Homejoy, the three-year-old startup that raised $40 million in its drive to revolutionize home cleaning, said it's shutting down at the end of the month. The ostensible cause of death: Four lawsuits accusing the company of misclassifying workers as independent contractors, potentially exposing it to millions of dollars in penalties. Founder Adora Cheung said that she couldn't convert them into employees and still stay afloat.
“How do we support and do right by those people while remaining a two-way platform?” Cheung told the website Re/Code. “I wish we were able to do more for them, but the reality is that we can’t under the current regulatory environment.”
It would be easy to conclude, therefore, that regulations -- and the resulting litigation -- are what's strangling the on-demand economy. That forcing employers to put workers in boxes built for the 20th-century workplace, as some employers have alleged, is making it impossible to innovate new business models.
But that conclusion would be incorrect (and not just because closing up shop was a convenient way for the struggling Homejoy to shake the lawsuits, with a soft landing from Google). Already, some companies are finding excellent reasons to build themselves with employees from the ground up.
Take Managed by Q, an on-demand provider of office cleaning services. Co-founder and CEO Dan Teran says there was never much question what tax classification his workers would get, for a couple reasons: First, they needed to control the customer experience more than they could with contractors. "Our staff are very much part of our interface. Categorically, we needed to be able to train people," Teran says. Training is a key determinant of employee status.
And second, they needed to attract great staff. "We thought, 'what do the best people need?' and worked backwards to provide that," Teran says. Parents often provided the best service, and they really need health insurance, so the fact that Managed by Q provided it became a selling point in recruiting.
Of course, it is pricey to provide all those benefits and pay the extra taxes associated with employing people -- on the order of 20 to 30 percent more expensive. Teran says they deal with it by having other sources of revenue besides labor, like building maintenance and supply replenishment, so compensation isn't their only cost driver.
That works if you build the company from the ground up. But what about transitioning mid-stream? Teran thinks it's possible, even for an Uber or a Handy, the other large home cleaning service that's already vacuuming up the workers Homejoy has let go.
"All of these companies have done really incredibly things in building scale. Switching over would be no harder than building what they’ve built," he says. The problem, Teran thinks, is more psychological. "People have convinced themselves that this is what the future of work looks like. People become invested in one view of the world."
A number of companies already have executed the transition from contractors to employees, including Instacart and Shyp. And with all the court rulings boding ill for the contractor model, venture capitalists may look more favorably on human resource strategies that avoid the hassle. Shannon Liss-Riordan, a lawyer responsible for many of the lawsuits, thinks companies are getting the message.
"I would say most of the major 'on demand' companies have been sued, but there are many smaller ones out there that have tried to copy the Uber business model and need to take a hard look at whether they really want to take that risk," Liss-Riordan says. "I hope more will follow the lead of Shyp and Instacart that have decided to reclassify workers as employees and provide them the protections workers have."
Now, with all the lawsuits facing Uber and Uber-type companies, there's been much discussion of an intermediate status that might give workers on those on-demand platforms some protections, in exchange for a little more employer control. But it doesn't seem to be in the cards, if Labor Secretary Tom Perez has anything to do with it. His department has issued more guidance on how to tell the difference between the existing categories, and in an interview with C-SPAN's Newsmakers show on Friday, suggested that any legal changes weren't needed.
"This notion that we have to have either an independent contractor driving you, or else we can’t create a business model, is simply incorrect," Perez said. "We talk to innovators all the time in Silicon Valley and elsewhere who understand that 'I can create a new business model and take care of my workers.'"
That doesn't mean additional protections couldn't be extended to legitimate independent contractors, as well -- just that building a business by bending the rules is increasingly difficult to pull off.