Uber and Lyft face landmark lawsuit over gig worker classification

California Attorney General Xavier Becerra said the companies have “worked tirelessly” to skirt the state's new labor law.
Uber and Lyft drivers protest during a day-long strike outside Uber's office in Saugus
The question as to whether drivers are employees or contractors has been a sticky one ever since the companies began nearly a decade ago.Brian Snyder / Reuters file

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By Cyrus Farivar and Olivia Solon

SAN FRANCISCO — California Attorney General Xavier Becerra on Tuesday filed a lawsuit against the ride-hailing giants Uber and Lyft, alleging that they have evaded state law by declaring their workers to be contractors rather than employees, his office announced.

The state filed the lawsuit in San Francisco County Superior Court along with the city attorneys from San Francisco, Los Angeles and San Diego, and it accuses the companies of violating a new state law known as “AB5.” If a court rules against the companies, they could potentially owe huge penalties and substantial restitution to California drivers.

“The time has come for Uber’s and Lyft’s massive, unlawful employee misclassification scheme to end,” according to an advanced copy of portions of the complaint that were shared with NBC News.

AB5, which took effect on Jan. 1, attempts to ensure that so-called gig economy and other workers are considered employees, rather than independent contractors as they have been for years. Under the law, employees are eligible for consideration benefits, including workers’ compensation, unemployment, unionization rights and more. Companies save millions annually by avoiding such financial costs.

“We believe it’s time for all workers to be treated fairly," said Becerra in a livestreamed press conference on Tuesday. "We believe if you play by the rules, everybody gets ahead. We believe innovation doesn’t require that you mistreat workers and we believe that the law is very clear.”

By classifying their drivers as independent contractors, Uber and Lyft have avoided paying into the state unemployment fund. During the pandemic, many drivers who weren’t able to work have sought unemployment benefits but did not qualify until the federal government stepped in with the Coronavirus Aid, Relief and Economic Security (CARES) Act.

Becerra said this was evidence of the companies “shirking their obligations to the workforce” and pushing costs onto the tax payer.

Both Lyft and Uber have said that if they are forced to reclassify gig workers as employees it would fundamentally alter their business model and have an adverse effect on their profitability, according to their latest annual reports submitted to the Securities and Exchange Commission in February and March 2020 respectively.

“We are looking forward to working with the Attorney General and mayors across the state to bring all the benefits of California’s innovation economy to as many workers as possible, especially during this time when the creation of good jobs with access to affordable healthcare and other benefits is more important than ever," Lyft said in a statement.

Uber also issued a statement: “At a time when California’s economy is in crisis with four million people out of work, we need to make it easier, not harder, for people to quickly start earning. We will contest this action in court, while at the same time pushing to raise the standard of independent work for drivers in California, including with guaranteed minimum earnings and new benefits.”

San Diego City Attorney Mara W. Elliott has been pursuing a similar case against Instacart.

The lawsuit notes that Lyft and Uber have unsuccessfully lobbied for an exemption from AB5, saying that “rather than owning up to their legal responsibilities, Uber and Lyft have worked tirelessly to find a work-around.” The companies also make drivers sign contracts with arbitration agreements that prohibit class actions.

“And now, even in the midst of a once-in-a-century pandemic, both companies have gone to extraordinary lengths to convince the public that their scheme is in the public interest," the complaint said. "Uber and Lyft have launched an aggressive public relations campaign in the hopes of enshrining their ability to mistreat their workers, all while peddling the lie that driver flexibility and worker protections are somehow legally incompatible.”

This public relations campaign refers to an effort known as “Protect App-Based Drivers & Services,” funded by Uber, Lyft and DoorDash, which seeks to overturn AB5 by state ballot measure this year.

These companies have claimed that AB5 now eliminates the “flexibility and independence many drivers’ lives require — putting these services and earning opportunities at risk at the worst possible time.” However, the law does not, in fact, contain any language that would do away with the flexible work schedule that the companies say their workers value so highly.

“Uber and Lyft claim that properly classifying drivers as employees is incompatible with flexibility. That is a lie,” said San Francisco city attorney Dennis Herrera. “There is no legal reason why Uber and Lyft can’t have a vast pool of employees who decide for themselves when and where they work – exactly as drivers do now. These companies simply don’t want to do it. Uber and Lyft are selling a lie. They are lying to the public and lying to their drivers.”

Employees or contractors?

The question as to whether drivers are employees or contractors has been a sticky one ever since the companies began nearly a decade ago.

For years, the rival companies have touted the ad hoc work schedule as an attractive perk for drivers. However, one of the major downsides has been that drivers are on the hook for incurring numerous work expenses, including gas, car maintenance, insurance and more.

Several lawsuits and academic studies have claimed that drivers consistently make below minimum wage when those costs are included in calculating net earnings.

Lawsuits that attempted to change these corporate practices have ultimately been little more than speed bumps for Uber and Lyft. Notably, over a year ago, Uber settled a case for $20 million, which one outside expert called “mostly a win” for the company.

In California, minimum wage is currently $13 per hour — but critically, Uber, Lyft and numerous other gig-economy firms do not consider the bulk of their workers to be employees and claim that they are not bound to this law. Some cities set a minimum wage even higher: In San Francisco, it’s $15.59.

Before AB5 was even drafted, the California Supreme Court ruled in April 2018, in a case known as Dynamex, that workers are assumed to be employees unless all parts of a three-part test are met. The AB5 law was drafted to enshrine this court decision into state law.

But in a separate lawsuit, a federal judge in San Francisco found last month that Lyft is squarely within the bounds of the Dynamex test and that “Lyft’s argument to the contrary is frivolous.”