It seems that ridesharing companies Uber and Lyft just can't catch a break these days. First, there continues to be stiff competition and tension between these companies and traditional taxi services. Then there's the insurance conundrum: carriers are still trying to pin down who is responsible for the risks of ridesharing – the rideshare companies or the individual drivers?
And now, a new wrinkle arises in the rideshare saga. Drivers in California are suing Uber and Lyft over alleged worker misclassification. Let's take a look at the lawsuit and what it could mean for the future of these rideshare services.
Baby, You Can Drive My Car (and Maybe I'll Sue You)
According to a report by Reuters, drivers are seeking class-action status in separate lawsuits targeting the two rideshare companies. Currently, drivers for both companies pay for their own gas and car maintenance, which can exceed $10,000 a year if they drive about 60 hours a week.
Drivers claim they should be considered employees because Uber and Lyft…
- Set prices for the rides.
- Take a percentage of their fares.
- Require drivers to pass background checks.
- Can't operate without the drivers.
By contrast, Uber and Lyft contend that drivers are independent contractors because they control their own schedules, are not assigned a territory, and must provide their own equipment (apart from a sign and a leased iPhone furnished by the company).
Many states use the ABC test to help determine whether a worker is an employee or independent contractor in these cases. According to the test, a worker is an employee unless…
- The individual controls and directs the performance of their service.
- The service the individual provides is supplemental to the business's primary operations.
- The individual regularly engages in an independently established trade, occupation, profession, or business.
If these three criteria are met, the worker is an independent contractor. California doesn't necessarily use this measure, but if other states do, you can see the problems Uber and Lyft might face. Because the rideshare services depend on the drivers in order for their business to work, it would be difficult to argue that the drivers are independent contractors based on this test.
The Cost of Misclassifying Drivers? A Hefty Fare Indeed
If the judges side with the plaintiffs and rule that the drivers are employees (at least in California), Uber and Lyft may be forced to start paying for…
- Part of the drivers' Social Security and Medicare taxes.
- Workers' Compensation benefits.
- Unemployment insurance.
- Overtime pay and back taxes.
Such a ruling could have major implications for the rideshare services. Uber is active in 161 American cities and Lyft in more than 60, and together, they enlist the services of thousands of drivers. If drivers are ruled as employees in California, it won't be long before drivers in other cities take notice and file lawsuits of their own.
Though Uber and Lyft are both successful businesses (Uber is currently valued at $40 billion), the cost of employee benefits can significantly cut into profit margins if the businesses haven't budgeted for the costs.
The moral of the story? Remember that worker misclassification is a hot-button issue right now, and the Department of Labor is actively cracking down on it. If you accidentally misclassify workers and don't offer them benefits, you can be sued over the error and be forced to pay thousands in overtime pay and employment benefits. Plus, if your state requires you to offer Workers' Comp benefits to your employees, your state can sue your business for being uninsured. You can read about that here: “State Sues Small Business over Workers' Compensation Insurance Violation.”
To learn more about the distinction between employees and independent contractors, read the post, "Workers' Comp Insurance: When Is Someone a Contractor?"