Employees Or Contractors? On-Demand Startups Still Struggle To Define Their Workers

SAN JOSE, Calif.

They’ve piled up billions of dollars and disrupted major industries, but the Bay Area’s on-demand startups have yet to answer one important question, do they have employees?

Uber, Lyft and many others in the multibillion dollar industry insist they don’t, but some on-demand startups are beginning to ask themselves if the old employee model might work best in the long run. Instacart, Shyp, Sprig, Luxe and Honor are among the companies that recently reclassified some or all of their independent contractor workers as employees.

“We wanted them to feel the emotional connection to the organization that all the other employees did,” said Johnny Brackett, a spokesman for on-demand shipping service Shyp, which made its couriers employees last year. “Part of that was putting them through orientation, which you can’t do with contractors.”

But startups in the industry are far from agreeing on which business model is best for workers and for their bottom lines, and that uncertainty could spell trouble for an industry experts say already is bloated with more on-demand delivery apps than the market can sustain. They add that investors may shy away from startups where the unresolved question of workers’ employee status threatens potential litigation, regulatory push-back or excessive spending.

“It’s very hard to invest when you don’t know what you don’t know,” said Ben Narasin, a partner at venture capital firm Canvas Ventures. “You’ve got this maybe existential risk, maybe just regular risk, but you have no way of quantifying it.”

At issue is whether the army of drivers and couriers who roam the Bay Area, summoned by smartphones to shuttle passengers across town or drop off late-night snacks, should receive the benefits, and potential drawbacks, of traditional employment.

So far regulators, lawmakers and the courts haven’t been much help.

Making the wrong choice has put more than one startup out of business. Homejoy, a San Francisco on demand cleaning service, and Zirtual, a San Francisco company that matches entrepreneurs with online personal assistants, blamed their demise in part on the employee versus contractor issue. Homejoy’s contractor workers sued the company multiple times over their status, and Zirtual suffered soaring costs after switching to employees. Experts estimate companies with employees pay up to 30 percent more per worker.

Eden, a startup that dispatches a fleet of “wizards” to Bay Area offices to tackle companies’ IT, handy-man and cleaning needs, recently moved its workers from contractors to employees, a change that co-founder and CEO Joe Du Bey estimates will cost more than $1 million over the course of a year. But he expects the money he’ll save in recruiting will offset that expense, as his workers will stick around longer now that they have benefits. Some wizards even have stock option plans, a perk nearly unheard of for an on-demand worker.

“Once I kind of looked around at the (independent contractor) landscape, it didn’t feel like that would scale super well,” Du Bey said. “It just felt like as we got bigger, we’d have people who weren’t deeply connected to the client.”

Eden handyman Safi Majidzadah appreciates the benefits that include medical insurance, a 401(k) and reimbursement for work expenses. He used to drive for Uber as an independent contractor, and says after deducting his car payment, gas and insurance from his earnings, he wasn’t left with enough to support his wife in nursing school and their two children. So he worked into the night, sometimes driving for 18 hours at a time.

“I would just park the car right by Golden Gate Park,” he said, “and I had a sleeping bag in my car and I would just go to sleep, take a nap for a couple of hours.”

Switching to an employee model often makes good business sense, said Arun Sundararajan, a business professor at New York University and author of “The Sharing Economy.” A fledgling company typically has scattered, unpredictable demand and may not need people covering eight-hour shifts. But as a startup grows, it may need a more predictable labor supply.

Shyp launched in 2014 with a fleet of contractors who picked up items customers needed shipped. Those couriers signed up for designated hours but had every right to stop working mid-shift. As the company grew, its executives realized that was going to be a problem.

“It just wasn’t going to work after we reached a certain point,” spokesman Brackett said.

Starting last year, Shyp moved to employees, who now get workers comp, reimbursement for driving expenses, overtime pay and health insurance.

Those benefits sound good on paper, but former Shyp courier Paula Van of Los Angeles preferred her status as a contractor.

After the switch, her pay dropped from $16 an hour to $14, plus expense reimbursements, and she had access to fewer available shifts. Shyp ultimately laid her off in April.

“They had the right intentions,” Van wrote in an email, “but I think the company was a lot better when we were (independent contractors).”

Home-care services provider Honor decided to transition its caregivers from contractors to employees in part so it can train them, by law a company can’t train independent contractors. The idea was to provide better service, co-founder and CEO Seth Sternberg said, and also to expand by allowing the company to hire workers without prior experience.

For some entrepreneurs, launching their on-demand startup with a fleet of independent contractors was a given. There is a sense that all such companies use the business model popularized by Uber, said Jordan Brown, founder and CEO of on-demand moving company Lugg.

“We definitely didn’t talk about it that much,” he said, of his team’s decision to label its 300 Bay Area movers as independent contractors. “We felt like it was the right call, and went for it.”

San Francisco-based Lyft insists that making drivers employees would jeopardize the flexibility that makes the app popular. Drivers would have to report for scheduled shifts instead of choosing where, when and whether to work each day, the company argues.

“Lyft’s vision, to provide an alternative to vehicle ownership, is succeeding because drivers are entirely in control of their schedules,” David Mack, senior director of public affairs, wrote in an emailed statement.

That flexibility is key for people like 42-year-old Dave Erickson of San Diego. Erickson, his partner and their two kittens earlier this month completed a three-month cross-country road trip he financed by delivering meals for DoorDash along the way. Erickson loves the independence and progressiveness of the on-demand economy.

“Having the freedom to be able to travel the country and work, and have a working vacation, that just tops it off,” he said recently while on his way to Mount Rushmore.

But some on-demand startups are trying to marry employee benefits with a flexible schedule. Eden’s IT workers and handymen have employee benefits and still craft their days in the typical on-demand fashion, if they feel like making money, they turn on the app, select a job and head to work. The Eden platform tracks their hours, and if employees work an average of 30 hours a week over eight weeks, they are given full-time employee benefits. If not, they are considered part-time employees.
The software also knows when employees work overtime, and to cut costs, it limits the jobs available for employees who are approaching the 40-hour benchmark.

“Being independent and being paid as a W-2 employee,” Du Bey said, referring to the employee tax designation, “those don’t have to be opposite.”