California Attorney General Xavier Becerra filed a lawsuit Wednesday against ride-hailing apps Uber and Lyft for "misclassifying" drivers as independent contractors instead of employees "in direct contravention of California law."
The California law in question called Assembly Bill 5 (AB5) went into effect Jan. 1 and requires more companies to identify independent contract workers as employees under certain requirements so that they can be entitled to standard state benefits such as workers' compensation, minimum wage pay and overtime pay.
The law has put a spotlight on Uber, Lyft and other ride-hailing or delivery app companies that employ drivers as gig workers instead of employees. Uber and Lyft have been finding ways to work around the law, but Becerra's lawsuit will likely create major complications for the billion-dollar ride-hailing giants.
"Californians who drive for Uber and Lyft lack basic worker protections — from paid sick leave to the right to overtime pay. Uber and Lyft claim their drivers aren't engaged in the companies’ core mission and cannot qualify for benefits," Becerra said in a statement.
"Uber and Lyft drivers who contract the coronavirus or lose their job quickly realize what they're missing. But it’s not just these workers who lose," Becerra said. "American taxpayers end up having to help carry the load that Uber and Lyft don’t want to accept. These companies will take the workers’ labor, but they won’t accept the worker protections. California has ground rules with rights and protections for workers and their employers. We intend to make sure that Uber and Lyft play by the rules."
A Lyft spokesperson told FOX Business that the company is "looking forward to working with the attorney general and mayors across the state 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 healthcare and other benefits is more important than ever."
Uber did not respond to a request for comment.
Becerra is demanding $2,500 for each violation of California's Business and Professions code as proven at trial and another $2,500 for each violation of California's Unfair Competition Law "perpetrated against a senior citizen or disabled person" as proven at trial. These penalties could add up to hundreds of millions of dollars in fines for Uber and Lyft, since California has about 3 million gig workers, according to The Los Angeles Times.
But the law goes well beyond Uber and Lyft, who have extensive funding and lobbying resources to fight Becerra's lawsuit and continue to produce massive profits even if Becerra wins.
"Becerra, with the blessings of [California Gov. Gavin] Newsom, is just smashing businesses to ... enlarge the state's Department of Labor, enlarge the power of the attorney general's office, and make it so that if you're going to do anything business in California, you're going to have to go through the government to get anything done," said Barry Janay, a New York attorney with extensive employment law experience. New York state is said to be considering its own version of AB5.
When employers classify workers as independent contractors, they avoid taxes, including the 6.2 percent of salary and wages companies must pay for Social Security and Medicare. Employers must also pay for workers' compensation and unemployment and disability insurance.
"The bill passed with driver protection in mind ... and the state is going to receive billions of dollars in payroll taxes as a result," Janay said.
While Becerra's argument appears to be in favor of workers' protections, safety and health, his lawsuit against Uber and Lyft will have unintended consequences on the state's small businesses and startups, Janay said.
Hiring employees could cost workforces 20 to 30 percent more than it would cost workforces to hire independent contractors, according to an analysis by The New York Times.
But Janay thinks that number "is probably much higher," especially for Uber and Lyft, and threats to labor costs are indirect threats to consumer costs.
The companies went so far as to propose a $21 minimum wage in August to avoid designating their independent contract drivers as employees.
Uber and Lyft argue that drivers can reject rides, choose the direction they drive in and the hours they work without being penalized, which qualifies them as independent contractors. But if drivers choose to act deceptively and keep their apps open while they continuously reject rides while being paid a minimum $15-per-hour wage under AB5, that could drive up significant costs for the ride-hailing companies on top of increased costs resulting from more employee benefits like health care, Janay explained.
"Someone who is just on call but not taking rides, assuming the worst intentions of people, is entitled to minimum wage. Uber and Lyft will have a really hard time navigating this," he said, adding, "I would hope [Uber and Lyft] would have some kind of defense for this. They are going to need enormous amounts of oversight."
California lawmakers and officials "want to always be on the forefront of labor rights, and the population thinks that's all great," Janay said, but he doesn't think the population realizes exactly how the law will affect small business owners and innovators who hire independent contractors to get work done without having to follow specific employee guidelines.
Businesses could alternatively ask workers to start their own businesses, a setup that AB5 allows, but that leads to a whole other set of complications, including meeting the criteria to obtain a business license.
The trucking industry scored one of the first wins against AB5 after a judge temporarily exempted more than 70,000 independent truckers from the law. Meanwhile, franchise owners have said the law casts a "cloud of uncertainty" over their businesses and hope to work with lawmakers to retool AB5.
Many critics of AB5 say it's pro-union — but not pro-worker — legislation. Freelance writers in California are grappling with rejection letters, not job offers. Decisions by sites like SB Nation to drop about 200 contractors are part of the fallout from AB5.
"The attorney general's office is fighting so hard to get everybody classified, and it almost seems like a backdoor way to make it impossible for anyone to be considered an independent contractor," Janay said. "No one will hire freelancers anymore. It's horrible for startups, small businesses that don't have enormous venture capital funding. There's not going to be any bootstrapping anymore."
He added that freelancers and innovators are moving out of California for this reason.
"It creates so much uncertainty as to how you're going to grow your small business," Janay said. "With AB5 and just how broad it is in writing and implementation, it creates a chilling effect on almost anyone who wants to create a startup or small business" — the kinds of places that rely on independent contractors to get work done as efficiently as possible when they are just starting to find their footing.
For many small business owners, especially those who do a variety of projects requiring different types of expertise, contractors provide more flexibility.
Janay gave the example of a small plumbing business in which the "master plumber" holds licenses that his independent contractors do not hold. The master plumber may choose to hire those independent contractors to perform jobs that don't require specific licenses and then pay those workers for jobs they can get done with their own skills on their own time.
As employees, those workers would have to follow more specific guidelines like regular schedules, rules for performing certain tasks, uniforms and so on. While workers receive more benefits as employees, identifying gig workers as employees could complicate the master plumber's operations, lead to an increase in his prices and ultimately hurt his business.
Janay said "the amount of power people can wield over companies" in California is "hostile to the very existence of businesses."
California has a collectivist government to say, "It's only fair to the employees," but in reality, AB5 and lawsuits like Beccara's are going to take away innovation, he said.
FOX Business' Evie Fordham and the Associated Press contributed to this report.