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Jul
2015
22

On-Demand Economy Startups Begin Using Employee Model Instead of Independent Contractors

Instacart part-time employees

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The on-demand economy is at a crossroads as employee misclassification lawsuits are beginning to chip away at the viability of a business model often built on hiring independent contractors.  Homejoy, a three-year-old home cleaning startup which had raised $40 million, recently announced that it would shut down at the end of the month.  The reason for them folding?  Four separate lawsuits claiming misclassification that would cost the company millions in back wages and penalties. 

Homejoy founder Adora Cheung told Re/Code that she couldn’t convert Homejoy workers into employees and still stay afloat:

“How do we support and do right by those people while remaining a two-way platform?  I wish we were able to do more for them, but the reality is that we can’t under the current regulatory environment.”

Uber, Lyft, and several other on-demand companies are currently facing misclassification lawsuits that could undermine their basic business models.  The Boston Globe touched on a case against Instacart, a grocery company that offers ordering and delivery from a wide array of stores including Market Basket and Whole Foods. In that case, Donna Busick, a 57-year-old Bostonite is filing a private arbitration case claiming that she and hundreds of other employees were shortchanged on wages and expenses while working as contractors for the company. 

Instacart swiftly announced that it would transition its grocery shoppers in Boston and Chicago to part-time employees.  The company plans to make similar changes in other cities in the near future. 

A similar announcement has come from Shyp, a California-based on-demand app startup that picks up boxes and packages.  

In a recent <>Washington Post article, Wonkblog writer Lydia DePillis argued that while many on-demand companies think “forcing employers to put workers in boxes built for the 20th-century workplace is making it impossible to innovate new business models,” many new startups are becoming successful while classifying their workers as employees.  She uses the example of Managed by Q:

Take Managed by Q, an on-demand provider of office cleaning services. Co-founder and CEO Dan Teran says there was never much question what tax classification his workers would get, for a couple reasons: First, they needed to control the customer experience more than they could with contractors. “Our staff are very much part of our interface. Categorically, we needed to be able to train people,” Teran says. Training is a key determinant of employee status.

And second, they needed to attract great staff. “We thought, ‘what do the best people need?’ and worked backwards to provide that,” Teran says. Parents often provided the best service, and they really need health insurance, so the fact that Managed by Q provided it became a selling point in recruiting.

Teran says it is more expensive to hire employees, but the uncertainty of the on-demand economy coupled with recent attempts by the Department of Labor to better define independent contractors means the traditional employee model may be a better long-term investment.  Teran admits that he classified his workers as employees from the ground up, but suggests it is entirely possible for established on-demand companies to make the switch:

“All of these companies have done really incredibly things in building scale. Switching over would be no harder than building what they’ve built,” he says. The problem, Teran thinks, is more psychological. “People have convinced themselves that this is what the future of work looks like. People become invested in one view of the world.”

Attorney Shannon Liss-Riordan, the attorney making waves in the on-demand economy, thinks a lot of companies are beginning to get the message about their reliance on misclassification.  She told The Washington Post:

“I would say most of the major ‘on demand’ companies have been sued, but there are many smaller ones out there that have tried to copy the Uber business model and need to take a hard look at whether they really want to take that risk.  I hope more will follow the lead of Shyp and Instacart that have decided to reclassify workers as employees and provide them the protections workers have.”

Importantly, the Department of Labor refuses to accept the lazy argument that ensuring employee status makes being in business too expensive to succeed. Labor Secretary Tom Perez made this argument in an interview with C-Span, saying:

“This notion that we have to have either an independent contractor driving you, or else we can’t create a business model, is simply incorrect.  We talk to innovators all the time in Silicon Valley and elsewhere who understand that ‘I can create a new business model and take care of my workers.”

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