Welcome

New Jersey Pursues Lyft on Taxes, Keeping Pressure on Gig Model

Nov. 5, 2020, 6:03 PM

New Jersey regulators are seeking to penalize Lyft, Inc. for labeling its workers as independent contractors, arguing that, like its chief rival Uber Technologies Inc., the ride-hailing giant owes millions of dollars in employment-related taxes.

Lyft owes roughly $16 million in unemployment and disability taxes that include back pay and interest, according to internal documents from the New Jersey Department of Labor and Workforce Development obtained by Bloomberg Law.

That’s a fraction of the $650 million bill the state hit Uber with last year after an audit, but the principle is the same: that New Jersey’s worker classification standard makes it hard to defend relying on contractors.

While the state’s determinations against Lyft and Uber are limited to unemployment and disability insurance, it could also mean that these companies are required to pay drivers minimum wages and overtime under state law.

Uber and Lyft could see operating costs increase from between 20% and 40% if forced into an employment model, and paying the bills would be acknowledging that their workers are employees, said Rachael Kohl, an assistant law professor at the University of Michigan, who directs the Workers’ Rights Clinic.

“There are a lot of benefits to businesses to hire independent contractors to avoid all the laws that govern workers,” Kohl said. “In New Jersey, it’s been determined they misclassified everybody and if the companies are employers, they should have been paying the tax.”

New Jersey’s continued insistence that Uber and Lyft treat drivers as employees comes as the companies won a ballot initiative on Election Day that essentially allowed them to be excluded from a California law on worker classification and to continue treating their drivers as contractors. The proposition passed as the ride-sharing companies face a state appeals court ruling that they had to begin treating their workers as employees.

New Jersey’s labor department sent a letter to Lyft on August 14 detailing the taxes owed, according to the documents. The company disagreed with the determination on September 10 and requested a hearing, according to the documents.

“Drivers are correctly classified as independent contractors and overwhelmingly want to remain that way by a 4-to-1 margin. Efforts to force them to be employees would have dire economic consequences and cost thousands of jobs,” Lyft spokesman CJ Macklin said in a written statement. The company said it can’t comment directly on the state audit.

Uber continues to fight its audit. The state labor department declined to discuss details, saying it can’t comment on an ongoing case. A company spokesman also declined to comment, and referred to previous statements made to Bloomberg Law that Uber believes its workers should be classified as independent contractors.

Uber’s bill covered alleged worker misclassification over at least a four-year time period from 2010 to 2015. Lyft’s audit includes claims of unpaid taxes from 2014 to 2017. The state labor department began the audit into Lyft in 2018, and the last full year of tax returns filed was in 2017.

Tax Battles Continue

The worker classification issue took on added importance at the outset of the Covid-19 pandemic as Uber and Lyft drivers saw their gigs largely dry up. Independent contractors, outside of an emergency measure passed by Congress, aren’t eligible for unemployment insurance, which is financed by employer taxes.

In New Jersey, Uber and Lyft drivers have frequently filed for unemployment insurance and disability claims. Bloomberg Law obtained documents showing 353 claims filed by drivers for the companies to determine their eligibility for benefits. That includes a number of recent claims for unemployment due to lack of work.

When a company doesn’t make contributions to the unemployment trust fund, drivers who are deemed employees still receive benefits when they file claims, said Angela Delli-Santi, a spokeswoman for the New Jersey labor department.

“Good actor employers who properly classify their workers and contribute to the trust fund pay higher contributions presumably to make up for this shortfall,” she said.

New Jersey Labor Commissioner Robert Asaro-Angelo told the state Senate Budget Committee in September that “in its efforts to combat worker misclassification, we have vigorously protected workers, and employers who play by the rules.”

Taxpayers On The Hook

Thirty-seven states used some variation of a three-part “ABC test” to determine employment status for unemployment insurance as of 2018, according to the U.S. Labor Department.

New Jersey, Massachusetts, and California are among those that adopted the test for broader legal questions, as well.

New Jersey uses a version of the test to determine whether workers are employees or contractors. In order to classify workers as contractors, state law 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, or outside of the places of business where the services are otherwise performed.

Patricia Campos-Medina, co-executive director at The Worker Institute at Cornell University, said she expects Uber and Lyft to continue to challenge these structures.

“They want to fight it here like they did in California. It’s part of a national change of how you define full employment,” she said. “It might not be a sustainable mode. They can’t sue every time a government challenges them. More workers are now demanding public support during the economic downturn. That’s shifting the debate.”

To contact the reporter on this story: Erin Mulvaney in Washington at emulvaney@bloomberglaw.com

To contact the editors responsible for this story: Bernie Kohn at bkohn@bloomberglaw.com; Jay-Anne B. Casuga at jcasuga@bloomberglaw.com

To read more articles log in.

Learn more about a Bloomberg Law subscription.