For several years, one of the most visited entries on the SmallBusiness.com WIKI is titled, “How to determine if a worker is an independent contractor or an employee.” The difference is sometimes subtle, but the definition can mean a great deal in terms of a company’s labor costs, regulatory requirements and taxes. With high-profile startups like Uber creating new app-enabled marketplaces for customers and service providers to match up needs with solutions in real-time, the long-fought battle over the difference between the designation of independent (freelance, contracted, self-employed) labor and employed labor is becoming a crucial factor in the future of the on-demand economy.

Background

Earlier this summer, we shared that the future of the on-demand economy could hinge on the outcome of court rulings that determine whether or not the drivers, deliverers, housecleaners and other service providers are employees of startup companies like Uber or are, as Uber and others claim, independent contractors. In that article, we reported that Uber is currently fighting against the creation of a class-action lawsuit related to the employee vs. independent worker label (and corresponding tax and benefit treatments).

Recently, the Wall Street Journal reported that some on-demand startups have decided to change their business models and convert from marketplaces for independent workers to a conventional employee-based service provider. The Wall Street Journal also suggested that the confusion and court contests are beginning to raise fear among venture capitalists, resulting in difficulty for some of the startups to raise more funding.

Some on-demand economy companies that are moving to a conventional employee model

Luxe: The urban car-parking service plans to convert hundreds of parking attendants to employees in the seven cities in which it operates. Luxe will offer both part-time and full-time positions and pay for expenses such as cellphones, uniforms, health benefits, and even scooters to those who work full-time.

Shyp: The company, which dispatches workers to collect customers’ goods and mail them, has announced plans to convert to an employee model and will provide healthcare insurance, workers’ compensation insurance coverage and vehicle expenses.

Instacart: The grocery delivery service is switching some of its workers to part-time with more limited benefits. (It is also defending itself in labor definition lawsuits.) According to WSJ.com, “Only those who remain in a grocery store for their shifts, plucking items from shelves for customers, are eligible for the change. Drivers delivering those items will remain contractors.”

On-demand companies that already have an employee model

Munchery: The food delivery service considers its workers to be employees.

Alfred Club (Hello Alfred): The home chore, errands and personal assistant company already classifies their service providers as employees.

There is no ‘joy’ in HomeJoy

Some companies have run out of time in their wait for a definitive court decision on the employee vs. contractor issue. On July 31, on-demand housecleaning service Homejoy shut down in part, they claimed, because of such labor litigations. “There are still many unresolved challenges in the home services space. We gave it our all, but regretfully, we have made the difficult decision to cease operations,” the founder wrote in the company’s blog.” The company had raised about $40 million from prominent venture-capital firms. Homejoy couldn’t raise new funds with lawsuits claiming it misclassified its roughly 1,000 workers as contractors.

Lawsuits signal a tough time for fundraising

“If your business model depends on the independent worker model and you plan to raise money in the next 12 months, you’re going to be in a precarious position,” Roger Lee, a general partner with Battery Ventures, told WSJ.com. His firm is an investor in the prepared-food delivery company Sprig, which uses contracted drivers—after starting out with employees.

Illustration: SmallBusiness.com

See also on the SmallBusiness.com WIKI
How to determine if a worker is an independent contractor or an employee