(Adds comment from Uber, attorney for drivers)
By Dan Levine
SAN FRANCISCO, Sept 1 (Reuters) - Uber drivers are entitled to class action status in litigation over whether they are independent contractors or employees, a key development in a case threatening Uber's business model and that of other hot startups dependent on similar service workers.
Three drivers sued Uber in a federal court in San Francisco, contending they are employees and entitled to reimbursement for expenses, including gas and vehicle maintenance. The drivers currently pay those costs themselves.
The results of Uber's legal battle could reshape the sharing economy, which is built around Internet companies that serve as marketplaces matching people who provide a service with others looking to pay for it.
In the ruling on Tuesday, U.S. District Judge Edward Chen in San Francisco said California drivers could sue as a group on the question of whether they are employees or contractors, and over their demand for payment of tips that were not passed on to them. Drivers' attorneys must submit more evidence to sue as a group for reimbursement of other expenses.
Chen also said Uber drivers who have worked for the service since May 2014 must specifically opt out of an arbitration agreement in order to sue the company.
Class action status generally gives plaintiffs more leverage to negotiate a settlement. In a statement, Uber said it will appeal, but that the arbitration portion of Chen's ruling means a "tiny fraction" of a potential 160,000 California drivers are eligible to be class members. Additionally, one of the three drivers who sued is no longer eligible to represent the class, Uber said.
Shannon Liss-Riordan, a lawyer who represents drivers in the case, said Uber's characterization of the size of the class is "not correct," and that "many thousands" will be part of the lawsuit.
"This decision is a major victory for Uber drivers," Liss-Riordan said.
Uber had argued that the drivers should not be allowed to sue as a group because they have little in common and relate to the company in different ways.
However, Chen wrote that there is an "inherent tension" in Uber's argument.
"On one hand, Uber argues that it has properly classified every single driver as an independent contractor," Chen wrote.
On the other, Chen wrote, Uber argues that individual drivers are so unique that the court, "unlike, apparently, Uber itself," cannot make its own determination.
Uber and other companies, including Lyft and Handy, say the contractor model allows for flexibility that many see as important to their success.
An ultimate finding that drivers are employees could raise Uber's costs beyond the lawsuit's scope and force it to pay Social Security, workers' compensation, and unemployment insurance.
In June, a California labor commissioner ruled that an Uber driver was an employee, not a contractor. Uber has appealed that decision.
The debate has spilled into U.S. presidential politics, with Democratic presidential contender Hillary Clinton in July saying on-demand companies raise "hard questions" about workplace protection and what a good job will look like in the future.
In arguing against class action status, Uber had submitted sworn statements from hundreds of drivers supporting the company. However, Chen rejected this evidence because the statements could have been the product of biased questions.
There is simply "no basis," Chen wrote, to support Uber's claim "that some innumerable legion of drivers prefer to remain independent contractors rather than become employees."
The case is Douglas O'Connor et al v. Uber Technologies Inc, U.S. District Court, Northern District of California, No. 13-3826. (Reporting by Dan Levine; Editing by Tom Brown)