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

4
What’s Behind the Backlash Against the On-Demand Economy and Independent Workers?

The majority of independent workers prefer being independent. However, a sizable minority don’t like their work and would prefer traditional employment.

5
The On-Demand Economy May Be Headed for a Talent War

Are there enough independent contractors to meet the demand for the on-demand workers necessary to operate these companies?

6
“Are Uber Drivers Employees of Uber?” and Why The Answer is Important

Agencies like the California Labor Commission have issued rulings that Uber drivers are employees, not contractors. What does that mean to the future of the “on-demand economy.”

7
Amazon Expands its On-Demand Marketplace of ‘Home Services’ in 15 U.S. Metropolitan Areas

Amazon continues to go local with the expansion of Amazon Home Services, an on-demand marketplace to match customers with home-related service-providers.

8
What Were They Drinking? Startups Focusing on Same Day Alcohol Delivery

Same day alcohol delivery — wine, beer and spirits — is the last frontier in convenience and on-demand local delivery,

9
Coverage of an On-demand Economy Backlash Continues to Miss the Positives

The majority of on-demand workers like what they are doing, a fact missing from coverage suggesting there’s an on-demand economy backlash.

10
Google Testing a Search Tool for the On-Demand Economy

Google is testing a search-engine enabled on-demand marketplace.

11
Amazon Prime Now Drivers Join in On-Demand Economy Lawsuit Parade

Amazon.com is being sued in California courts by former Amazon Prime Now delivery drivers in a proposed class-action suit.

12
Amazon Moving Ahead of Google in Home Delivery Race, What That Means for Small Business

Amazon Prime Now is in 20 markets compared to Google Express’ seven.

13
On-demand Economy Participants Typically Work 12 Hours a Week to Augment Household Income

Augmenting their household income is the primary reason independent workers participate in the on-demand economy.

14
New Small Businesses Are Emerging From the On-demand Economy

The on-demand business model is growing the segment of small business called “sole proprietors” or “single employee” businesses

15
The Five Faces of the On-Demand Workforce

Participants in the on-demand economy fall into different groups, different motivations and different levels of satisfaction.

16
Small Businesses Using On-Demand Economy to Access Tech Talent Pool

Because of the wave of on-demand economy companies, even the smallest of small businesses can use an app to connect with independent tech workers.

17
Yelp Joins Google, Amazon and a Slew of Startups in Home Services On-Demand Marketplace

Yelp adds Request a Quote feature to participating service providers.

18
Uber Settlement Defines Drivers as Independent Small Businesses, Not Employees

Uber has agreed to a class-action lawsuit settlement with drivers in California and Massachusetts

19
Shopify’s Ecommerce Merchants Can Now Offer Local, Same-Day Delivery in 200+ U.S. Locations

Ecommerce software provider Shopify is teaming up with on-demand same-day delivery service Postmates.

20
Uber Didn’t Create the On-Demand Economy, The On-Demand Economy Created Uber

Uber exists because of the growing need for highly flexible part-time work to supplement incomes.

21
Voters’ Decision Keeps Austin Too Weird For Uber, Lyft

Uber and Lyft, the ride-sharing, on-demand economy companies, lost a key vote by focusing on the wrong messages.

22
Employers Prefer Full Time Workers, But Agree That On-Demand Economy is Here to Stay | 2016

Employers have a love-hate relationship with the on-demand economy.

23
The On-Demand Economy Workforce Continues to Expand | 2017

Two-thirds of on-demand economy participants say they are satisfied with their work

24
HomeAdvisor Buys Angie’s List to Grow its Home Services On-Demand Marketplace

To compete with the giants creating new, on-demand home services marketplaces, HomeAdvisor acquires Angie’s List.

25
Gallup: Most Employees Who Work Varying Hours Like Their Schedules | 2017

According to Gallup, the majority of employees who work variable hours each week report no problems or financial hardship with the variable hours.

26
Two Small Business Trends That Contributed to Ikea’s Decision to Buy TaskRabbit | 2017

Are the acquisitions of TaskRabbit and Angie’s List pointing to the consolidation of the gig economy?