The accusation by Mike Anderson is contained in court documents filed Thursday, the Austin American-Statesman reported.
The newspaper reported Anderson, who worked for Armstrong until November, and the cycling champion are involved in a lawsuit regarding Anderson's termination and alleged promises made to him by Armstrong to help him open a bike shop.
Armstrong filed the first suit in December. Thursday's filing was part of Anderson's counterclaim, the report said.
Armstrong was in training in Europe Thursday. Tim Herman, Armstrong's attorney in Austin, said he was not surprised by the counterclaim, since Anderson's attorneys first made the drug allegations. He said the attorneys had demanded $500,000.
"We told them unequivocally we are not going to pay blackmail or extortion money on something that's not true.''
Anderson's attorney, Hal Gillespie, said the $500,000 was part of a "settlement proposal and not a demand" put to Armstrong before the suits were filed.