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Independent Contractors vs. Employees: Misclassification Gets a Lyft

| Oct 26, 2020 | Employment & Labor Law

A recent decision from California serves as a reminder to companies that proper classification of employees and independent contractors is critical.  In The People v. Uber Technologies, Inc., et al., the California Court of Appeal, First District, upheld a preliminary injunction entered by the San Francisco Superior Court prohibiting Uber and Lyft from classifying their drivers as independent contractors.  This is not a final determination on whether the ride-sharing companies’ models actually violate state or federal law, but it does signal significant concern from the judiciary regarding the legality of such an independent contractor-based system.

For background, a preliminary injunction is a form of temporary discretionary relief that may be offered early in a case.  Although the legal standard for granting a preliminary injunction varies across jurisdictions, typically a court must consider whether there is a likelihood that the party seeking the injunction will prevail on the merits, as well as the potential harm to the parties if the injunction is granted – or denied.

Here, both ride-sharing companies rely on technology platforms that connect customers needing transportation with drivers.  The companies historically have considered the drivers independent contractors, as the drivers set their own schedule, use their own vehicles, determine their own routes, and have the ability to decline customers.  Indeed, drivers are even able to work for both companies simultaneously.  As a result, the companies are not responsible for, among other items, employment taxes, worker’s compensation coverage, workplace safety standards, overtime compensation, and certain benefits, such as paid leave.

In Uber, the appellate court agreed that “there is more than a reasonable probability the People will prevail on the merits at trial” – in other words, Uber and Lyft drivers are likely employees, and not independent contractors.  The court based its decision largely on the fact that the drivers are integral to these businesses: “defendants’ usual course of business involves the day-to-day task of matching riders and drivers each time a user requests a ride, arranging for riders’ payments to be processed, and retaining a portion of the proceeds from each ride.”

This is not just a California issue.  In 2020, Virginia enacted a new statute, providing that “an individual who performs services for a person for remuneration shall be presumed to be an employee of the person that paid such remuneration . . . unless it is shown that the individual is an independent contractor as determined under the Internal Revenue Service Guidelines.” Va. Code § 40.1-28.7:7 (emphasis added).  In short, Virginia presumes a worker is an employee; the burden is on the employer to prove otherwise.

Moreover, the IRS Guidelines are far from a bright-line rule.  Rather, companies are to “examine the relationship between the worker and the business,” considering “the degree of control and independence in this relationship.”  Companies are directed to look at three aspects: Behavioral Control (who directs and controls the work?), Financial Control (who controls the financial aspects of the worker’s job?), and the Relationship of the Parties (does the worker have a contract? receive benefits?).  As in California, a critical question is, “The extent to which services performed by the worker are a key aspect of the regular business of the company.”

Civil penalties for misclassification in Virginia (which will be effective January 1, 2021) range from up to $1,000 for the first offense to $5,000 per individual for a third or subsequent offense, and debarment.

While the independent contractor-employee dichotomy is not new, the Uber case is a reminder to companies nationwide that employees and independent contractors are not interchangeable, even in a gig economy or a remote workforce.

Kristin A. Zech is an employment lawyer with Berenzweig Leonard.  She can be reached at 703-940-3788 or [email protected].