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Commentary on NY Times Article, “California Sues Uber and Lyft, Claiming Workers Are Misclassified”

über and Lyft car

California Sues Uber and Lyft, Claiming Workers Are Misclassified. In January, 2020 Assembly Bill AB-5 went into effect redefining the criteria for a 1099 contract worker as opposed to a W-2 employee. The bill was aimed at the employers who drive the Gig Economy and in the subsequent months, Uber, Lyft and Door Dash poured 10s of millions of dollars into combatting the law. Last week California’s Attorney General and the Attorneys General of San Francisco and Los Angeles together filed suit against Uber and Lyft claiming that their workers are misclassified and they must pay $2,500 per misclassified worker for their violation of AB-5’s criteria.

To review: AB-5 states that, in order for a worker to be classified as a 1099 contract worker and not an employee, the worker: 1. must be free from time and financial control of the hirer 2. must perform work outside the core function of the hiring entity’s function and 3. must have their own business entity. It appears that the timing of this lawsuit is driven by budgetary concerns as the State of CA has seen apx 4M people file for unemployment during the Coronavirus pandemic.

Lyft responded by saying they would cooperate with the AG and find a solution. Uber responded in a more aggressive way saying they would prefer to take the issue to court. The New York Times article does note that, “Uber and Lyft have reported that they have substantial cash reserves to weather the downturn caused by the pandemic. Uber said it had more than $8 billion, while Lyft said it had more than $2 billion.”. It remains to be seen what will happen with the suit against the largest Gig Economy companies.

For the small business, this serves as a warning that, despite the fact that many people are out of work and may want to seek employment as contract workers as they wait for a new position in their chose career fields, California EDD will not soon be relaxing the stringent criteria for classification as a 1099. Business owners beware: your classifications must be air tight to avoid EDD audit. If you have questions about your worker classification, reach out to the experts at MIlikowsky Tax Law. We have defended employers who have been audited by EDD, accurately conveying their company’s situation to the government and saving money, and time as well as saving businesses from serious financial hardship associated with 1099 reclassification, including fines and back taxes they would have owed if not for our detailed defense.