OAKLAND, Calif. — California’s attorney general and a coalition of city attorneys in the state sued Uber and Lyft on Tuesday, claiming the companies wrongfully classified their drivers as independent contractors in violation of a state law that makes them employees.
The law, known as Assembly Bill 5, requires companies to treat their workers as employees instead of contractors if they control how workers perform tasks or if the work is a routine part of a company’s business.
At least one million gig workers in the state are affected by the law, which is supposed to give them a path to benefits like a minimum wage and unemployment insurance that have been traditionally withheld from independent contractors.
Although A.B. 5 took effect on Jan. 1, Uber, Lyft and other gig economy companies that operate in California have resisted and are not taking steps to reclassify their drivers. Uber, Lyft and DoorDash have poured $90 million into a campaign for a ballot initiative that would exempt them from complying with the law. Uber has also argued that its core business is technology, not rides, and therefore drivers are not a key part of its business.
The lawsuit also claims the ride-hailing companies are engaging in an unfair business practice that harms other California companies that follow the law. By avoiding payroll taxes and not paying minimum wage, Uber and Lyft are able to provide rides at “an artificially low cost,” the suit claims, giving them a competitive advantage over other businesses. The suit seeks civil penalties and back wages for workers that could add up to hundreds of millions of dollars.
“California has ground rules with rights and protections for workers and their employers. We intend to make sure that Uber or Lyft play by the rules,” Xavier Becerra, California’s attorney general, said in a statement. The city attorneys of San Francisco, Los Angeles and San Diego joined in the lawsuit.
California’s move is a significant threat to the gig companies and could influence other states with similar laws to take action against them, labor experts said.
“Uber and Lyft have lived a kind of charmed life in terms of escaping law enforcement generally, and particularly with regard to employment law,” said William B. Gould IV, a law professor at Stanford University and the former chairman of the National Labor Relations Board. “The attorney general’s action can’t help but have a positive influence on law enforcement generally against them.”
Although Uber and Lyft have argued that its drivers have independence and decide when to work, the lawsuit claims that both ride-hailing companies exert enough control over drivers to make them employees. In remarks after the lawsuit was filed, California Governor Gavin Newsom said he would seek funding for enforcement of A.B. 5 in the state budget and that California had a responsibility to enforce the law.
“Uber and Lyft are traditional employers of these misclassified employees. They hire and fire them. They control which drivers have access to which possible assignments,” the lawsuit says. “Uber and Lyft are transportation companies in the business of selling rides to customers, and their drivers are the employees who provide the rides they sell.”
Because ride-hailing companies and app-based food delivery services do not employ drivers, they avoid the costs of insurance and vehicle maintenance, sick leave and unemployment. But the coronavirus pandemic has exposed gaps in the gig economy, as drivers have abruptly lost their income and struggled to get unemployment insurance, or fallen sick without access to paid sick leave.
“Uber and Lyft are breaking the law. We are going to put a stop to it,” said Dennis Herrera, the city attorney of San Francisco. “This pandemic just highlights the danger of the work these essential workers are doing.”
Lyft said in a statement that it was “looking forward” to working with the attorney general and mayors “to bring all the benefits of California’s innovation economy to as many workers as possible, especially during this time when the creation of good jobs with access to affordable health care and other benefits is more important than ever.”
Gig companies have responded to the outbreak by offering limited quarantine pay to drivers who receive a positive coronavirus diagnosis or a doctor’s recommendation to isolate themselves. The companies have also distributed hand sanitizer and other cleaning supplies to drivers.
Uber has worried that providing those things could expose it to misclassification claims from workers, and the company has asked lawmakers to shield it from lawsuits over how its drivers are classified if it provides the drivers with medical supplies or compensation. Its chief executive, Dara Khosrowshahi, wrote a letter to President Trump recently asking for a new classification for drivers that would make them neither employees nor contractors.
Mr. Khosrowshahi has called for a so-called third way of classifying workers, which would provide some health benefits to drivers without making them employees who could receive full employment benefits.
The lawsuit criticized Uber and Lyft’s lobbying efforts, including a ballot initiative that would exempt the companies from complying with A.B. 5. “Amid a once-in-a-century pandemic, they have gone to extraordinary lengths to convince the public that their unlawful misclassification scheme is in the public interest,” the suit said.
Uber said on Tuesday it would press forward with its ballot initiative. “We will contest this action in court, while at the same time pushing to raise the standard of independent work for drivers in California,” said Matt Wing, an Uber spokesman.
The lawsuit comes at a fraught moment for Uber and Lyft, as the businesses struggle to adapt to the sudden decline in demand caused by the pandemic. Consumer data suggests that spending on ride-hailing has dropped as much as 83 percent. Lyft is expected to report its first-quarter earnings on Wednesday, while Uber reports on Thursday.
Before the pandemic, Uber and Lyft were racing to become profitable after their 2019 initial public offerings stumbled.
But as demand has declined, both companies have tried to cut costs. Last week, Lyft laid off 17 percent of its work force, furloughed 5 percent, and cut pay for executives and remaining staff members. Uber is also considering layoffs and on Monday announced the closing of its food delivery business in Egypt, Honduras, Saudi Arabia and several other markets where it was deeply unprofitable.
The stock prices of both companies declined on news of the lawsuit. Uber’s shares fell about 1 percent and Lyft’s fell 4 percent.
Still, 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.
“In what world can you not pay your fair share?” said Lorena Gonzalez, a California Assembly member who represents southern San Diego and drafted A.B. 5.
The city and state attorneys involved in the suit said they believed it would succeed despite Uber’s ballot measure. “They are not going to succeed in any event. The voters are too smart for that,” said Mike Feuer, the city attorney of Los Angeles.
Noam Scheiber contributed reporting from Evanston, Ill.