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Why the Contractor-Employee Conundrum Isn’t a Fatal Liability for the On-Demand Economy

By Parag 20th August 2015

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As published on Streetfightmag

Convenience, and value are how customers visualize Uber and many other Uber-like platforms that have come up in different verticals. These platforms have led to a prosperous gig economy taking roots in Silicon Valley and giving workers many avenues for supplemental income. Potential for disruption for these platforms is associated with the fact that they make the interface between suppliers and buyers much more efficient.

The recent California Labour Commission ruling, classifying one Uber driver as an employee has led to a lot of chatter about cracks in the business model underlying the “on-demand economy.” Add to this the recent news that HomeJoy is shutting down due to miscategorization of their workforce. The official version associates the inability to raise funds with VCs being apprehensive about pending class action lawsuits against Homejoy — and it would seem that we have an existential crisis at hand. But let’s analyze the facts at hand further before we come to any conclusions.

Background: Uber’s case

The whole contractor-vs.-employee debate boils down to the fact that on-demand employers have limited control of when, what, and how a contractor works. While the IRS has established tests to determine whether businesses are treating the stakeholders as contractors or employees, the whole thing remains a grey area when applied to on-demand mobile platforms.

In the case under discussion, the commissioner went on to rule that while Uber holds itself as nothing more than a technology platform designed to enable drivers and passengers to transact, in reality it is involved in every aspect of the operation.

From the ruling:

“Even though there is an absence of control over the details, an employee/employer relationship will be found if the platform retains pervasive control over the operation as a whole and the worker’s duties are an integral part of the operation.”

Pervasive control was established on the basis of facts that:

  1. The pay for a particular task is fixed by Uber. Drivers are discouraged from accepting tips. The right to a cancellation fee is also limited to Uber’s discretion even if the driver shows up at the designated location.
  2. As a driver you need to accept rides above a certain threshold to stay associated with Uber.
  3. Uber controls the tools that drivers use — cars cannot be more than 10 years old and must be registered with Uber. They must comply to industry standards.
  4. Driver must maintain a star rating of 4.6 or greater to stay associated with the platform

To put things in perspective it is important to realize that The California Labor Commission’s ruling is non-binding and applies to a single driver. In addition, it is contrary to a previous ruling by the same commission, which concluded in 2012 that the driver “performed services as an independent contractor, and not as a bona fide employee.” Five other states have also come to the same conclusion.

Uber has grown too big to afford changing the classification of its drivers from contractors to employees and deal with associated costs of providing workers with compensation, social security, and unemployment insurance. More likely, Uber will modify the platform to the point it has a legal standing to call the drivers as contractors. This will involve giving drivers more choice about how they operate on the platform on the lines quoted in the ruling.

From a more subjective perspective, the number of drivers associated with Uber in freelance capacity has been doubling every six months. At the end of 2014, the number stood at 160,000. This growth is testament of the fact that everything is not wrong with Uber’s classification of its drivers as contractors. Most of the drivers associated with Uber can and do choose to earn their living from multiple sources, including other ride-sharing companies. Even if somehow all of Uber’s drivers are transferred to an employee classification, a lot of drivers who see this as a side gig or an avenue to earn extra cash might be stifled by the restrictions an employee classification brings and will be happier with the status quo.

In a nutshell if you are looking to begin an on-demand platform the factors that you need to consider are associated with the degree of control the platform will exert over the worker and will involve answering questions like”

Does the worker have a schedule set by the company?

Does the company require the workers to wear uniforms, receive training and use tools provided by the company?

Are the prices controlled by the platform or can they vary with the contractors?

This puts some on-demand startups such as Taskrabbit in a much more favorable position over others. Taskrabbit, even after a pivot last year which brought the model closer to Uber’s, still gives the workers right to decide the price points they want to charge per hour. Same hold true for SideCar where the drivers set their own price, decide their own working hours and choose which rides to accept.

What does this mean for other startups in this space?

The on-demand economy is still evolving and the existing regulatory turf is murky at best to provide clear answers. But the point that I want to bring home through this post is the ODE platforms can emerge across on the other side while treating the supplier side as employees as well.

Some existing examples:

  1. MyClean – A New York based on-demand cleaning service (similar to Homejoy and Handy in terms of services) is a good case study of how the employee model is working better for them vis-a-vis a contractor model. This blog post from the company website touches on how they bootstrapped to a $4million a year business in 3 years. (Since 2013 they have reportedly doubled it to $8million a year employing 200 cleaners.) While the labor costs, according to CEO Michael Scharf, were 40% higher shifting from a 1099 model to W-2 model, the switch gave the company a lot more control over managing, dispatching, training, and ensuring quality end-service.
  2. Munchery – An SF-based 0n-demand meal delivery startup that has raised $32 million in VC funding also adheres to the more expensive employee model classifying its drivers as employees and giving them benefits if they work at least 30 hours per week. Drivers make $11 an hour plus 56 cents a mile if they use their own cars. Munchery’s co-founder Trin Tran believes that the contractors don’t give good results. As drivers are their only point of human to human interaction they need to represent the brand well.
  3. Sprig – Another on-demand meal delivery startup was using a similar model till apparently they shifted to the 1099 model at their lawyer’s suggestion.

The future of the on-demand economy

While there are many issues which need a resolution, I believe that it’s not doomsday for the on-demand economy. On the contrary, we are just starting. The reason for optimism lies in strong fundamentals for primary stakeholders on both sides of the platform — customers and suppliers.

Once customers get used to value, convenience and delight, there’s no going back for them. And for suppliers the gig economy takes away the biggest burden associated with working freelance: advertising for and attracting customers.

In the coming few years I predict that many existing mid-stage and smaller traditional businesses will jump on the trend. The goal won’t be conquering the world for every business but survival in terms of getting hands on more customers (who want instant gratification) and more suppliers (who want to associate with the business albeit in a more flexible arrangement).

For these service-based businesses, the technology that is enabling the on-demand platforms of today will lead to much more efficient and transparent operations.

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