Here Are The On-Demand Companies Getting Rid Of Contract Labor — And Why

Even as lawsuits threaten the contract-based employment model of companies like Uber, cheap freelance labor is the norm in the industry. But a few companies argue that paying employees well isn’t just the law — it’s good for business.

In 2011, when Maren Donovan was founding her company, Zirtual — which sets users up with remote personal assistants who perform tasks such as transcribing a phone call or making dinner reservations — hiring her employees on a contract basis seemed like the right thing to do. It's cheaper, for one, and the prevailing wisdom in the then-nascent on-demand industry was that the labor costs associated with paying employees full-time were enough to sink a new venture before it started.

But Donovan also thought that's what her employees would prefer. "We really thought people wanted the freedom and flexibility to work when they want, and make as little or as much money," she told BuzzFeed News. But, she said, as the company grew, she came to realize that many of her employees didn't come to Zirtual for the freedom — they came for the paycheck, too. "What we heard from the people who were working for us," she said, "is that they wanted steady work."

So about a year ago, Donovan began phasing out 1099 workers, or independent contractors. All Zirtual employees are now full-time salaried workers with benefits, training, and holidays off.

In this, Zirtual is an anomaly in the on-demand economy, the name given to the constellation of Ubers for X and Insta-everythings that provide personal services such as meal delivery, laundry, home cleaning, and errand-running on a piecemeal basis, with the press of a button, at the hands of a sprawling contract labor force. But the company is part of a growing handful of similar labor startups that have decided their businesses are more sustainable, more innovative — and, perhaps most crucially, more legal — when the rights of their employees are protected, and are thus challenging the fundamental doctrine of a multibillion-dollar economy.

Within the massive on-demand services industry — which is valued anywhere between $60 and $500 billion — contract labor is the norm, and the prevailing wisdom is that traditional full-time labor is an inefficient model in a technologically enabled world. As a 2014 report from the venture capital firm Sherpa Ventures — an investor in on-demand titans including Shyp, Uber, and Washio — argued, "perpetual, hourly employment is often deeply inefficient for all parties involved."

At base, the legal distinction between a contract — or 1099, after the tax form these people fill out — laborer and a full — or W2 — employee hinges on control. A W2 employee can be told what to wear and where to go by their employer; they can be trained. A 1099 employee can't, technically, hold a contract for longer than six months, and can break that contract at any time, coming and going from various companies and labor marketplaces as they please. Essentially, 1099 employees get autonomy; W2 employees get job stability. Even as the model comes under legal fire, with some companies finding themselves on the receiving end of lawsuits for potentially misclassifying their employees as contract laborers, many observers of the on-demand economy maintain that contract labor is best for all parties involved.

Mitch Ratcliffe, a senior analyst at BIA/Kelsey and an expert on the local on-demand economy, argues that the industry simply can't survive without the massive supply of a cheap, flexible labor that it provides. "These models don't scale if you're hiring people and you're not putting them to work every minute you're paying them for," he told BuzzFeed News. In a crowded industry with sometimes small margins and usually big ambitions, every added cost matters — and full-time labor is expensive.

Salaries, benefits, and overtime aren't the only costs, either — hiring full-time labor also means taking legal responsibility for your employees. Marcela Sapone is the founder of Alfred, a butler service that uses W2 labor. "Tech companies that want to scale quickly have looked at the liabilities involved with actually having employees," she told BuzzFeed News. "And they say, 'Oh, we don't want that.'"

Sapone said would-be funders balked at the added cost and complication of hiring W2 labor. "When we were reaching out to potential investors," she said, "many told us, 'That doesn't make sense. That's not a scalable business.' I said, 'It's the only scalable business.'"

The way Sapone sees it, she can't guarantee a high-quality end product for her customers using contract labor. For Alfred to be the magically predictive butler service she wants it to be, the "Alfreds" need to use their personal judgment, human intuition, and training in high-end service when performing tasks in a person's home. Alfred employees make between $25 and $30 an hour.

Managed by Q, which cleans and manages office spaces by deploying its fully employed operators via an app, is another such company. Both Daquan Gailyard, a Managed by Q "operator," and Saman Rahmanian, the company's founder, told BuzzFeed News that they believe offering employees full benefits fosters a work environment where employees are loyal, well-trained, engaged — and happy.

It's also a work environment in which employers are less likely to get sued. Over the past year or so, Uber, Lyft, Handy, Homejoy, and Instacart, five of the on-demand sector's biggest players, have all been sued by workers claiming that given the amount of control those companies exert over their working lives, they ought to be compensated as employees.

None of those cases has been resolved yet. But Sarah Leberstein, a lawyer with the National Employment Law Project, said the on-demand economy is nothing new, at least not when it comes to the rights of workers. While many in the industry believe the creation of a third worker classification is necessary, Leberstein says the current law is adequate.

"When it's applied to a new or evolving context, you get some employers who try to take advantage of that situation, and the newness, to avoid their responsibilities," she said. "But I think we're catching up."

That's good news for companies like Zirtual, whose investors — which include Zappos CEO Tony Hsieh — were supportive of the switch to W2 labor, in part because of legal liability. "Especially in the last six months, with lawsuit after lawsuit, they've been like, 'Oh my gosh, I'm so glad we did this,'" Donovan said.

Hunter Walk is a venture capitalist at Homebrew, a fund that backs both contract-based and W2-based on-demand services companies, including Managed by Q. For that reason, the question of how best to support workers going forward is of real importance to him — but he's not sure what the answer is. "What is the role of the government in the safety net in a place where there's not the same assumption about stable, ongoing, multi-decade relationships between employer and employee?" Walk asked.

But while venture capitalists like Walk consider how the tech industry might be changing the structures of our government, those more familiar with the law — that is, lawyers — feel differently. Shannon Liss-Riordan is the attorney who's quickly becoming well-known for going after Uber and other on-demand companies via class action lawsuits. She argues that there's nothing new about the kinds of jobs on-demand companies create, and that the laws that are on the books are perfectly sufficient. "I think there are very good reasons for the labor laws that we have on the books right now," she told BuzzFeed News, "which got put in place over decades to provide protections for employees."

What remains to be seen, Liss-Riordan said, is whether Uber and others will respond to the suits by making "tweaks" to their models or by digging in their heels. Historically, she said, wage and hour cases can be dragged out for "a really long time."

But in the meantime, startups like Alfred, Zirtual, and Managed by Q suggest there doesn't necessarily need to be a tradeoff between independence and protection, between worker happiness and regulation. As Ratcliffe said, if a shift towards using W2 employees to execute these on-demand tasks more reliably does take place, "Is the business model any different than a regular one?" If it turns out it's not, a whole lot of money may have been sunk into a new idea that doesn't really exist.

"It's amazing to me how much money has been poured into these startups," Liss-Riordan said. "Did anyone consult a lawyer?"

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