A Nevada lawsuit alleging Lyft committed fraud by misclassifying its workers as independent contractors is a new test case in the fight over worker protections at the state level. A federal judge earlier this month allowed a former driver’s complaint against rideshare giant Lyft Inc to proceed, advancing allegations the company intentionally defrauded Nevada’s unemployment compensation system by treating its drivers as independent contractors. The lawsuit cites violations of Nevada’s False Claims Act, which mirrors a federal statute that makes it illegal to “knowingly” conceal or avoid obligations to pay the government.
The issue of how workers in the gig economy should be treated for purposes of minimum wage, unemployment insurance, and other laws has emerged as one of the most contentious legal questions in the employment space, as some jurisdictions have tried to crack down on companies who label their workers as independent contractors. Attorneys say the strategy could be emulated in other states with similar False Claims Act laws and strict worker classification statutes, presenting a new legal vulnerability for companies like gig-giants Uber, Lyft, and DoorDash, among others, that use independent contractors to provide their services.
“The theory and the idea behind this somewhat novel approach could be certainly applied in other contexts,” said Joshua Buck, the attorney representing the whistleblower in the case.
Classification Tests
A key factor in a false claims case is proving that there was an intent to defraud, which could be a challenge given the uncertain legal landscape surrounding worker classification, attorneys say. “In order to prove a False Claims Act case, you have to show that there was some awareness, or at least awareness, of a substantial risk of falsity,” said Denise Barnes, a former Department of Justice trial attorney now with Bass, Berry & Sims. “If Lyft believes that they’re really exempt from having to pay and they went through an analysis, they discussed it internally, and they had an actual belief, a subjective belief, that they didn’t have to pay this, then you can’t prove the knowledge component of a False Claims Act case,” she explained.
Deciding how a worker should be classified under the law isn’t always cut and dry. Whether a worker should be treated as an independent contractor or employee for purposes of workers compensation, unemployment insurance, and minimum wages, among other protections, varies by state and the specific law being applied. Many states and the federal government use what’s known as an “economic realities” test that weighs multiple aspects of the working relationship, like how much control a worker has over the job and how permanent the work is, among other factors, to determine if the worker should be an employee or is in business for themselves.
For purposes of unemployment insurance in Nevada, the state uses a simplified “ABC” classification test that presumes a worker is an employee unless they meet three factors. Companies like Uber Inc, Lyft, and DoorDash have generally classified the workers that provide their services as independent contractors for years, arguing that they serve as a platform that connects businesses to customers, not as an employer. But, the Nevada lawsuit argues that Lyft’s drivers should be deemed employees under that “ABC” test. And it said because Lyft failed to seek an exemption to the state’s unemployment insurance system, the company knew it was violating the law.
Proving Fraud
Lyft has fought against employee status for its drivers in California and other states, which use the same “ABC” worker classification test as Nevada’s unemployment system. “Everybody who does business in the state of Nevada is presumed to know the law,” said Buck, who questioned how a company as large as Lyft wouldn’t have a legal team reviewing the law before engaging in business in the state. “But on top of that, they’ve known and they’ve fought the this independent contractor status for years in different areas,” he added.
Over the past two decades, gig companies have successfully dispelled and settled claims brought by states and individuals alleging drivers were wrongfully classified as independent contractors. They’ve also financially backed multiple ballot campaigns to secure carve outs for their drivers to state-level changes to rules affecting independent contractors. “The challenge that Lyft has, or that any defendant has in these situations, is that these gig economy companies definitely have internal legal opinions basically saying you can classify them as independent contractors,” added Dave Jochnowitz, a plaintiffs-side attorney with Outten & Golden. “There’s no real doubt in my mind that all of them have that.”
But, Michael Elkins, founder of MLE Law, questioned whether Lyft’s determination that it’s workers should be contractors would meet the court’s definition of fraud. “In the long run, there’s really good argument that a lot of these workers are, in fact, independent contractors,” Elkins said, “and just because you as an employer analyze it one way, and a court says, ‘I don’t agree with you, I think you were wrong,’ does not equate to fraud per se.” “In reality, some of these things are close calls,” he added, “it’s not exactly crystal clear that gig economy workers across the board are W2 employees or independent contractors.”
Other States?
Whether similar false claims cases regarding worker misclassification could be successful in other states depends on the types of fraud that can be brought under the state’s claims statute, attorneys say. “It’s really tricky to combine labor and employment with the False Claims Act, because so many of the avenues that you go after would ultimately be tax avenues,” Jochnowitz said. “And the most obvious one is unemployment or otherwise unpaid employment taxes.” Only a handful of states — Nevada, Indiana, Rhode Island, Delaware, Hawaii, and New Hampshire — allow lawsuits to be brought under their false claims statute alleging violations of tax law.
Not every state has a specific worker classification standard on the books either, attorneys say. Without a strict classification rule like the “ABC” test used for Nevada unemployment, the case may be harder to bring. “If other states had a different test, they may have a better shot of having a better outcome” from Lyft’s perspective, said Buck. But, there’s also other avenues to bring claims of fraud based on failure to pay taxes meant for employee benefits, like workers compensation, Buck noted. “The concept can certainly be applied in other areas,” he said.
