Is the Sharing Economy Due for Extinction?

Lawsuits against on-demand sharing economy companies for misclassifying their workers as independent contractors rather than employees are gaining momentum, particularly after last month’s ruling against Uber. The lawyer who sued Uber and Lyft for not classifying contract workers as employees is now representing workers against four more on-demand companies: delivery services Postmates and Instacart, laundry service Washio, and the shipping company Shyp. Workers from Postmates, Shyp, and Washio filed a lawsuit against their alleged employers on June 29th. The earlier lawsuits filed against Uber and Lyft will be tried in August.

The idea behind the sharing economy, according to Wikipedia, is that “information technology [is used] to provide individuals, corporations, non-profits and governments with information that enables distribution, sharing and reuse of excess capacity in goods and services. A common premise is that when information about goods is shared (typically via an online marketplace), the value of those goods may increase, for the business, for individuals, and for the community.”

If it sounds too good to be true, that’s because it is, apparently. Sharing economy, on-demand companies set up business structures that guarantee independence and flexibility – there is not necessarily a set schedule, a desk to sit behind, or a boss to answer to, and sometimes there is an ever-present opportunity to take or refuse engagements as workers desire. In this way, it makes perfect sense that on-demand companies would classify their workers as contractors - the reins of control are loosened or non-existent. However, this means that guarantees of minimum wage and paid overtime, family and medical leave, and unemployment insurance are also non-existent. Likewise, because there is no employer-employee relationship with contractors, employers are not legally obligated to provide a safe or even harassment-free environment or other job protections. In fact, technically, contractors have no right to bring an employment lawsuit against employers at all. In order to sue for any of these things, workers must first allege that they are in actuality employees who were wrongly classified. Assuming that finding is made, a worker can then proceed with her other claims.

So why do the companies set themselves up for potential lawsuits? Well, the cost savings and ensuing low rates from creating contractors instead of employees is what enables many of these companies to survive and compete against their non-share counterparts in the first place. But there is a catch. As workers realize the reality of the lack of protections and benefits they have in the workplace, they become disgruntled, seek out attorneys, and file lawsuits. This is further complicated by the fact that traditional contractor v. employee lines aren’t fully relevant to these non-traditional workplace structures. That’s why although the plaintiffs lawyer who is suing all these companies claims this is a workers’ rights issue, in reality it’s much more complicated than that. The workers who contract with sharing economy companies gain a freedom and quality of work life they might not otherwise have. But they give up things in the bargain. When they regret their choice, courts may be forced to decide an issue without precedent. In the Lyft case, U.S. District Judge Vince Chhabria said in his decision that he's not sure if Lyft drivers fit in either category of California's "outdated" employment codes. “The jury in this case will be handed a square peg and asked to choose between two round holes,” he wrote. “The test the California courts have developed over the 20th Century for classifying workers isn’t very helpful in addressing this 21st Century problem.”

Homejoy, an on-demand home cleaning company which uses independent contractors, is just the latest company to struggle with the ramifications of misclassification. Adora Cheung, Homejoy’s CEO and co-founder, announced that the company will shut down next Friday after coming under fire for its worker classification. While calling its workers independent contractors, the company maintained a significant amount of control over its cleaners, including aspects such as the locations where they were assigned jobs, how many jobs to perform each day, which customers to see, the job start time and end time, and the amount of driving they needed to do. A full complaint is available here:

More to the point, though, is that Homejoy, like Uber, is completely dependent on its independent contractor workers for its product offering. Any time a company classifies its key product-producing workers as contractors, there is a serious risk of a misclassification lawsuit.

With four lawsuits against Homejoy, the San Francisco-based company had a difficult time raising money to continue operations. The prevalence of such lawsuits against on-demand companies across the country has caused investors to shy away from the risk in backing them. Cheung stated that the lawsuits against the company and their impact on fundraising were the “deciding factor” for the closure.

While these lawsuits are causing some companies such as Homejoy to close, others with similar business models are able to stay afloat. Handy, a home-cleaning and handyman startup, has also been sued over its independent contractor use. However, with over $60 million raised in private investment, the company is moving forward with business as usual. It’s even offering a $1,000 incentive for Homejoy professionals to register to work with Handy after Homejoy closes. Despite being sued, Handy has enough funding (like Uber) to stay in business nonetheless.

In addition to the misclassification activity in the courts, the U.S. Department of Labor issued a memo last week stating that “most workers are employees under the FLSA’s broad definitions.” With the increased scrutiny over the way that on-demand companies classify their workers, these businesses are faced with tough decisions about where to go from here.

Although it might seem like the solution is to never use independent contractors, it’s important to remember that the use of independent contractors is still a perfectly viable and legal option for companies, especially those that are risk-tolerant. However, if a company chooses to continue using independent contractors, it may want to consider restructuring its business and re-documenting its worker agreements to make sure they are compliant with existing classification guidelines. If it can’t do that, it’s better to leave workers as they are and factor in the risk of a lawsuit in expenses (getting legal advice as to extent of the risk) or reclassify independent contractors as employees instead. The trick for the last option is to phrase things in such a way that workers don’t attempt to sue for past misclassification procedures. But that last topic is the subject for another day’s post.