A lot hinges on whether a worker is a full-time employee or an independent contractor. Companies with employees are required to withhold taxes and Social Security, while independent contractors are responsible for their own payments. Workers generally have their hours set in a fixed schedule, are provided with company equipment, and may receive health benefits or retirement plans; independent contractors do not, by and large, and are free to work on other projects. Getting the classification wrong – which normally means classifying employees as contractors, and so not paying taxes – can lead to heavy fines from the IRS. Still, the National Employment Law Project estimates that up to 30% of U.S. employers may be doing just that.
Getting the classification wrong can lead to heavy fines from the IRS.
Lyft, a ride-sharing service, is now facing legal action from a former driver who accuses the company of misclassifying its drivers as independent contractors, taking a percentage of their tips in the process. The $6.5 million putative class action also alleges that Lyft refused to reimburse drivers for gas mileage.
According to the company, drivers are employed as contractors for Lyft and are not employed directly. Instead, Lyft arranges rides between drivers and passengers through its ridesharing app. The company also receives 20% of drivers’ tips. Patrick Cotter, who filed the case in California federal court, alleges that this breaks California labor laws.
In the lawsuit, Cotter asserts that Lyft’s treatment of drivers demonstrates that they are considered employees, yet are being misclassified as independent contractors. Drivers must use their own cars and phones and pay for insurance, but the company inspects the cars before riders can be picked up. Crucially, the company trains drivers, enforces specific policies – such as a ‘fist bump’ greeting – and is able to fire drivers. Regarding tips, drivers are paid using only tips from passengers, minus 20% taken for administrative fees, the suit says. If drivers are contracted workers, then this policy, along with the company’s policy of not reimbursing drivers for distance driven to and from work, is illegal, says Cotter.
The suit was brought under California labor laws in the U.S. District Court for the Northern District of California.