The Sneaky Move Uber and Lyft Are Using to Lower Their Tax Bill (2024)

For years, worker advocates have been asking: Why should so-called gig corporations get to ignore the rules every other business has to follow? A report issued last month by Massachusetts State Auditor Diana DiZoglio shows that companies nationwide should be asking this same question.

Because Uber and Lyft treat drivers as independent businesses, rather than employees covered by workplace laws, the report estimates that in Massachusetts in 2023 alone, the two companies avoided paying approximately $47 million in unemployment taxes, workers’ compensation, and paid family and medical leave insurance. Massachusetts Gov. Maura Healey, when she was attorney general, sued these companies in 2020 over the classification of drivers; the trial in that case began last week.

At first glance, it may seem as though other employers wouldn’t have a horse in this race. But gig corporations like Uber and Lyft freeload off of payments that other employers make to comply with laws and support safety nets. The business community should advocate for everyone to follow the same rules, because failing to do so burdens law-abiding companies and subjects them to unfair competition.

Unemployment insurance programs provide a great example of how gig corporations take advantage of law-abiding employers. These programs are funded through employer taxes, which go into a “trust fund” used to pay benefits. In dire situations (like the COVID-19 pandemic and 2008 financial crisis), states borrow money from the federal government, which can lead to higher employer tax rates, because the state must pay interest on the loan. Accordingly, when some businesses don’t pay unemployment insurance taxes, it can lead to higher tax rates for other employers.

There’s no single estimate of how much Uber and Lyft have avoided paying in unemployment taxes nationally, but several reports and cases provide a sense of the magnitude. The Massachusetts auditor’s “best estimate” is that the two transportation network companies would have had to pay $124 million over the past decade. A 2020 California study estimated that Uber and Lyft would have owed $413 million in unemployment taxes from 2014 to 2019 if they had classified workers as employees. The New Jersey Labor Department in 2022 entered into a $100 million settlement with Uber for back unemployment taxes for a five-year period (2014–18); the state recently sued Lyft for $16 million over similar allegations. (Importantly, even though platform companies aren’t paying into unemployment systems, that doesn’t mean their workers aren’t getting benefits; many Uber and Lyft drivers have received unemployment insurance, as well they should.)

The likely scale of the problem across the entire country including all gig corporations will be dizzyingly high, almost certainly well into the billions. The available examples are limited: They come from three states, for limited time periods, and don’t include food delivery companies like DoorDash or Instacart, or newly emerging hospitality or health care companies also using this business model. Some states have unwisely created legal carve-outs for platform corporations, which also affects the likely estimates. With a war chest of unemployment taxes avoided, the obvious question is: Why should other employers pay higher unemployment taxes because gig businesses don’t pull their weight?

Gig corporations also freeload off other employers’ benefits. Consider an individual with two jobs: working for a restaurant 30 hours each week and driving for Uber for 20 hours. If that person stops working to care for an ill relative and receives unemployment benefits, that unemployment insurance claim will be attributed only to the other employer, potentially raising their rate, and not split with Uber. If the two-job worker needs medical care, or is temporarily disabled, those claims will be covered only by the other employer’s health insurance or temporary disability insurance, because Uber doesn’t provide this for drivers. And gig corporations also don’t pay Social Security and Medicare for the millions of “independent contractors” who power their daily operations.

Misclassification of workers also leads to unfair competition,as FTC Commissioner Alvaro M. Bedoya recently explained. I have spoken with owners of temporary agencies that lost clients or left a particular market, because they can’t compete with emerging gig companies that offer lower rates by avoiding workplace laws. It should go without saying, but: You shouldn’t have to cheat to successfully compete.

Federal, state, and local policymakers should stop letting gig corporations off the hook for flouting our core workplace laws. And business leaders nationwide should be up in arms about gig corporations’ grifting. Honest employers’ self-interest lies with everyone paying their fair share.