WASHINGTON (April 22, 2016) – Concluding a legal battle that began last year, ridesharing company Uber announced it will pay $100 million to settle two class-action lawsuits initiated by drivers who sought to be classified as employees, rather than as independent contractors.

Eli Lehrer, president of the R Street Institute, reacted to the announcement:

“While it would have been far better for the government to simply leave an innovative business model alone and empower workers to make their own decisions, this is still a welcome development in that it preserves the basics of an important, innovative business model,” Lehrer said.

The classification of its drivers as independent contractors has been integral to Uber’s rapid growth, as well as to its famed ability to offer its drivers flexibility in creating their own schedules. By applying a more traditional model to Uber, courts and regulators would threaten that approach, since classifying every driver as an employee would legally entitle drivers to minimum wage, overtime pay, unemployment compensation and more. Such a dramatic increase in per-employee costs would undoubtedly lead to the necessary establishment of limitations on when and how much drivers work for the company.

While the settlements are a welcome development, in that they avert a threat to the emerging ridesharing business model, the situation highlights the need for state and federal lawmakers to take decisive action to provide clarity. Labor markets need sensible regulatory policies that finally put an end to the continuous regulatory and legal challenges that have plagued startups like Uber and Lyft in their formative years.

In its annual Ridescore project, which scores 50 of America’s largest cities on how friendly their regulatory frameworks are toward ridesharing and other for-hire transportation services, R Street noted a general trend of improvement over the past year. But even as states like West Virginia, Mississippi and South Dakota have proactively passed legislation classifying most ridesharing drivers as independent contractors, labor-classification issues were seen as the “next wave of TNC policy challenges, as the initial matters of legal status, insurance and background checks approach complete resolution.”

“The time has come for lawmakers to begin sketching a policy framework that provides workers and firms much greater flexibility than exists in today’s rigid, old-economy structures,” noted the report’s authors. “Regulatory regimes that divide labor only into traditional salaried workers and entirely independent contractors do not suit the modern sharing economy.”