Rideshare giant Lyft has agreed to pay $272.5 million to resolve a landmark 2020 lawsuit brought by the state of California, which accused the company and its competitor Uber of improperly misclassifying their drivers as independent contractors rather than traditional employees. California Attorney General Rob Bonta announced the massive settlement on Thursday, marking a major milestone in the long-running legal and legislative battle over the rights, benefits, and labor classification of gig economy workers.
The lawsuit, originally filed in May 2020 by the California Attorney General’s office alongside the city attorneys of San Francisco, San Diego, and Los Angeles, was born out of a turbulent period of labor reform in the state. It followed directly on the heels of the passage of Assembly Bill 5, a legislative measure designed to codify stricter standards for labor classification, but materialized just before California voters altered the landscape again by passing Proposition 22 in November 2020.
Under the terms of the newly announced settlement, which still requires formal approval from the court, Lyft will disburse $272.5 million in total penalties and restitution. Crucially, a substantial portion of that figure—amounting to at least $237,075,000—has been strictly earmarked to pay back drivers for the minimum wage, expenses, and benefits they were allegedly denied during the period covered by the litigation.
According to the state’s announcement, driver eligibility and individual compensation payouts will be calculated based on a precise formula taking into account the number of hours and miles each driver logged on the platform between April 5, 2016, and December 15, 2020. This retrospective compensation aims to make whole thousands of drivers who operated under independent contractor rules during a time when state regulators argued they were legally entitled to employee protections.
The roots of this legal standoff stretch back to the 2019 legislative session, when California lawmakers passed Assembly Bill 5. The legislation formally incorporated the legal framework known as the "ABC test" into state law. The ABC test establishes rigorous criteria that businesses must satisfy in order to lawfully classify workers as independent contractors rather than employees. Under the strict statutory requirements of the test, if a worker performs tasks that are core to the hiring entity’s usual course of business, they generally must be classified as an employee.
Because rideshare companies rely entirely on drivers to transport passengers—the foundational service of their business models—the original language and interpretation of AB 5 threatened to upend the foundational operational structure of both Lyft and Uber. State officials argued that under the ABC test, drivers should have been classified as employees all along, meaning they were legally owed guaranteed minimum wages, overtime, sick leave, and reimbursement for necessary business expenses such as vehicle maintenance, insurance, and gasoline.
Faced with the existential threat that employee status posed to their highly flexible, low-overhead business models, Lyft, Uber, and other gig economy platforms mounted a massive, multi-million-dollar political counteroffensive. They backed Proposition 22, a high-profile ballot measure presented to California voters in November 2020. Prop 22 successfully carved out specific exemptions from the ABC test for app-based rideshare and delivery drivers, effectively reclassifying them permanently as independent contractors while simultaneously establishing a compromise tier of alternative benefits, such as healthcare subsidies and earnings guarantees.
Even as Prop 22 became law with the approval of California voters, the legal battles surrounding worker classification did not disappear. Labor organizations and individual rideshare drivers promptly challenged the constitutionality and legality of Prop 22 in the state court system, arguing that the ballot measure infringed upon the legislature’s authority and stripped workers of constitutionally guaranteed protections.
Despite those persistent legal challenges from labor advocates, Prop 22 has repeatedly weathered judicial scrutiny. The law was officially upheld by the California Supreme Court as recently as 2024, securing a major legal victory for the gig economy model in the state.
While Lyft’s $272.5 million agreement successfully resolves all of the state’s remaining claims against the company regarding the historical misclassification of its workforce, the broader legal war is not entirely over. Uber, the co-defendant in the original 2020 lawsuit, continues to face its own unresolved portion of the litigation, leaving the ultimate fate of Uber’s historical liability in the hands of the courts as proceedings continue.
