In previous blogs, DCR cautioned that the regulatory environment regarding the use of independent contractors could threaten the survival of a business itself. Earlier this week, we reported on Department of Labor guidance that further restricted the independent contractor status. We are now seeing the first victim.
Over the past few years, the popularity of social media has given rise to a new industry – On demand Services. We can now go online and order transportation, house cleaning, errand services, baby sitters, and a variety of other services aimed at reducing the tasks we all face in life. Most of these new start-ups depend on independent contractors to deliver these services. And, as they say, herein lies the problem.
On July 31st, cleaning services company Homejoy is actually shutting down. The company, founded three years ago, allows customers to get cleaning services from background-checked and certified cleaners at $25 an hour; with just a phone call. The company grew rapidly, delivering services in 35 cities across 4 countries. However, the start-up found it impossible to raise adequate funds to defend against four lawsuits filed by independent contractors seeking employee status and benefits.
The regulatory environment has put ‘on demand’ services companies on notice. Many are facing a growing volume of classification litigation, and there’s little reason to believe that the ultimate judgements will favor the companies dependent on independent contractors. The decision to shut down Homejoy came after the California Labor Commission ruled against Uber, the on demand transportation company. It determined that an Uber driver is an employee and not an independent contractor. Though the decision against Uber did not set a binding precedent, the worker classification, or misclassification, issue is clearly established as an issue for start-ups which are built around on-demand services.
Unlike Homejoy, well-financed ‘on-demand’ start-ups like Handy (Homejoy’s chief competitor) and transport providers Uber and Lyft have the deep pockets that will help them stay afloat; which has four separate law suits pending over charges of misclassifying its contingent workers as independent contractors. However, in a recent decision Uber elected to pull out of the French market rather than continue to fight the opposition to their business in that market.
Other ‘on demand’ start-ups are attempting to avoid misclassification risks by applying more traditional employment models. Companies like ‘Managed by Q’ operate in the same space as Homejoy but use employees instead of independent contractors to deliver their services. It is unclear whether these convenient services can be delivered at a competitive price point when incurring the costs associated with a traditional labor force.
Having to switch independent contractors into employees would prove an expensive affair, making it hard for companies like Uber which have taken this route to change paths later in the day. Having to deal with such a transformation is daunting prospect. It will undoubtedly prove to be the nemesis of more on-demand service companies soon, as the regulatory environment renders it progressively unviable for them to continue down their chosen paths. As per the calculation by Re/code, Uber would incur $209 million to get its California drivers on to its rolls – without factoring in its share of the cost of gas and vehicle maintenance.
Start-ups like Homejoy want the current regulatory environment to change and wish to see a classification of employees which allows those who work as contractors to enjoy a lot of flexibility. They cite the growing number of people seeking flexible work environments that support their ability to pursue academic degrees, raise families or ease into retirement. This runs counter to the perspective of the Department of Labor that these companies seek to deny workers their rightful benefits while avoiding payment of labor-related taxes.
Does this mark the death knell of ‘on demand’ start-ups? Not so fast. It is interesting to note that Google and many venture capital firms have invested millions into these start-ups. Google also announced plans to enter this market by offering local assistance services. We’ll need to wait to see the employment model selected by Google when these services are launched.
While challenges seem to be increasing, the way ahead for ‘on demand’ start-ups using contingent workers and classifying them as independent contractors is not entirely closed. DCR will be closely monitoring the outcomes of pending litigation, and actions taken by these companies to survive. We’ll keep you posted.
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