Do Lawsuits in California and Massachusetts Threaten the Gig Economy as We Know It?

The COVID-19 pandemic has underscored the important role that gig workers play in our economy. At the same time, it also has highlighted the working conditions of gig workers, spurring several states to take action on their behalf.

Attorneys General in California and Massachusetts as well as the California Labor Commissioner have filed suit against rideshare companies Uber and Lyft, alleging the companies misclassify drivers as independent contractors instead of employees. Just yesterday (August 10, 2020), a judge in California issued a preliminary injunction in one of those cases, finding that Uber and Lyft must convert their drivers from independent contractors to employees. If the claims ultimately are successful, and gig economy businesses such as Uber and Lyft are forced to permanently make their workers employees, it could create a significant shift in the gig economy business model as we know it.

The first of these suits came May 5, 2020, when the California Attorney General sued Uber and Lyft, alleging that both companies are misclassifying their drivers as independent contractors instead of employees. In doing so, Uber and Lyft deprive their drivers of minimum wage, overtime, rest breaks, paid sick leave, expense reimbursements, workers compensation, unemployment insurance, and paid family leave that would be available to an employee. The California Attorney General seeks an injunction and restitution for unpaid wages, meal and rest break premiums, unpaid sick leave, taxes, and other penalties.

On August 10, 2020, Judge Ethan Schulman of the San Francisco Superior Court issued a preliminary injunction in that case, ordering Uber and Lyft to re-classify their drivers as employees. In issuing the injunction, Judge Schulman found that the Attorney General would likely be able to prove that the drivers are not independent contractors under state labor law because they do not perform work that is “outside the usual course of their business.” Further, in balancing the harms of issuing an injunction, Judge Schulman found that by misclassifying workers as independent contractors, Uber and Lyft are depriving drivers of a “panoply of basics rights and protections,” which has a “ripple effect[] on law-abiding competing businesses, and on the public generally.” By contrast, the harm to the ride-sharing companies is merely the cost it will take to bring their businesses into compliance with state law. The judge stayed the order for 10 days to allow Uber and Lyft to seek an immediate appeal.

The California Labor Commissioner filed separate lawsuits against Uber and Lyft on August 5, 2020. The suits allege, among other things, that Uber and Lyft committed wage theft by misclassifying their drivers as independent contractors, rather than employees. The Labor Commissioner alleges that both companies failed to pay wages in a timely fashion and did not provide accurate itemized wage deduction statements. The Labor Commissioner seeks similar relief to that sought by the Attorney General.

These lawsuits come on the heels of California Assembly Bill 5 (AB-5), which went into effect on January 1, 2020. Under AB-5, workers in California are considered employees unless they are free from control from the hiring entity, perform work outside of the hiring entity’s usual business, and engage in an independently established trade or occupation. Uber and Lyft continue to fight that legislation and are backing a ballot initiative in California that would exempt them from the requirements of AB-5.

Uber and Lyft’s challenges are not limited to California. On July 14, 2020, the Massachusetts Attorney General also sued Uber and Lyft, claiming systematic denial of benefits, like sick leave, paid time off, and unemployment insurance. The suit seeks a ruling that the drivers are employees under state law, as well as an injunction preventing Uber and Lyft from denying the drivers employment protections.

A wide array of companies that rely on gig workers—from food service to child care—could be impacted by court decisions ordering companies to comply with state wage and benefit provisions. This could lead to a fundamental shift of business models in those states, or could drive certain businesses out of those states if they cannot make business profitable using an employee model with the added wage, tax, and benefit costs.

Recent decisions in New York and Pennsylvania have found that Uber and Lyft drivers are employees under state unemployment laws as well. Those decisions are Islam v. Cuomo and Lowman v. Unemployment Comp. Bd. of Review. Similarly, on October 14, 2015, the Oregon Bureau of Labor and Industry issued an Advisory Opinion, stating that Uber drivers are employees for purposes of Oregon state law.

Moreover, in November 2019, the New Jersey Department of Labor and Workforce Development determined that Uber drivers were misclassified as independent contractors and assessed Uber $650 million in past due unemployment and disability insurance taxes. While these decisions and actions in and of themselves do not necessarily have the same impact as the Massachusetts and California enforcement actions, they still could contribute pressure on the gig economy business model. 

These cases also serve as an important reminder to companies to review their classification practices. The law dictates whether a worker is an employee or independent contractor. Simply labeling someone an independent contractor is not sufficient if legally inaccurate. The consequences for misclassification can be steep, including liability for unpaid wages, taxes and benefits, as well as civil and criminal penalties.

Attorneys in Ballard Spahr’s Labor and Employment Group stand ready to assist with employee misclassification concerns, COVID-19 matters, and other workplace issues. 

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