Misclassification Mistake Leads to $19M Payout by Lyft

It’s a wildly astronomical number, and we’re not trying to scare anyone – but a recent case from New Jersey shows that employee misclassifications can be a costly mistake.

The state of New Jersey recently recovered more than $19 million against the ridesharing service Lyft, which it accused of wrongly misclassifying more than 100,000 of its drivers as independent contractors instead of employees.

It’s a wakeup call for any employer that is even the slightest bit lax about taking the time to properly classify all of its workers.

The massive payment was announced last month by the New Jersey Department of Labor and the state’s attorney general.

State: Audit Revealed Misclassification

The seeds for the payout were sown when a number of Lyft drivers filed claims for unemployment insurance and disability benefits. Those claims triggered a state audit, which revealed that Lyft had not made any contributions to the corresponding state funds on the drivers’ behalf.

The audit covered a four-year period beginning in 2014. Following its review of the company’s books and records for that timeframe, the state slapped Lyft with an assessment of more than $10.8 million in past due contributions to the proper funds. It also tacked on another $8.5 million in penalties and interest.

Lyft initially contested the state department of labor’s findings. As a result, the case was transferred to the state’s Office of Administrative Law for a scheduled hearing.

Lyft Drops Appeal, Pays Entire Misclassification Amount

Though it contested the findings, Lyft paid the $10.8 million to stop interest from continuing to accrue. Then, in August of this year — and just days before the scheduled hearing — it withdrew its appeal and paid the remaining balance.

“We will not allow businesses to exploit workers by misclassifying them, stripping employees of essential benefits and avoiding their responsibility to support programs that protect our workforce,” said New Jersey Attorney General Matthew J. Platkin in a press release. “This practice undermines our strong labor laws.”

Employees Enjoy Greater Protections

It can be more convenient and cost-effective for employers to utilize independent contractors rather than employees to get work done. Employees are entitled to a number of benefits that independent contractors do not receive, including:

• payment of a minimum wage
• overtime pay
• unemployment benefits
• workers’ compensation coverage
• family leave, and
• worker safety law protections

Of course, there is nothing inherently wrong with using independent contractors instead of employees. The problem for employers occurs when a misclassification occurs, when they label workers as independent contractors, but the relationship between the parties shows they are employer and employee.

Employee or Independent Contractor? How to Tell

The federal Department of Labor has addressed the issue of employee misclassification, advising that the question of whether a worker is an employee or independent contractor is to be answered “by looking at the economic realities of the worker’s relationship with the employer.”

The question essentially is this: Is the worker in business for himself, or is he economically dependent on the employer for work?

The DOL also identifies factors that should be considered in determining whether a worker is an independent contractor or an employee. These factors include:

• the worker’s opportunity for profit or loss
• relative investments by the worker and the employer
• the degree of permanence of the work relationship
• the nature and degree of control that is exercised by the employer over the worker
• whether the work is integral to the employer’s business, and
• the level of skill and initiative that is needed to do the work.

Though none of the factors by themselves establishes employment status, here are some signs tending to indicate that a worker is an employee:

• The employer provides all of the worker’s tools and equipment.
• The employer provides office space for the worker.
• The worker performs services for a single employer over a continuous period of several years.
• The employer closely supervises scheduling and the performance of the work.
• The work performed is “critical, necessary, or central” to the company’s business.
• The worker does not use specialized skills to get the job done.

“New Jersey will continue to take strong action to stop misclassification and hold violators accountable,” Platkin added. “As our economy evolves, we remain steadfast in safeguarding workers’ rights.”