment, or lower taxes. They also have to pay for work-related costs, in the case of Uber and Lyft this includes their gas, insurance and car maintenance.

There is little argument that classifying workers as employees is more expensive for a company, but advocates argue that well-funded companies like Lyft and Uber can afford to treat workers more fairly. The counter-balance to this argument, argued by the companies, is that independent contractor status is good for workers because it allows them the freedom and flexibility that they crave.

As we can see the Lyft settlement is a bit of a mixed bag result for the 1099 economy ecosystem of companies. The lawsuit has been closely watched in Silicon Valley, as the outcome will likely have an impact on many other “sharing economy” companies that rely on independent contractors. While it does allow Lyft to continue operating its current business model without having to reclassify its California drivers as employees, it doesn’t prevent drivers in other states from challenging the company on their independent contractor classification.

As the Lyft case demonstrates, there are risks in engaging independent contractors. The good news is these risks can be mitigated by working with an independent contractor compliance and engagement expert to make sure it is being done correctly. At TalentWave our compliance experts are actively monitoring these developments as they will influence the broader regulatory and civil litigation environments for our enterprise clients who engage flexible workers. In the short-term it is likely that 1099 economy companies like Lyft and Uber will have to carefully evaluate their business models, and how they engage their services workers. Longer-term we can expect to see more regulatory and legislative activity that will attempt to better define and govern these flexible workers with the goal of collecting proper employment taxes and providing worker protections similar to what traditional employees receive.