Uber's drivers had argued that they are employees and entitled to claim expenses and other rights.
The two sides have agreed that Uber will pay $84m immediately, and a further $16m if the company goes public and its valuation increases by one and a half times from its value at December 2015 within one year of its initial public offering, Uber chief executive Travis Kalanick said.
Drivers will now be given more information about their individual ratings and how that compares with others, and Uber will introduce a policy explaining the circumstances under which drivers can be stopped from driving for Uber.
Uber and its drivers will also work together to create a drivers' association in both California and Massachusetts. This will be funded by the company, and Uber representatives will meet with the associations every quarter to discuss any issues.
"Six years ago when Uber first started in San Francisco, it was easy to communicate with the handful of drivers using the app," Kalanick said. At the time, the company communicated individually with each driver, he said.
"It was clear from those early conversations that drivers really valued the freedom Uber offered. Today, while the number of drivers using our app has grown dramatically, their reasons for doing so haven’t changed. In the US almost 90% say they choose Uber because they want to be their own boss," Kalanick said.
However, Uber plans to improve the way that it communicates with drivers, and will introduce its first 'deactivation' policy US-wide. Drivers can be stopped from driving for Uber for a range of infractions from drunk driving to having a smelly car. Kalanick said.
There will, however, also be an appeals process for those who feel they have been dealt with unfairly. Uber has also agreed not to deactivate drivers who turn down too many trips, recognising that "drivers need breaks, and sometimes things come up", Kalanick said.
In a related story, bicycle couriers in the UK are fighting to be recognised as employees, the BBC has reported.
Four couriers are taking their employers to a tribunal in a bid to gain rights including paid holidays and the minimum wage. The four are currently considered to be self-employed despite working for one firm for around 50 hours per week, the BBC said.
Employment law expert Edward Goodwyn of Pinsent Masons, the law firm behind Out-Law.com said: "This debate is going to continue as different groups of workers begin to question the terms of their contracts. Employers will fight it, as it obviously raises their costs. They will seek to rely on their contracts, but if those contracts do not reflect the parties’ intention and the workers are doing the work personally, more of these claims will succeed. It’s been against a backdrop of a general movement within the EU towards giving workers more rights that these types of claims have become more attract to pursue."