Employees vs. Independent Contractors for On-Demand

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Mark Dabbs

15 Jun 2018 - 7 min read

Disclaimer: This article offers general information about using Employees vs. Independent Contractors for on-demand services. It’s not legal advice: for that, we suggest you consult legal counsel.

Making it easy for others to participate in your business is a big reason why some companies do so well in the On-Demand economy. Previous articles have looked at three big and three small businesses that have been very successful.  In nearly all of these successful On-Demand business examples, service providers are called on to – do what they already do.  As we also examined previously, supply and demand are not the same everywhere.  And, just as importantly, labor laws are not the same everywhere.   That’s especially true when talking about using employees vs. independent contractors when it comes to On-Demand services.

Big Benefits and Scalability of On-Demand

It’s a fundamental mantra of the On-Demand economy that “Access is Better than Ownership.”  The vast potential of On-Demand comes from increasing the efficient use of people’s unused assets (inventory, equipment, property, skills, etc.) at scale.  Traditional businesses own, manage and maintain nearly everything related to business operations – offices, vehicles, equipment, inventory, not to mention insurance and taxes.  Equally, most businesses rely upon employees for the majority of their work and productivity.

But, as the owner of an On-Demand business, you really want to have only two points of focus:

  1. Your technology (often in the form of a mobile application)
  2. Core employees to help you grow your business.

Theoretically, you could get by on a skeleton crew – business development, marketing, customer support, a CPA, plus a solid Human Resources Team – and access to legal advice.   A team of 6-10 employees could conceivably manage On-Demand operations across dozens of cities.  That’s an enormous advantage by any standard of comparison to traditional business models.

Simple?  Well, yes and no.  It really depends.  There’s one real catch – labor laws.  However, simply being aware that labor laws are not uniform puts you in a position to resolve most issues so they never become problems.

Preferably, you’d like everyone who signs up with you as a service provider to be an independent contractor.  After all, their role as a service provider is to deliver the product or service you offer to your customers.   That’s most often their product or service when it comes down to it (for example, Uber drivers).  Your On-Demand business makes money by offering a service and generating leads.

Who’s the Boss?

For a great many reasons, issues around using employees vs. independent contractors are probably the #1 problem area for many businesses in the On-Demand world. Who holds the liability when something breaks? Who pays the taxes? We might call it the “Who’s the Boss Test.” For present purposes, the magazine Entrepreneur offers a simple explanation of the legal difference between employees vs. independent contractors. The article still holds true, if dated. Consultation with a legal expert is always advised if you want the definitive answer.

Someone with an online store can find an easy fit by being a third-party seller for Amazon. A pediatric nurse practitioner for a hospital is still attending to children’s health if they make home visits for Q.care.  Rick Rome, owner of WashClub has an even easier case.  He makes a commission or royalty every time a customer uses his white label app for On-Demand drycleaning services with a participating laundromat.

So, in most cases, service providers are being paid to do what they normally do.

Problems begin when requiring a service provider to do something other than what they normally do.  This is not entirely a disqualifying factor for a viable On-Demand business. However, this has a strong tendency to slide onto the slippery slope of treating independent contractors as employees … without giving them the benefits of being an employee.

Labor Laws Are Not the Same Everywhere…

Employment laws in the United States are decided on a state by state (and sometimes by city/county) basis.  One difference is that all states are subject to the Federal Minimum Wage of $7.25 an hour which hasn’t changed since 2009.  However, individual states may set the minimum wage higher.  California changed its minimum wage to $10.oo per hour in 2016. For New York State, it is $10.40 as of 2018.

That’s just one simple difference how labor laws can vary by state.

Unless … You Live in California

If you live in California, you might be aware of the Private Attorneys General Act (PAGA) of 2004.  Very simply, the law allows employees to bring civil actions to recover civil penalties for all manner of grievances.  What makes this law particularly special is an unwaiverable clause that, “California courts will refuse to defer to the selected forum if to do so would substantially diminish the rights of California residents in a way that violates our state’s public policy.”   Essentially, residents of California are protected by California labor laws regardless of the state in which their contractual agreement is signed, and the particulars thereof.

It may sound tricky, but that’s why it is important to have a lawyer and an HR team.  An HR Team, among other things, keeps track of changes in labor laws.  Lawyers help make sure documents and contracts adhere to laws, then resolve matters if they ever go to court.   Both are important whether you have an On-Demand business or not.  Per statistics from XCELHR and Provident Financial Group:

  • Nearly 75% of all litigation against businesses involves employment disputes.
  • Plaintiffs win decisions on roughly 67% of employment cases.
  • Average trial defense cost is $45,000.
  • The median award for employment practices liability insurance cases runs $218,000.

Including elements of your HR Program in your app for service providers also help you protect your business – and resolve issues before they even start.  Leastwise, your HR Team pays for itself if it can successfully resolve a single dispute before it goes to court.

Employees vs. Independent Contractors – Lawsuits

Contractors being treated as employees has been the basis for numerous class action suits which strike at the very heart of a viable On-Demand business.

  • Zirx faced a class-action suit from its independent contractor service providers being treated as employees.  Zirx set their hours, required everyone to wear a uniform, and didn’t pay for overtime. Valets normally work for fancy hotels, restaurants and nightclubs as employees. Valets are normally not a standalone business. Zirx’s requirements involved someone doing other than what they would normally do.  Functionally, Zirx failed the “Who’s the Boss Test” for their independent contractors.
  • Homejoy, an On-Demand Home Cleaning Service, raised $38 million in VC funding.   Home cleaning is a pretty easy business to enter.  Others saw how easy it was, too.  In the face-off against competitors, Homejoy ran into quality of service, pricing and customer retention issues.  But, it was the same employees vs. independent contractors issue involving 4 lawsuits that ultimately delivered the coup de grâce which put Homejoy out of business.
  • Uber and Amazon have both faced lawsuits over the same issues regarding hourly obligations, quotas and how they terminate agreements with drivers. So this isn’t just an issue for the “little” guys.

HR Programs for On-Demand Businesses

When an On-Demand businesses start thinking it is a Tech company and therefore can somehow “automate HR,” it has a firestorm waiting to happen.  The importance of a Human Resources Program for working with a large contractor base cannot be overestimated.

While you cannot automate an HR Department, you can automate portions of an HR Program:

  • Add a Company HR Policy Handbook to Your App.  Have all company policies applicable to independent contractors conveniently accessible through your app.  This is a relatively simple, if “text heavy,” function.
  • HR Support and Push Notifications.  Make it easy for your independent contractors to connect with your HR Team and ask them questions.  At the same time, make it easy for your HR Team to reach all independent contractors or on a state/city basis via your app.
  • Standard Process and Due Process in Addressing Grievances.  Make it easy to resolve grievances in a timely matter.  This is an issue of mutual interest, relative to contractor pay, performance and status.  In today’s litigious-happy environment, this is your chance to nip lawsuits in the bud.

Before you launch your On-Demand business, you’ll be spending a lot of time and effort to sign-up as many service providers as you can.  With companies like Uber, drivers may have little or no direct personal interaction with employees in Uber.  If you follow this model, your App becomes your spokesperson, manager and trainer to your service providers.  Make it easy for service providers to engage your business.  Automate what you can, but don’t forget that your service providers are people — and ultimately require a human touch.

Additional Reading:

There's a Better Way to Manage Your Mobile Business

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