Uber, Lyft Being Probed in New Jersey on Misclassifying Drivers

New Jersey labor auditors are investigating Uber Technologies Inc. and Lyft Inc. to see if the rideshare companies are wrongly classifying drivers as independent contractors and should be on the hook for employment taxes, according to documents obtained by Bloomberg Law.

The state Department of Labor and Workforce Development is trying to determine if the companies must start paying for drivers’ unemployment insurance and whether drivers have to divulge their rideshare earnings when seeking jobless benefits. If the state decides that drivers are employees, Uber and Lyft would also be responsible for paying drivers minimum wages and overtime, and providing temporary disability insurance. The department has sent surveys to drivers across the state over the last year seeking information about their work arrangements and tax status.

“The following information is needed to determine if your relationship with the company was that of an independent subcontractor or an employee for unemployment insurance,” the department wrote in one of the driver surveys reviewed by Bloomberg Law.

A labor department staffer confirmed the audit and six current and former rideshare drivers in New Jersey said that they received surveys. The staffer spoke on condition of anonymity because he was not authorized to discuss the probe.

Department spokeswoman Angela Delli-Santi declined to comment. Representatives for Lyft declined to comment and Uber didn’t respond to Bloomberg Law’s requests for comment.

The investigation is the latest challenge to the Uber and Lyft business model, which the companies tout as being a virtual middleman connecting riders to drivers treated as self-employed entrepreneurs. Workers classified as independent contractors are not protected by minimum wage and overtime laws, don’t get workers’ compensation and unemployment insurance benefits, and are responsible for paying both the employer and employee share of Social Security, Medicare, and other taxes. They can, however, write off certain business expenses for tax purposes.

The probe comes as the companies face a number of lawsuits over their classification of drivers as contractors. That includes recent proposed class actions in federal courts in New Jersey and Massachusetts. The legal battles have also featured debates over whether Uber and Lyft drivers have to individually arbitrate disputes against the companies.

The companies’ costs per driver could jump by more than 20% if they have to reclassify workers as employees, according to a Bloomberg Intelligence analysis. They would be forced to pick up the tab for unemployment insurance and certain taxes and could be required to increase pay. Drivers would also arguably have the right to unionize based on their status as employees. Those who moonlight for Uber and Lyft while holding down other jobs would also have to report rideshare income if they seek unemployment insurance benefits.

New Jersey Gov. Phil Murphy (D) told union members at an event in July that the state planned to crack down on worker misclassification. He also recently signed legislation allowing authorities to stop work at construction sites in response to wage and hour violations and issued a report from a misclassification task force convened by the governor’s office. The task force said a labor department audit of 1 percent of New Jersey employers last year showed that those businesses underreported more than $462 million in wages as a result of misclassifications.

Legal Pressure Mounting

New Jersey uses a strict “ABC” test, a three-part analysis to determine whether workers classified as contractors should be considered employees under state law. It requires a company to show that it doesn’t control the work and that the service provided is outside of its “usual course” of business.

“It makes it much harder for the companies to get around treating drivers as employees,” says Veena Dubal, a law professor at University of California, Hastings. “There is a strong argument to be made that they control the drivers and that the taxi service is their primary business.”

Rideshare drivers are not all on the same page in the employee-contractor debate, but many say they would welcome increased pay and a voice in the terms and conditions of the job. Uber and Lyft have steadily decreased per-mile driver earnings in New Jersey in recent years, according to drivers, a move they say isn’t adequately offset by some flat rate increases based on trip length.

“Some people don’t want to be classified as employees, which I understand, but you do deserve some rights,” Antoinette Dukes, who drove for Lyft last year, told Bloomberg Law.

Uber and Lyft are also facing a new law in California that uses the same “ABC” test. A slew of gig operators—like delivery services DoorDash and Postmates, and home cleaners Handy—that use online apps to connect service providers with customers were unsuccessful in a lobbying blitz aimed at stopping the legislation. They are expected to push to get a referendum to repeal the law on the ballot next year. Rideshare companies had offered to institute minimum wages, portable benefits like paid sick leave, and some collective bargaining rights in exchange for being carved out of the new law.

In the meantime, Uber Chief Legal Counsel Tony West has said the company will continue to classify California drivers as contractors. That decision—Uber says shared ride services are outside its normal course of business as a “digital marketplace” platform—has already drawn a new lawsuit.

“The fact that Uber is already saying that the ABC test does not apply to them I think is pretty significant,” Bradley Tusk, a consultant who’s advised Uber and Handy, told Bloomberg Law. “They may not win in court but they could hold that up for years. It could mean the bill gets reopened fundamentally.”

Tusk managed the last mayoral campaign of Michael Bloomberg, majority owner of Bloomberg Law’s parent company.

Some Recent Wins

It hasn’t been all bad news for rideshare businesses.

A federal appeals court last year blocked a Seattle ordinance that would have allowed drivers to unionize. The court said that move would have violated antitrust laws that prevent collusion and price fixing among independent businesses.

The federal Labor Department and the National Labor Relations Board have this year issued guidance indicating they aren’t likely to pursue Uber or Lyft for misclassification. The DOL in an April opinion letter said workers at an unnamed “virtual marketplace” are not employees because the company acts as a “referral business” that links workers to new opportunities. The NLRB’s top lawyer in a memo made public some two weeks later said Uber drivers are independent contractors, excluded from protections for union and other activity.

NLRB General Counsel Peter Robb‘s office focused in particular on what it called drivers’ “virtually complete control of their cars, work schedules, and log-in locations, together with their freedom to work for competitors of Uber.”