On Wednesday, August 5, the California Labor Commissioner filed two complaints against ridesharing giants Uber and Lyft with the Alameda County Superior Court. The complaints allege various wage and hour causes of actions, including misclassification of employees as independent contractors, failure to pay minimum wage, failure to pay overtime, failure to pay wages for meal and rest periods, failure to indemnify employees for incurring business expenses, among others. However, the crux of Labor Commissioner’s complaints is simple: Lyft and Uber have made business decisions to unlawfully classify its drivers as independent contractors rather than as employees.
The complaints allege that Uber and Lyft cannot overcome the presumption that all of its drivers are employees, as both companies fail to satisfy the requirements under AB-5, as codified in Labor Code section 2750.3 (see discussion below). Specifically, the complaints allege that Uber and Lyft exert substantial control and direction over the drivers, including setting restrictions on the types of vehicles drivers may drive, setting the fares customers must pay, setting the compensation of their drivers, tracking the drivers through their respective apps., etc. Additionally, since Lyft’s and Uber’s drivers transport customer passengers, they are not engaged in an independently established trade or business of the same nature as the work they perform for Lyft or Uber.
Ultimately, the Labor Commissioner’s position is that Uber and Lyft cannot meet the elements of the ABC Test. Thus, both companies have willfully and unlawfully “misclassified [their] drivers as independent contractors . . . thereby denying [them] the protections available to employees under the Labor Code . . .”
The Labor Commissioner’s complaints seek injunctive relief (a court order prohibiting a party from doing or engaging in a specific action or conduct – in this case misclassifying their drivers as independent contractors), as well as, statutory and civil penalties for wage and hour violations. For that reason, Uber and Lyft could face substantial liability for the alleged violations.
The ABC Test: The Legal Basics
These lawsuits stem from Uber and Lyft violating AB-5. AB-5, which went into effect on January 1, 2020, codified the California Supreme Court’s ABC Test for independent contractors as set forth in Dynamex Operations West, Inc. v. Super. Ct. decided in 2018.
In short, AB-5 presumes that a worker is an employee, unless the hiring entity establishes that the worker:
A. Is free from the control and direction of the hiring entity in connection with the performance of the work – both under the contract for the performance of the work and in fact;
B. Performs work that is outside the usual course of the hiring entity’s business; and,
C. Is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Lab. Code § 2750.3(a)(1)(A)–(C) (emphasis added).
Although it may seem simple on its face, the ABC Test makes classifying a worker as an independent contractor much harder for employers. Specifically, businesses will face an uphill battle in overcoming prong “B” of the test.
Of course, and as with almost any law, AB-5 carves out certain (and very narrow) exemptions, such as for those engaged in “professional services” and “bona fide business-to-business contracting relationships” (if certain conditions are met). In these circumstances, the determination of employee or independent contractor status is governed by the Borello test.
The Independent Contractor/Employee Dichotomy: Corresponding Legal Implications and Requirements
Why is it so important to properly classify a worker as an independent contractor vis-à-vis an employee?
Federal and state laws impose numerous requirements on employers with respect to their employees. That is not the case when workers are classified as independent contractors. For that reason, many businesses classify workers as independent contractors because it relieves them from having to comply with such laws or providing certain benefits. For example, independent contractors need not be covered by workers’ compensation, are not covered by wage and hour laws, and are excluded from coverage under the National Labor Relations Act.
On the other hand, classifying a worker as an employee may feel as opening Pandora’s box; it triggers numerous requirements under the law. These include: complying with all wage and hour laws (such as payment for overtime, providing meal and rest breaks, paid sick leave, reimbursement of business expenses), record keeping, deducting employment taxes from their earnings, etc.
Employers must remember, however, that both independent contractors and employees are protected under state anti-harassment laws.
The lawsuits against Uber and Lyft serve as an important reminder for all employers to audit and take a closer look at their classification practices, and ensure proper compliance with the law. Simply deeming and “classifying” a worker as an independent contractor on paper may be insufficient. Employers must carefully apply the ABC Test to make a proper determinations and classifications. Moreover, even if a business believes that they may be exempted from the ABC Test, it is recommended that they consult with legal counsel, as the exemptions are rather complex.
The consequences of misclassification can include liability for unpaid wages and hefty statutory and civil penalties. More importantly, misclassifying workers may expose companies to lawsuits under the Private Attorneys General Act (PAGA), which allows employees to sue the employer on a representative capacity on behalf of the state and other aggrieved employees. PAGA claims can lead to substantial civil penalties and can become an employer’s biggest headache rather quickly.