A Blog by Jonathan Low


Feb 19, 2015

The Gig Economy Is Being Sued to Death: Is It Doomed?

The Free Agent Nation has become the Gig Economy. From empowered, enlightened and independent to cowed, desperate and increasingly angry.

And when people believe both that they are being taken advantage of - and - that they have a case, they sue.

Companies that profess to engage independent contractors are finding that the courts are no longer so willing to protect systems that cross the line from providing 'opportunity' to demanding adherence to work rules, codes of conduct and processes.

The cost advantages that the ability to ignore wage and hour laws as well as the rest of the employment protection structure designed and implemented in the 20th century is significant. Whether that advantage is necessary or simply opportunistic and self-aggrandizing is open for debate.

At issue is whether the courts and the society that supports this economy is willing to continue supporting expedient tactics whose benefits are so unevenly distributed. JL

Sarah Kessler reports in Fast Company:

This rising legal retribution is a huge threat to the gig economy. Not being responsible for employees’ taxes and benefits allows companies 20% to 30% less in labor costs, leading to numbers like Uber’s $40 billion valuation. Lose this workforce structure— and you lose the gig economy.
When Vilma and Greta Zenelaj came across a Craigslist job ad that promised they could make as much as $22 an hour and get paid fast, it seemed like a good deal. The Albanian sisters had moved to Santa Monica to get a foothold in the film industry, and though they had produced a few independent features, they had run out of savings before they could also make a living. Now they were desperate to pay their bills.
Handy (then Handybook), the company that posted the Craigslist ad, is best known as a cleaning service. But unlike Merry Maids or your local cleaning franchise, it doesn’t actually employ any cleaners. Instead, it relies on an army of independent contractors to complete jobs, taking a 15% to 20% commission of every hour worked. It’s part of the "gig economy," a much-hyped new class of the service industry where workers are expected to operate like mini-businesses. The influence of these companies is growing: according to an analysis by Greylock Partners, the value of transactions over platforms such as car services Lyft and Uber, grocery delivery service Instacart, courier service Postmates, and others could grow as large as $10 billion this year.
But the Zenelajs had never heard of the gig economy, and it wasn’t until orientation that they realized they would not be employees of Handy.
Soon they were booking up to four cleanings a day through the platform. Handy promised to turn them into entrepreneurs, and it was true that when things went wrong, they were responsible: They didn’t get paid to wait for a client who was running up to 30 minutes late, though they drove to his house (Handy does reimburse cleaners for one hour if the client doesn't show up); they didn’t get paid if they stayed home sick; they didn’t get paid when they got stuck in traffic between jobs. There was no overtime pay or benefits, and they had to buy their own supplies and gas.
But the sisters allege that other kinds of work independence were a farce. When they couldn’t finish a job in the allotted time slot, they had to call customer service if they wanted to stay longer for more pay. First-time clients could not book cleanings with them specifically, which made leveraging relationships for recommendations difficult. They say there were suggestions, which they interpreted as rules, about how to listen to music (only with headphones, with permission from the customer) and go to the bathroom (discreetly). After about two months, both of them were banned from the platform: Handy says one sister performed poorly and the other sister funneled jobs to her after she was banned. (Vilma and Greta say they had just teamed up to complete jobs, which is also against Handy's terms of service, and that's why both of them were fired.)
"It is not fair, because there are laws here," says Vilma. "They are claiming to be just giving us contracts, and they’re not. They’re acting like an employer. But they’re not paying for it."
She and Greta filed a class action lawsuit against Handy in October, alleging that the company misclassified them as independent contractors. They are seeking compensation for missed lunch breaks, minimum wage compensation, reimbursement for business expenses, and overtime, in addition to other penalties. According to Handy’s math, this compensation would cost $291,000, not including attorney’s fees. Not only that, if Vilma and Greta prevailed, the lawsuit would also apply to all its current and former workers in California over the last four years. As of this past fall, that was about 2,000 people. That’s a potential penalty of almost $600 million—a lot of money for a company that has only raised about $42 million in venture capital.
Lawsuits like the one being brought against Handy are just the most threatening cloud in a brewing storm. Uber drivers have protested in San Francisco and Los Angeles and gone on strike in New York. Anecdotes in high-profile stories about Homejoy, a cleaning service similar to Handy, detail grueling hours and so little pay that in one instance, the worker was homeless. Workers on Amazon’s Mechanical Turk, an online platform that pays independent contractors cents per task, recently orchestrated a letter-writing campaign to Jeff Bezos asking for him "to see that Turkers are not only actual human beings, but people who deserve respect, fair treatment, and open communication." Legally, Uber and Lyft are also facing charges of misclassifying workers, and a case against an online work platform called Crowdflower that uses independent contractors to complete tasks is in the process of being settled.
If you had the liability that we’re talking about for Handy, it would shut a lot of these companies down.This rising legal retribution is a huge threat to the gig economy. Not being responsible for employees’ taxes and benefits allows companies like Handy to operate with 20% to 30% less in labor costs than the incumbent competition, leading to eye-popping numbers like Uber’s $40 billion valuation or Instacart’s latest $220 million round of funding. Lose this workforce structure—either by a wave of class-action lawsuits, intervention by regulators, or through the collective action of disgruntled workers—and you lose the gig economy.
"If you had the liability that we’re talking about for Handy, it would shut a lot of these companies down," says Shelby Clark, who runs an organization for sharing economy workers called Peers, which is at least partially backed by stakeholders in the platforms they work on. Craig Shapiro, the founder of the Collaborative Fund, which has invested in sharing economy companies, puts the conundrum like this: "It translates valuing something like Uber or Lyft as a software technology company," he says, "to [valuing it as] something more like a traditional transportation business."
What’s at stake with these lawsuits and protests? The very definition of "employee" in a tech-enabled, service-driven 21st century American economy. Gig economy companies do not own cars, hotels, or even their workers’ cleaning supplies. What they own is a marketplace with two sides. On one side are people who need a job done—a ride to the airport, a clean house, a lunchtime delivery. On the other are people who are willing to do that job. If Uber and other companies are going to be as big as some claim, a new deal has to be brokered, one that squares the legal rules governing work with new products and services. What benefits can you expect from a quasi-employer? What does it mean to be both independent and tethered to an app-based company? The social contract between gig economy workers and employers is broken. Who will fix it, and how, will determine the fate of thousands of workers and hundreds of millions of dollars.

In a certain light, the gig economy looks like a dream; after all, full-time employment has been falling for years. Between 1995 and 2005, when the government kept data on what it calls "contingent workers," about 30% of the labor force fell into this non-full-time-employment category. In 2009, employment law firm Littler Mendelson estimated that about half of the jobs added after the recession will be contingent, making the workforce 35% freelance, temp, and part-time workers. A year later, Intuit estimated that it will be more like 40%. Meanwhile, the United States has a record number of 2.87 million temp workers, who arguably occupy the bleakest corner of the contingent worker universe.
Thanks to these new on-demand startups, though, whether you’re a stay-at-home mom with a few odd hours to spare or a recently unemployed fast-food worker who needs to make ends meet while looking for a job, you can work whenever you want, doing whatever you want. "I like the flexibility and I feel like it gives me a better work and life balance," says Chris Otey, who has worked as an independent contractor on Amazon’s Mechanical Turk for about the past five years. In the gig economy, you’re better than an employee; you’re a little business. "I want to live in a world where people can become entrepreneurs or micro-entrepreneurs, and if we can lower the friction and inspire them to do that, especially in an economy like today, this is the promise of the sharing economy," Airbnb’s CEO, Brian Chesky, once told the Wall Street Journal. Just like the government didn’t begin to regulate the Internet before it was a behemoth, these people argue, regulating this new economy before it’s fully created could halt innovation.
But the gig economy can also be interpreted as a loophole for avoiding labor laws—more of a familiar nightmare than a new dream. Robert Reich, a political economist and the former secretary of labor, compares it to the piecework system of the late 19th century, the very same system that led to trade unions and labor protections in the first place. "There is no economic security, there is no predictability, and there is no power among workers to get a fair share of the profits," he says. "You and I and everybody else, if the present trends continue, will be selling what we do to the highest bidder."
There’s not much public data about how many people try and fail to make money with gig economy jobs, and platforms are unlikely to volunteer it (Uber recently released some data about its drivers' pay, though it did not account for driver expenses like gas or disclose data about driver turnover.) But it’s safe to say that there are advantages to being an employee (security, safety laws, minimum wage, benefits) and that there are also advantages to being an independent contractor (freedom, independence). Similarly, there are advantages to hiring employees (quality control, dependable workers) and hiring contract workers (cheaper, don’t need to guarantee work). Where platforms get into legally dubious territory is when they try to claim the advantages of both systems at the same time. "These weren’t just people working for five minutes, they were putting in hours and effort," Otey says of his time working for one Amazon Turk user, a company called CrowdFlower. "I didn’t have control over the work I did. It was all done on their platform. I couldn’t choose my own hours. I had to work when they provided the work. They pretty much controlled all the aspects of the work that was being offered."
The laws that determine independent contractor and employee status vary from state to state and from situation to situation, but many of them focus on the question of how much control workers have over their work. If their employer is mainly focused on the outcome of that work, there’s a good chance they’re fairly being classified as an independent contractor. When their employer begins to control not only what work they do, but how they do it, that classification gets murky. So Handy, by doing things like giving workers suggestions for how to clean and asking them to wear a shirt with the Handy logo, made itself more vulnerable to a lawsuit. Similarly, though traditional taxi drivers are often independent workers rather than employees, a platform like Uber takes a certain amount of control when it fires them for low ratings or changes their fare prices. "Imagine going into work one day and your boss tells you that you’re going to have to do the exact same job you did last week but for 30% less money," is the way one Uber driver put it recently.
"They almost can’t help but step into the shoes of the employer," says Alek Felstiner, a labor lawyer with Levy Ratner, PC in New York who has studied independent contractors on platforms like Mechanical Turk. "They are going to have a choice between taking actions that make them more marketable, and thus becoming vulnerable as employers under these laws, and remaining completely hands off. But they can’t really can’t have their cake and eat it, too."

When I first met Dmitry Solominsky, in 2013, he worked full-time doing handyman jobs on TaskRabbit, a platform that matches independent contractors with workers for odd jobs like cleaning and moving. He was one of the platform’s top-earning workers in New York City, making about $35,000 per year, and he loved it. If he didn’t want to put pants on in the morning, he told me, he didn’t have to. And that was great.
But last summer, TaskRabbit changed its system from one where workers bid on jobs—sometimes ending up in a classic race to the bottom—to one where clients pay them by the hour. With this switch, the platform instituted a minimum wage of $11.20, which matches the highest minimum wage in the country.
This ostensibly good change, which TaskRabbit says led to its highest "NPS score" among workers ever, was disastrous for Solominsky, who suddenly struggled to make a living. "There are now hundreds of less [sic] tasks available," he wrote in an email to me in July. "It is incredibly difficult to string together consistent work," he reaffirmed in January. When I talked to him in February, he had pretty much given up altogether. "It’s frustrating to know that I had a consistent source of fairly good income that is now completely depleted, and I can’t really do anything," he said. Now he finds most of his handyman work elsewhere.
If Solominsky had built his own Handyman business, he would not be so impacted by the decisions of another company. But all he has of his supposedly independent business—his pages and pages of glowing reviews, his nearly unanimous five-star ratings—is tied up on the TaskRabbit platform.
Right now, our legal system only has two buckets for workers who aren't volunteers or interns. You are an employee. Or you are an independent contractor. Want to give people like Solominsky some security? Some benefits? Then you have to make him an employee. He doesn’t want that. Want him to be an independent contractor? Then there’s very little you can do for him that will not make you potentially vulnerable to a lawsuit like the one Handy is facing.
The risk of being sued has led many would-be gig economy companies to place workers like Solominsky into the employee bucket.
Alfred, for instance, is a company founded in 2013 that dispatches helpers to coordinate errands like laundry, cleaning, and grocery shopping. It is the kind of job that could easily be filled by independent contractors. But when Marcela Sapone, its CEO, thought about her product, she realized that it was dependent on relationships with workers, who as independent contractors she could not legally train or provide any benefits. "It could be a 1099," she says, referring to the independent contractor tax form, "but by making them employees we are essentially saying, look, we’re actually going to train you and give you a career path, we’re going to pay you a fair wage, and we’re going to guarantee you work." So she pitched investors a company that would rely on employees instead. It was a hard case to make—after all, hiring employees made her cost structure about 30% more expensive—but eventually she found investors who agreed to fund it. The legal risk, the risk of being asked to pay back-taxes by the IRS, was one winning point. "I think this is a battle that everyone knows is coming," she says, "and they’re making budgetary and emotional preparations to fight."
Zirtual, a company that provides virtual assistants, switched its workers from independent contractors to employees last year for similar reasons, telling press that "HR had begun to see the writing on the wall."
Other companies that seem well suited to the gig economy, like a package delivery service called Parcel, an on-demand laundry service called FlyCleaners, and an office-cleaning app called Managed by Q, have also made the decision to hire employees, citing their ability to ensure a quality experience. "We obsess about every detail of the interface that the customers interact with," says Managed by Q cofounder Saman Rahmanian, "and we realized it is very easy to put out an app and fix the bugs and make things look right, but the actual service, that service is being done by a human being, and if we want to control that interface, then we just have to have these people be part of the stack."
But even among these companies, who are taking what they consider the high road, some still wonder whether employees really are the right choice for most of the gig economy, or just the only alternative. Zirtual’s CEO, Maren Kate Donovan, for instance, could hire a different kind of worker when she was employing independent contractors, one that could work only 20 hours a week. Now she can't have employees and independent contractors doing the same job because it would imply misclassification. But wasn’t that prior flexibility worth something? Spend a weekend using UberX, for instance, and you'll find plenty of retirees and other people who are happy for the opportunity to make some income without any obligation to work a regular schedule. "I think it’s way too harsh right now," Donovan says of how the Department of Labor categorizes employees. "If we continue to not see reform, then it will probably cut out a lot of services and opportunities, because not everybody can put people on full-time or part-time paid benefits. It just wouldn’t make sense."

The pressure to push workers into one bucket or another—to follow companies like Parcel, Alfred, and Zirtual in naming them employees, or to call them independent contractors and give them even less training and support for fear of a lawsuit—is stronger than ever. Otey, the Mechanical Turk worker, sued Crowdflower in a class-action lawsuit in 2012, alleging that it had misclassified its workers as independent contractors. "It all comes down to the funders and angel investors and everyone else making money, and the people who are doing a lot of the work making nothing," he says, citing an interview in which the CEO said that the company "end[s] up paying people about $2 to $3 an hour." Last year, the company began working out a settlement (at press time, it was still in progress). Other lawsuits in the gig economy are also looking serious. In 2013, a federal court denied Uber’s motion to dismiss a class-action lawsuit alleging that it misclassifies its drivers as independent contractors. In September, a driver filed a similar class-action lawsuit against Lyft. According to Reuters, U.S. District Judge Vincent Chhabria said that California legal precedents "point pretty strongly in the direction" that "people who do the kinds of things that Lyft drivers do here are employees."
Perhaps most frightening for companies like Handy and Uber was when, FedEx—a company that many gig economy companies had pointed to as an analog example of why their hiring practices are legal—lost a string of the many class action lawsuits that allege it has misclassified its delivery truck drivers as independent contractors.
But some wonder if there’s not room for compromise in this system. "Is there sort of a new middle ground that works for everybody?" asks Clark. "Forcing us back into these old constructs, is that the right thing for the worker and for the growth of the economy?" After all, it’s not as though our current definition of an employee is working that great. "It is based on a model that is failing," says Denise Cheng, who studied peer economy labor issues as her masters thesis project at MIT. "As employment decreases, it’s not like the answer is trying to get more people deemed as misclassified."
One answer, of course, is that the gig economy should be destroyed if it can’t follow existing labor laws. "Any enterprise that depends on paying people less than minimum wage probably shouldn’t exist," says Felstiner. "That’s the reason we have minimum wage." Dan Teran, a cofounder of Managed by Q, thinks the question itself is a little odd. "The protections that have been put in place for workers have literally evolved over a century and weren’t accidental," he says. "I agree that there may be some middle ground, but I would say also that there are hundreds of thousands of businesses that have thousands of part-time employees."
Other answers allow for more change. Arun Sundararajan, a professor at NYU, has argued that many parts of the sharing economy could self-regulate, with oversight from the government, the way that nuclear power plants do. Peers, the organization that Clark runs, has released products that allow gig economy workers to reduce their risk by paying for their own safety nets, like an insurance policy that provides a loaner car for an Uber or Lyft driver to use if hers is in an accident. Janelle Orsi, a lawyer who specializes in sharing economy companies, has argued that workers should create co-op versions of popular platforms like Uber and Mechanical Turk in order to keep more of the profits. Others have supported creating a third category of worker that falls between an independent contractor and employee, which would allow companies to give their independent workers some benefits and training without fear of being sued for treating them as employees.
For its part, Handy denies that it misclassified workers, saying that workers "choose the Handy platform because it provides much needed flexibility by allowing them to book whatever jobs best suit them." The company's terms of service for workers, last updated in December, ask them to agree they are independent contractors no fewer than five times. A previous case brought against Handy in California alleging it misclassified workers was dismissed last year after the company argued it was out of the court's jurisdiction, but Felstiner says the settlement in the Otey case shows these types of lawsuits are "not so crazy that they’re going to get tossed out of court."
Lawsuits are a big, visible threat to the gig economy, but even if none are successful, there’s another, slower-burning problem that will corrode the gig economy if left unresolved. It’s a problem that gets worse every time a worker like Solominsky, who has completed almost 600 jobs on the TaskRabbit platform with nearly unanimous perfect reviews of his work, who the company once interviewed on its promotional blog, decides that there is nothing that TaskRabbit could ever do to win him back as a dedicated laborer. "They don’t have our interests at heart," he says. "It’s a shame, because they really lost lots of good people who used the site."


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