Labor & Employment Developments Blog

A recent $24.75 million class action settlement in Lawson v. Grubhub, Inc., marks yet another milestone in the ongoing debate over gig-economy worker classification. This settlement serves as a reminder to companies of all sizes that how they classify workers can carry significant legal and financial consequences.

Case Overview

Grubhub recently settled a decade-long class action lawsuit in California, in which a former delivery driver accused it of misclassifying him as an independent contractor rather than an employee. After years of litigation, including multiple appeals and shifting legal standards, the company agreed to a $24.75 million settlement. This case highlights the ongoing risks companies face when worker classification is challenged and underscores the importance of aligning business practices with evolving state and federal standards.

Key Takeaways

1. Tests matter: The ABC test in California, for example, places the burden on the company to show that a worker is properly classified as an independent contractor. If any prong of the test fails, the worker must be classified as an employee.
2. Legislation and ballot measures can change the landscape: Laws governing classification are evolving, sometimes quickly. In addition, what is an acceptable classification practice under a legal framework in one state, may not be acceptable in another.
3. Actual practice over contract labels: Courts are increasingly focusing on the reality of how work is done (schedules, control, direction, equipment, etc.), not simply what contracts say. Even if an agreement calls someone an independent contractor, the factual relationship may support employee status.
4. Risks of misclassification are real and expensive: Potential liability includes back pay (minimum wage plus overtime where applicable), penalties, benefits, payroll tax obligations, and legal fees. Settlements like Grubhub’s show that the stakes can be significant.

What Should Employers Do?

• Audit employment relationships: Employers should review how they classify workers. Are the contractors treated in practice as contractors? What degree of control does the company exercise (hours, methods, tools, oversight)?
• Document clearly: Make sure contracts reflect reality—meaning that company practices are aligned with the contractual terms. Be especially attentive to how much flexibility the worker really has in scheduling, choosing work, and using their own tools/equipment.
• Watch your jurisdiction: Laws vary widely across states (and sometimes cities). What works in Ohio or Kentucky might not pass legal muster in California or New York. Stay updated on local and state laws, precedents, and regulatory changes.
• Factor risk into cost/operations: Misclassification is not simply a wage and hour issue—it can result in tax consequences and liability for failure to maintain workers’ compensation coverage. Although proper employee classification may come at a cost, misclassification risk will usually outweigh that cost when all factors are considered.
• Plan for changing law: Legal frameworks for classification are in flux. Employers operating in multiple jurisdictions or relying heavily on gig or contractor labor need to build flexibility into their business models and be prepared to adapt as court decisions and statutes evolve.

The Grubhub settlement serves as a powerful example for companies big and small: classification of workers is not optional. Proper classification of workers is central to compliance, strategy, and risk management. With laws and standards shifting, and courts scrutinizing the actual working relationship rather than just the labels used, companies need to be proactive and precise. The KMK Labor & Employment team is ready to assist with assessing worker classification policies and ensuring proper worker classification.