The reliance on independent contractors as the backbone of the “sharing economy” has suffered a series of blows recently. A California Labor Commissioner ruling against Uber’s use of contractors and the July shutdown of on-demand house cleaning startup HomeJoy in the face of employee lawsuits have tech entrepreneurs and their investors spooked, worried they may lose their ability to designate workers as independent contractors.

The IRS allows workers to be designated as independent contractors if employers maintain the right to control or direct only the result of work, not what will be done and how it will be done. Critics argue the independent contractor designation has been abused to dodge employee benefits and payroll taxes, while proponents say that without the flexibility of the designation the modern on-demand tech economy would not be possible.

Now with government scrutiny bearing down on the worker designation, many are asking: Do on-demand tech startups that rely on independent contractors have a future?

We spoke with several people familiar with the debate: Saba Waheed, research director of the UCLA Labor Center; Tianxiang Zhuo, managing partner at Brentwood venture capital firm Karlin Ventures; Mike Jones, chief executive of Santa Monica startup studio Science Inc.; and Rattan Joea, founder and chief executive of Hawthorne’s Opoli, a ridesharing company that only contracts with those that have commercial driver’s licenses.

Question: Can the on-demand tech economy work without the flexibility of the independent contractor designation?

Waheed: There doesn’t necessarily need to be a tradeoff between independence and protection, between worker happiness and regulation. There are some examples of successful on-demand tech companies that rely on employees. Alfred, for instance, is a company that dispatches helpers to coordinate errands like laundry, cleaning and grocery shopping. The company trains workers, pays fair wages and offers benefits. The added labor costs are offset by potential litigation costs and the risk of paying back-taxes to the IRS for misclassification.

Zhuo: It would certainly be challenging. Firstly, the added cost of providing benefits would increase the cost to the end consumer and might make a lot of these services less viable.

The way it could work is if we reach an intermediate standard coined by several people as the “dependent worker,” where we retain the flexibility that has allowed the sharing economy to flourish so quickly but ensure that workers who participate in the sharing economy have access to the benefits they need, e.g. health care, unemployment (benefits).

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