By Brendan Pierson

Feb 24 (Reuters) - DoorDash DASH.O has agreed to pay $16.75 million to settle a lawsuit by New York's attorney general accusing it of pocketing customers' tips for delivery drivers while misleading both customers and drivers about the practice, Attorney General Letitia James announced on Monday.

The money will go to drivers who were shortchanged between May 2017 and September 2019, when the company changed its policy in response to widespread public criticism, James' office said.

"DoorDash misled customers who generously tipped and deceived Dashers who deserved to be paid in full," James said in a statement. "This settlement returns millions to the pockets of hardworking Dashers and ensures transparency in DoorDash’s payment practices going forward."

"While we believe that our practices properly represented how Dashers were paid during this period, we are pleased to have resolved this years-old matter and look forward to continuing to offer a flexible way for millions of people to reach their financial goals," DoorDash said in a statement.

The settlement stems from an investigation that began in 2021 into what DoorDash touted as a "guaranteed pay" model.

The company told its drivers, known as Dashers, their "guaranteed pay" for delivering an order, representing it as a minimum amount. They also told customers that all of their tip would go to drivers.

In fact, the company used customers' tips toward the guaranteed pay. That meant that unless tips were exceptionally large, they served only to reduce the company's costs and did not increase drivers' pay.

DoorDash hid its practice not only from customers but also from drivers, who did not see the tips that were counted toward their "guaranteed" pay, James' office said.

James said at a press conference that internal DoorDash communications showed that executives knew its policy was deceptive, and that customers would reject it if they understood how it really worked.

DoorDash in November settled a similar case over its tip policy brought by Illinois Attorney General Kwame Raoul for $11.25 million.

For New York: Assistant Attorney General Lawrence Reina

For DoorDash: Natalie Hausknecht of Gibson, Dunn & Crutcher