$19.4 Million Lyft Settlement Signals Strengthened Worker Misclassification Enforcement In New Jersey

In September 2025, the New Jersey Department of Labor & Workforce Development (NJDOL) announced that rideshare mogul Lyft had submitted over $19.4 million to the state's unemployment, temporary disability, family leave insurance trust funds, and workforce development funds after an audit found that the company had misclassified over 100,000 drivers between 2014 and 2017 as independent contractors rather than employees. By treating these workers as independent contractors, Lyft avoided required state payroll tax and benefit contributions, including unemployment compensation, temporary disability and family leave benefits. Consequently, drivers were deprived of the advantages afforded to employees.

A state audit assessed unpaid contributions of over $10.8 million plus penalties and interest of about $8.5 million. Lyft initially contested the findings but then withdrew its challenge and paid the full amount. According to state officials, the misclassification "imposed a financial toll on both good actor employers and misclassified workers, who lose critical rights such as minimum wage, overtime pay, workers' compensation coverage, unemployment insurance, earned sick leave, family leave and more."

Employee Classification under New Jersey's ABC test

Under New Jersey law, as in California, workers are presumed to be employees when they perform services for pay, and the burden lies on the employer to prove that the individual qualifies as an independent contractor by satisfying all three prongs of the "ABC" test. The three components of the New Jersey ABC test are:

1. The individual has been and will continue to be free from control or direction over the performance of work performed, both under contract of service and in fact; and
2. The work is either outside the usual course of the business for which such service is performed, or the work is performed outside of all the places of business of the enterprise for which such service is performed; and
3. The individual is customarily engaged in an independently established trade, occupation, profession, or business.

If the employer fails to prove any one of these prongs, the worker is deemed an employee under New Jersey law. NJDOL has proposed new regulations to codify its interpretations of the ABC test, as well as those of the Supreme Court of New Jersey, which expand on and clarify these three prongs.

The practical effect of the ABC test is that independent contractor classification in New Jersey is strict and narrow. Simply being issued a 1099 or being labeled as an independent contractor in a contract does not override the statutory test. Rideshare companies, for example, often struggle to meet prong (B) because drivers perform their core business. Thus, the ABC test is a robust mechanism for protecting workers' rights in New Jersey.

What the New Jersey Lyft settlement means for gig economy workers across the U.S.

The $19.4 million settlement between Lyft and New Jersey is the latest in a broader enforcement trend: for example, Lyft's most prominent competitor, Uber, previously paid New Jersey $100 million in misclassification claims. This pattern sends several important messages to gig-economy platforms and enforcement regimes nationwide. First, it underscores that states are actively auditing ride-hailing platform companies and imposing large back-tax and benefit contribution burdens when misclassification is found. Second, the settlement illustrates that even relatively flexible independent contractor classification models are not immune from rigorous scrutiny where the workers perform a core function of the business and are subject to the business' control and integration factors.

For workers, the settlement reinforces that misclassification is not a benign technicality but can be a source of significant remedies and liabilities. For employers, it raises both reputational and financial stakes: auditing from one state can cascade into multistate liability. Finally, it may spur companies to revisit classification policies, adjust contracting practices, and build compliance frameworks—particularly in the gig economy where independent contractor status has been central to business models. Ultimately, Lyft's settlement functions as both a precedent and deterrent, reinforcing the truth that gig-economy firms may not avoid employee-status obligations merely by calling workers contractors.

Risks of misclassifying workers under New Jersey and federal law

Companies that misclassify workers face significant risks under both New Jersey and federal law. Under New Jersey law, the ABC test presumes employee status, and improper misclassification may result in the employer owing back wages, benefits, unpaid payroll tax contributions (unemployment, disability, family leave), and penalties. The New Jersey Wage & Hour Compliance Poster Packet determines penalties of up to 5% of the worker's gross earnings over the prior twelve months, up to $250 per misclassified employee for a first violation and up to $1000 per misclassified employee for subsequent violations, plus additional damages of up to 200% of wages owed and suspension or revocation of business licenses.

Under federal law, the United States Department of Labor ("DOL") enforces the Fair Labor Standards Act ("FLSA") and recently revamped its guidance on independent contractor classification in 2024. However, as of May 1, 2025, DOL agency investigators were directed not to apply the analysis in the 2024 final rule to current enforcement matters. Instead, the division will rely on longstanding principles outlined in Fact Sheet #13, including the six-pronged Economic Reality Test, which is less favorable of employee classification than New Jersey's ABC test. Regardless, misclassifying employees as independent contractors can lead to liability for unpaid minimum wages, overtime, back wages, liquidated damages, attorney's fees, and penalties. Additional risks include back-payment of employer payroll taxes, workers' compensation and unemployment insurance contributions, interest and penalties, class action litigation, and reputational harm.

In a state like New Jersey that fervently audits misclassification, a company suspected of misclassification may face multi-year audits, large benefit fund assessments, and collateral liability in other jurisdictions. For gig platforms in particular, misclassification liability can threaten the viability of business models predicated on flexible independent contractor status. Companies must treat classification decisions as both a matter of legal compliance and strategic business planning.

How can workers recognize if they've been misclassified, and what legal remedies are available?

Workers in New Jersey should consider their actual experience and circumstances when determining their classification status. Under the NJDOL's Independent Contractors and Misclassification guidance, being classified as a 1099 contractor does not guarantee independent contractor status. Instead, the facts of the work relationship are determinative. Red flags to independent contractor status include being treated like an employee (an employer setting hours, providing equipment, dictating work process, etc.); performing work that is core to the employer's business; and having no separate business, clients or profit-risk of one's own. Workers may find it helpful to ask themselves questions such as "Do I have my own business advertising?" and "Do I set my own hours and methods?" If the answer is "no," misclassification is likely.

Workers in New Jersey who are found to be misclassified can avail themselves of several available legal remedies. Awards may include back pay, liquidated damages, and retirement or disability contributions, among others.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.