As part of our continuing discussion about independent contractor misclassification, in this piece we explore the high stakes and costs of classifying apps-based transportation and delivery workers as independent contractors.
State and Local Enforcement Efforts Grabbing Headlines
Just this month the City of San Diego, in California, reached a $46.5 million settlement with Instacart for alleged misclassification of over 308,000 grocery shopping and delivery workers as independent contractors between 2015 and 2020. The settlement stems from a 2019 lawsuit filed by the City on behalf of the People of the State of California, alleging that Instacart unlawfully misclassified its workers (called Shoppers) as independent contractors in order to deny workers employee protections. In doing so, Instacart harmed its alleged employees and the public at large through a loss of significant payroll tax revenue, giving Instacart an unfair advantage against its competitors.
Had the workers been classified as employees, they would have been entitled to overtime pay, paid breaks and reimbursement for expenses such as gas mileage and cellphone data. The Instacart settlement will create a restitution fund for the workers to seek payments, along with a $6 million penalties trust fund for future consumer protection efforts.
Also recently, Uber and its subsidiary Rasier agreed to pay $100 million in back taxes to the state of New Jersey, following an audit in which the New Jersey Department of Labor and Workplace Development (NJDOL), found that the companies misclassified drivers as independent contractors. Workers who are hired as independent contractors are not covered by worker benefits such as unemployment insurance, overtime pay, workers’ compensation, and paid sick leave. By classifying their drivers as independent contractors, Uber and Raiser avoided providing these benefits to workers using their rideshare platform, and also bypassed contributing to state funds for unemployment, disability, and workforce development.
The $100 million payment from Uber covers almost 300,000 drivers over the period of 2014-2018. The sum includes $78 million in overdue contributions and $22 million in interest. The payment is the largest of its kind ever received in New Jersey, and will be used to pay and administer worker benefits.
Despite agreeing to the settlement, Uber maintains its official position that its drivers are independent contractors, not regular employees. Nonetheless, the magnitude and success of the settlement points the way for other state agencies that may be interested in auditing and regulating companies such as Uber. This settlement represents only the tip of the iceberg when it comes to the additional costs—including additional payroll taxes, training costs, and workers compensation insurance—that Uber would be liable for if its workers were reclassified as employees, instead of as independent contractors. This settlement combined with the Instacart one may forecast the direction courts will lean in the future.
Big Stakes for Uber and Other Companies Using Apps-Based Gig Workers in California
With a population over four times the size of New Jersey and the largest economy of any state in the U.S., California represents a significant market for Uber. Over recent years Uber has devoted considerable resources to ensuring a favorable legal and regulatory environment for its business model in California specifically. In 2019, research analysts at Barclays estimated that reclassifying workers in California alone would boost Uber’s annual operating loss by over $500 million, and would “further put into question the long term profitability of the industry.”
In 2020, Uber, Lyft, and other companies employing app-based drivers spent more than $200 million to back a ballot initiative, Proposition 22, that classified gig-workers as independent contractors. The ensuing passage of Proposition 22 allowed companies such as Uberto to continue classifying workers as independent contractors despite the passage of another piece of legislation, California Assembly Bill 5 (AB5), that would have reclassified many gig workers as employees starting in 2020.
AB5 codified a ruling made by the state Supreme Court in 2018 in the case Dynamex Operations West, Inc. vs. Superior Court of Los Angeles, which ruled that companies must use a three-part test, commonly known as the ABC test, to determine if workers should be classified as employees or independent contractors. Under the ABC test, for workers to be classified as independent contractors, the following three conditions must be met:
- The worker is free from the control and direction of the hiring entity in performing the work;
- The worker is performing work tasks that are outside the usual course of the company’s business activities; and
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Under this test, drivers for Uber and Lyft would have been required to be classified as employees, entitling them to a range of additional benefits, while raising operating costs significantly for companies such as Uber and Lyft. Seeking to exempt their app-based drivers from this classification requirement, Uber, Lyft and other corporations outspent opposition to Proposition 22 by a factor of 10-to-1, and Proposition 22 passed with about 58% of the vote.
Litigating Proposition 22 in California
Despite Uber’s victory in passing Proposition 22, legal challenges to its employment classification model continue. On August 20, 2021, the Alameda County Superior Court issued a ruling in the case Castellanos et al. v. the State of California et al., overruling Proposition 22 in its entirety. The judge reasoned that Proposition 22 infringed on the constitutionally-granted powers of the legislature to set standards around workers’ compensation law and pass future legislation, while also violating the requirement that limits California initiatives to a single subject by prohibiting collective bargaining. The case is currently in appeal.
Federal Government Action in the Offing
The long-running fight for national standards for independent contractor classification took a highly anticipated turn on October 11, 2022, when the U.S. Department of Labor (USDOL) announced a proposed rule that would tighten the reins on classifying gig workers as contractors. Fundamentally, the proposal would require that workers be considered employees when they are “economically dependent” on a company. The rule would restore a prior “multifactor” “economic reality” test where no one factor is presumed to carry more weight than others. The ultimate test would determine whether the worker is dependent on the employer for work and not just for income. Previously, under the Trump administration, the USDOL had adopted a regulation that was much more permissive, allowing workers who work for competing companies to be lawfully classified as independent contractors.
In Summary
Despite a number of high profile lawsuits and settlements, prominent players in the apps-based gig economy maintain their workers are independent contractors, not regular employees. Nonetheless, the magnitude and success of recent settlements and regulatory efforts pave the way for state agencies to continue auditing and regulating gig-based companies to ensure worker benefits such as unemployment insurance, overtime pay, workers’ compensation, and paid sick leave are not being intentionally skirted.
To learn more about misclassification, read Misclassification Red Flags to Watch Out For.
Our Employment Attorneys Can Help
If you suspect you have been misclassified by your employer, our employee rights attorneys at Valerian Law can help you exercise your rights and seek compensation for this wrongdoing. If you have any questions about employment rights, call us at 888-686-1918 to speak with one of our employment attorneys today.