Investors Must Confront The On-Demand Economy’s Legal Problem, Part 2

Editor’s note: Vinay Jain is the chief legal officer at Shake, a mobile platform to sign, send and access legal agreements.

In Part 1 of this two-part series, we described how many on-demand economy (ODE) companies like Uber, Handy and Postmates would expose themselves to major legal liabilities if their service workers were found to be employees rather than independent contractors. Now let’s look at the options available to some of these companies to reduce their risk.

Option 1: Reclassify contractors as employees

A handful of ODE companies have seen the writing on the wall and have voluntarily reclassified their workers as employees, or just classified them correctly from the outset. These include virtual assistant company Zirtual, the office-cleaning service Managed by Q and the storage company MakeSpace.

Reclassification offers advantages beyond regulatory compliance. Employees stick around longer than contractors, reducing turnover costs. Employers can train employees as much as they want, better ensuring uniform, high-quality customer experiences.

While reclassification is the safest bet from a compliance standpoint, it’s not an economically viable option for many ODE companies. The numbers simply wouldn’t work for an Uber if it were to become the nation’s largest employer of taxi drivers.

Option 2: Change the law

The tech community is rooted in the ethos of creative destruction: If something doesn’t work as well as it should, tear it down and put something better in its place. This mindset, however, tends to work better for software, devices and business models than it does for laws and regulations.

To be sure, ODE companies have scored some regulatory wins lately. Airbnb got San Francisco to legalize it and Uber successfully broke into Washington, D.C.’s taxi cartel. These companies have chosen to grow first and ask compliance-related questions later, and so far their strategy has worked. Their massive war chest of funding has bought them loads of lobbying, litigation and PR power.

But there’s good reason to believe that labor laws will be slower to change than, say, regulations designed to protect the taxi industry. The history of U.S. labor law is a chronicle of hard-fought gains by workers who faced down exploitation. To tamper with rights that have been part of the American social contract since at least the New Deal is to tread on contentious ground.

Moreover, the optics are not on the ODE’s side. It’s jarring to read about a company that has raised $40 million from the likes of Google Ventures hiring homeless people to clean the toilets of young professionals for less than minimum wage. Nonetheless, investors and other ODE cheerleaders have been sanguine about the prospects of regulatory reform.

Venture capitalists have boldly predicted that the ODE will “marginalize regulators unable or unwilling to adapt to changing consumer expectations.” When people say that Silicon Valley lives in its own bubble, this is the kind of thing they’re talking about. Yes, reforms that benefit the ODE may come, but the process will be slow and subject to fierce debate. Given the social issues at stake, that’s not necessarily a bad thing.

Option 3: Adapt

If the rules won’t change anytime soon, ODE companies will have to find ways to operate within them. So how can they legitimately maintain a workforce of independent contractors?

As we said in Part I, Craigslist would never be mistaken for an employer of house cleaners, in part because it’s clear that the transaction is directly between the service provider and the customer. What if companies like Handy or Homejoy did the same thing?

Imagine opening an app, seeing a list of independent cleaning companies or individuals that are available at a specified time and their rates, tapping into one of them, and being taken to an in-app web view that displays a short contract directly between the cleaner and the customer. The cleaner would be free to upload and modify its own terms, which the customer would review and agree to (or turn down) inside the app.

Payment would still be processed through the app, but the cleaning fee would be channeled directly to the service provider while the platform would simultaneously charge the provider (and possibly also the customer) a separate platform surcharge.

Would the user experience be as seamless as it is now? No, but it could come close. ODE companies excel at providing intuitive user interfaces. They should be able to find ways to integrate a few additional steps without overwhelming the consumer.

Will this work for all types of ODE companies? No. When you’re standing in the rain trying to summon a cab, you won’t be happy about the extra time and effort, marginal as it may be, to contract with an individual taxi company. But if your time horizon is further out — say for a house cleaning later this week — then it’s not such a big deal.

Would the platform be able to ensure the same level of uniformity and quality of customer experience as it does now? No, and that’s the point. If a company wants to specify how a worker does her job down to what she wears and how she greets customers, it needs to employ her. If the company doesn’t want to give the worker the protections and benefits of employment, then it needs to forgo that level of control. The company can’t have it both ways.

That’s why it won’t be tenable much longer for an ODE company to advertise on its splash page that “[o]ur skilled professionals go above and beyond on every job,” while disclosing in its fine print that the company “does not have control over the quality, timing or legality” of what its workers do.

Because worker classification is subject to a multi-factor test, there are ultimately no guarantees that a given set of operational changes will immunize a company against claims of misclassification. One of the factors is whether the workers’ services are central to the business. If so, it’s likely that the business has the right to direct and control the worker’s activities, indicating an employer-employee relationship. In other words, if a Handy looks more like it’s in the business of providing cleaning services than acting as a middleman, it’ll be harder for the company to argue that the cleaners are not employees.

Investors take heed

Except in highly regulated industries like finance or the law, early-stage tech entrepreneurs and investors tend not to spend much time thinking about regulatory compliance, including labor laws and worker classification. Their mantra is to grow first and ask questions later. It’s part of the culture.

“Disruption” is a holy word in tech circles; it represents the possibility of making the world more efficient, convenient, affordable and just plain better. But in our zeal to disrupt, it’s easy to forget that the old ways have sometimes persisted for good reasons — reasons that go beyond mere inertia or the influence of entrenched players interested in maintaining the status quo.

The time has come to ask tough questions about the on-demand economy. Worker misclassification is being taken seriously by the courts and regulators, and this will be the year when their gaze falls on prominent ODE companies. The changes these companies have brought to the service economy, for better or worse, are simply too big to ignore. The ODE and its investors would be wise to take a close look before the authorities do.