Employees or contractors? On-demand start-ups still struggle to define their workers

SAN JOSE, Calif. – They have piled up billions of dollars and disrupted major industries, but the Bay Area's on-demand start-ups have yet to answer one important question — do they have employees?

Uber, Lyft and many others in the multibillion dollar industry insist they don't, but some on-demand start-ups are beginning to ask themselves if the old employee model might work best in the long run. Instacart, Shyp, Sprig, Luxe and Honor are among the companies that recently reclassified their independent contractor workers as employees.

"We wanted them to feel the emotional connection to the organization that all the other employees did," said Johnny Brackett, a spokesman for on-demand shipping service Shyp, which made its couriers employees last year. "Part of that was putting them through orientation, which you can't do with contractors."

But start-ups are far from agreeing on which business model is best for workers and for their bottom lines, and that uncertainty could spell trouble for an industry experts say is bloated with more on-demand delivery apps than the market can sustain. They add that investors may shy away from start-ups where the unresolved question of workers' employee status threatens potential litigation, regulatory pushback or excessive spending.

"It's very hard to invest when you don't know what you don't know," said Ben Narasin, a partner at venture capital firm Canvas Ventures. "You've got this maybe existential risk — maybe just regular risk — but you have no way of quantifying it."

At issue is whether the army of drivers and couriers, summoned by smartphones to shuttle passengers across town or drop off late-night snacks, should receive the benefits — and potential drawbacks — of traditional employment. So far regulators, lawmakers and the courts haven't been much help.

Making the wrong choice has put more than one start-up out of business. Homejoy, a San Francisco on-demand cleaning service, and Zirtual, a San Francisco company that matches entrepreneurs with online personal assistants, blamed their demise in part on the employee vs. contractor issue. Homejoy's contractor workers sued the company over their status, and Zirtual suffered soaring costs after switching to employees. Experts estimate companies with employees pay up to 30 percent more per worker.

Switching to an employee model often makes good business sense, said Arun Sundararajan, a business professor at New York University and author of "The Sharing Economy." A fledgling company typically has scattered, unpredictable demand and may not need people covering eight-hour shifts. But as a start-up grows, it may need a more predictable labor supply.

Shyp launched in 2014 with a fleet of contractors who picked up items customers needed shipped. Those couriers signed up for designated hours but could stop working mid-shift. As the company grew, its executives realized that was going to be a problem.

"It just wasn't going to work after we reached a certain point," Brackett said.

Starting in 2015, Shyp moved to employees, who get workers comp, reimbursement for driving expenses, overtime pay and health insurance.

Those benefits sound good on paper, but former Shyp courier Paula Van of Los Angeles preferred her status as a contractor. After the switch, her pay dropped from $16 an hour to $14, and she had access to fewer available shifts. Shyp ultimately laid her off in April.

For some, launching their on-demand start-up with independent contractors was a given. There is a sense that all such companies use the model popularized by Uber, said Jordan Brown, founder and CEO of on-demand moving company Lugg.

"We definitely didn't talk about it that much," he said, of his team's decision to label its 300 movers as independent contractors. "We felt like it was the right call, and went for it."

San Francisco-based Lyft insists that making drivers employees would jeopardize the flexibility that makes the app popular. Drivers would have to report for scheduled shifts instead of choosing where, when and whether to work, the company argues.

But some on-demand start-ups are trying to marry employee benefits with a flexible schedule. Eden's IT workers and handymen have employee benefits and still craft their days in the typical on-demand fashion. The Eden platform tracks their hours, and if employees work an average of 30 hours a week over eight weeks, they are given benefits. If not, they are considered part-time employees.

The software also knows when employees work overtime and limits the jobs available for employees approaching the 40-hour benchmark.