A Blog by Jonathan Low


Sep 18, 2018

What Happens When Gig Economy Workers Become Employees?

When California legalized marijuana, it mandated that all workers, including delivery drivers, become employees so that customers - and law enforcement officials - would know who was legally authorized to transport the product.

Experience suggests that half of the previously designated independent contractors quit because they wanted flexibility (and perhaps less supervision), but the half who stayed appeared to appreciate the greater certainty. Just as importantly, the added costs did not 'destroy' the business model as many gig economy advocates had predicted. JL

Alana Semuels reports in The Atlantic:

The switch increased costs by 12 to 15%, a huge amount in a competitive industry. But customers like interacting with trained employees who know the product and take responsibility. “Customers are saying, ‘I like this more, these people represent your brand, they represent your product better.’” It’s more cost-effective to classify workers as employees than independent contractors, because they become more invested in doing a good job.
Ever since the emergence of companies like Uber and Lyft, businesses and labor advocates have engaged in an endless, largely theoretical debate about whether classifying workers as independent contractors—responsible for setting their own hours and paying for their own insurance, mileage, and other expenses—helps or hurts them.
On one side are gig-economy employers, who say workers like the flexibility of being an independent contractor, and prefer working when and if they please. On the other are labor advocates, who argue that gig-economy companies push much of the cost of their business onto workers, who don’t receive worker protections that were once standard, such as minimum wage and overtime protections.
The debate intensified in California in late April, when a state Supreme Court ruling found that employers must use a narrow test to determine how to classify employees, raising the likelihood that more companies will have to categorize gig workers as employees. Gig-economy companies lobbied the state to override the ruling, claiming that workers would lose their jobs, while labor advocates predicted that it would ensure that fewer people would have to rely on the state safety net. As usual, many of the people engaged in the debate about what’s best for workers were not the workers themselves.
But while the policy debate rages on, a real-world experiment has been testing what, exactly, would happen if companies had to switch a large swath of their workers from independent contractors to employees. As of January 1 of this year, cannabis-delivery workers are mandated by state law to be classified as employees. These rules, adopted after Californians voted to legalize marijuana in 2016, are a way for law enforcement to ensure that dispensaries take responsibility for their product, and that it is being handled by trained employees. Since they were enacted, dispensaries around California have started the process of switching delivery drivers, and in some cases other workers as well, from independent contractors to employees. Their experience highlights, more than any hypothetical debate, how there is no one easy answer for how to best structure the gig economy.
The decision to require delivery workers to be employees was very deliberate, according to Barry Broad, a Sacramento lobbyist who represents labor clients including the Teamsters and who was involved in the negotiations. Government officials thought that for the industry to be stable and accountable, independent contractors shouldn’t be carrying around marijuana, especially given that they could also be simultaneously driving for another gig-economy company. Law enforcement also needed to know, if they stopped a driver with a car full of cannabis, who was responsible for that cannabis, and so preferred that the drivers be employees of licensed dispensaries. There was another reason, too, Broad told me. “We wanted to make sure there is not a situation where there’s just gross exploitation of workers,” he told me.
Cannabis companies got on board, too, a marked contrast to other gig-economy companies. Jerred Kiloh, the president of the United Cannabis Business Association (UCBA) Trade Association, which represents legal dispensaries in Los Angeles, said that his organization wasn’t initially sure whether to support the rules or fight them. But unlicensed dispensaries were pushing back against any regulation, and licensed dispensaries worried that the proliferation of independent contractors would lead to the creation of a “gray area” in which customers didn’t know who was actually selling the product, and if they were buying from a licensed dispensary, he said, so they came around to regulation.
Workers are split on whether they like the changes. Sky Siegel, the general manager for the Perennial Holistic Center in Los Angeles, said about half of his drivers preferred being independent contractors, and quit before the change went into effect so they could find other gig jobs. Some left because Siegel can’t yet afford to offer them benefits, so he is limiting employees to 30 hours a week so as not to trigger IRS provisions that would categorize employees as full-time. Though they received minimum-wage protections under the new rules, many workers decided that 30 hours a week, even as an employee, was not enough.

But for the half who stayed, some parts of the job are easier. Rather than using their own cars to make deliveries, they use vehicles provided by the dispensary. The dispensary withholds their taxes, so they get to avoid the April panic that’s become a rite of passage for gig-economy workers. Because of California labor laws, if they work shifts that last more than eight hours a day, 40 hours a week, they receive overtime pay. Their shifts follow a regular schedule now, replacing the free-for-all that would happen in the past when new shifts were posted (Mondays at 4:20 p.m., of course).
Matthew Johnson, 24, is one of the employees who stayed on after the transition. He’d been driving for companies like DoorDash and Grubhub before he started working for Perennial, so he was accustomed to being an independent contractor. But he likes the predictability, job security, and guaranteed hours of being an employee. He has even moved up the job ladder: As an employee keyed in to what was happening around the office, he started doing some events with Eaze, the start-up that works with Perennial and other dispensaries to manage deliveries. He showed his bosses that he was a hard and dedicated worker, and was able to suggest some tweaks to the platform that made it run more smoothly. He got a promotion, and now, in addition to driving, he also manages customer-support service and operations for Perennial.
Johnson now thinks all gig companies should switch to the employee model. “I think that with the amount of hours people work, and the type of hard work they put in for these companies, they deserve to be employees,” he told me. “Sometimes the companies just throw them away, like they’re disposable.”
But Earl Kim, who started at Perennial as a driver and now also works in operations and management, is less sure that the change has been positive. Some workers don’t like that there are fewer hours available, and that shifts are more regimented, he said. Before, if you finished your shift early, you could leave; now you are getting paid by the hour, rather than by how much work you complete in a period of time.
Employers are divided on the change, too, largely because categorizing workers as employees has a much higher up-front cost to companies. Having employees means more meetings, more tracking of people’s progress, more coaching workers who might need improvement, more hoops to jump through when you want to fire someone.
Kiloh, the UCBA president who also owns the Higher Path cannabis collective in Los Angeles, told me the switch increased his costs by 12 to 15 percent—a huge amount in a competitive industry. But he’s targeting older customers, and he’s found they like interacting with trained employees who know the product well and take on responsibility for any questions they might have. “Customers are saying, ‘I like this more, these people represent your brand, they represent your product better,’” he told me. Kiloh, who has a master’s degree in economics, actually thinks it’s more cost-effective to classify workers as employees than independent contractors, because they become more invested in doing a good job. Still, he says he’d prefer to be able to have mostly employees and a few independent contractors during busy periods.
Siegel, of Perennial Holistic Center, told me that the switch wasn’t much of a headache; he had already been using a payroll company so just had it handle the new paperwork. He also has to closely track how many hours people are working, because lots of overtime pay could hurt his bottom line.
It is unclear if the April California Supreme Court ruling, in Dynamex Operations West v. Superior Court, would rally companies outside of the cannabis industry to switch its workers to employees. “Dynamex was sort of a bomb to how California had previously defined independent-contractor relationships,” said Jeffrey David, an attorney with an employment practice at Call & Jensen. He’s expecting to see a lot of litigation from independent contractors who say they should be classified as employees. But Veena Dubal, a labor professor at the University of California Hastings College of the Law, told me that the only thing Dynamex would really change is that workers would have to be employees for purposes of California minimum-wage and hour law. So driving companies would have to ensure that drivers are making the state minimum wage, but little else, she said.
Regardless, gig-economy companies including Uber, Lyft, DoorDash, Caviar, Handy, Instacart, and Postmates say that making drivers employees could drastically change their ability to stay in business. In a June letter to California Governor Jerry Brown, they wrote that the ruling would “destroy” California businesses and independent-contractor jobs. They argued that independent contractors who like the flexibility of gig jobs will lose work opportunities, and that the ruling will make it more difficult for people who want to run their own small businesses, or just do gig work as a side job. A poll conducted by EMC Research in August found that only 7 percent of independent contractors would prefer to become an employee and no longer be classified as an independent contractor. (It was sponsored by the I’m Independent Coalition, which supports classifying drivers as independent contractors.) The majority of Lyft drivers drive for fewer than 20 hours a week, and “tell us that this flexibility is incredibly important to them,” Adrian Durbin, a company spokesman, wrote me in an email.
If workers truly are ambivalent about becoming employees, the push to get workers reclassified may find itself stalled. Dubal has studied previous instances when employers were forced by law to switch workers from independent contractors to employees, such the 1996 court decision that won San Francisco taxi drivers employee rights. Workers were divided about whether they wanted to become employees in that and other cases, Dubal found, so it was difficult for labor groups or individual employees to rally workers around the cause and push for enforcement. They might have won the court cases, she found, “but lost the larger war for economic justice.” In all three of the cases she studied, employee-rights laws went unenforced for years, because workers either didn’t know they had thoserights or were afraid to ask for them. Some companies also changed the way worker jobs were structured to avoid having to make workers employees, Dubal found, and workers were not united enough to push back against those changes. 
A few employers already voluntarily classify delivery workers as employees. Enjoy, which delivers high-end technology products to consumers, is one of them. Ron Johnson, the company founder, who has worked at both Apple and JCPenney, told me he wanted to hire people who saw the job as a career, rather than as a gig. Workers still have some flexibility—they work 10-hour days, four days a week, but can schedule those days in advance, pick which days they want to work, and easily switch the cities they work in.
“We have worked really hard from day one to provide employees the freedom of the mobile economy with the hallmark of a great job in a more traditional economy,” Johnson told me. It was, at first, difficult to predict how many employees he’d need, and how many hours they should work, but the company figured it out, and customers prefer having trained workers, Johnson said. Turnover is extremely low, which is better for his bottom line.
Similarly, Managed by Q, which contracts with companies to run workspaces, only hires employees, Dan Teran, its founder, told me. Workers set their own schedules but also have stability, training, and benefits, he said. “There’s a false choice between flexibility and good jobs,” he told me.
But those companies all started from the beginning with employees, not contractors. Switching is a whole different matter entirely. Especially when there’s billions of dollars of venture capital at play. Glenn Kelman, the CEO of Redfin, the real-estate brokerage, told me that venture capitalists and investors pushed back forcefully when he told them he wanted to classify real-estate agents as employees. They were so obsessed with the problems of hiring employees rather than contractors that Kelman’s funding meetings would be entirely spent on the slide about worker classification in the pitch deck, and the investors would eventually decline to fund the company, he said. He stuck with the employee model for real-estate agents, and told me that it paid off, since he has lower attrition than the industry average and higher customer loyalty. But he admitted it was difficult at first.
Cannabis dispensaries switched drivers from independent contractors to employees and their businesses didn’t crumble. They didn’t have much of a choice—as California ushered in legalized marijuana, those who wanted to be a part of what could be a billion-dollar business had to play by the rules set by the state. Gig-economy companies like Uber and Lyft are also in a growing and highly lucrative marketplace—Uber alone was valued at $72 billion earlier this year. Those companies complain that their business model wouldn’t work if they made workers employees, yet other companies have shown that it can be done.


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