The on-demand economy has given rise to the on-demand worker. Startups like ride-hailing app Uber, courier service Postmates, cleaning services Handy and Homejoy, and grocery delivery app Instacart don’t hire employees. Instead, they act as marketplaces for labor, where every task is a separate transaction between a customer and a member of a distributed workforce. Uber, for instance, connects drivers with people who need a ride. Postmates connects couriers with people who want something delivered. Handy connects cleaners with people whose kitchens need mopping. And so on. The companies make money by charging a commission for the lead that they provide workers who sign up to take jobs through their platforms.
Because these startups have positioned themselves as mere brokers in these transactions, they aren’t required to pay workers benefits or guarantee them a minimum wage. And because they aren’t employees, workers have the freedom and flexibility to work whenever they want.
At face value, building a workforce this way seems like a no-brainer for many startups, which save about 30% on the cost of labor by paying workers as independent contractors.
But a new wave of app-based service businesses are rejecting this workforce strategy. Like their peers who dole out jobs by the gig, these apps empower customers to do everything from order lunch to get their laundry done with the push of a button. At the other end of their buttons, however, are actual employees who make the deliveries, do the cleaning, and run the errands, even if those tasks are doled out by apps. Startups that have foregone the “gig economy” or “1099 economy” in favor of hiring workforces include office cleaning and management service Managed by Q; on-demand restaurants Munchery and Maple; shared-ride service Chariot; and laundry service FlyCleaners. Parcel, a company that receives packages on its customers’ behalf and then delivers them at a time when they’re home, and Alfred, a personal butler service that runs its clients’ household errands, also dispatch their own employees.
Their founders say the business benefits of hiring employees outweigh the extra 30% in labor costs they would save by doling out gigs by smartphone app.
“It’s easy to add up the cost savings from having independent contractors–you know exactly how much you are saving per employee by not paying for workers’ compensation–but it’s much harder to quantify all of the benefits of having full-time employees that, in our view, offset many (if not all) of 1099 savings,” says Caleb Merkl, the CEO of a delivery-only restaurant in Manhattan called Maple that hires couriers to deliver meals in less than 30 minutes. “If you look at our delivery team, they are essentially our only point of human contact with our customers, so it’s a case where who’s doing the job and how they are doing it is incredibly important to our success.”
Theoretically, Maple could, like Postmates, set up an app-based system that would allow a crowd of couriers to pick up delivery jobs whenever they were available. Like Postmates and Uber, Maple’s restaurant business is likely to experience rush periods and slow periods. With a 1099 model, it could offer more “gigs” during the lunch rush, and then not pay anyone to sit around and wait for an order when business is slow. Theoretically, that would make good business sense.
But Maple has very specific processes for its delivery team–specific instructions for checking an order out of the kitchen, for interacting with customers, for parking their bikes–and providing training or a setting routine for workers is legally risky if you’ve classified them as independent contractors. Maple also has a short time window, which makes committing employees to shifts–another no-no for 1099 workers–essential to its business.
Attempting to have the cake–the ability to train employees, schedule shifts, and curate a workforce practices that inspire trust–and eat it, without also eating the cost of paying employee-related taxes and following labor regulations, has recently led to a number of high-profile class action lawsuits. To both meet the needs of his business and not risk getting sued for treating independent contractors as employees, Merkl decided to hire workers. Other delivery-only restaurants like Munchery came to similar conclusions.
So did Jesse Kaplan, the CEO of Parcel. “We spoke to a number of contractor-based startups and decided that the inconsistent availability and high turnover rate of a contractor workforce wouldn’t allow for the stable operation we were looking to build,” he says. Lyft plans to spend $50 million acquiring drivers this year, and none of those drivers will have any commitment to take more than one job or cover a specific shift. Parcel didn’t want to be in that situation.
Any business that wants a repeating relationship with a customer also runs into a potential legal problem when considering a 1099 workforce. It would be difficult for Alfred, which dispatches butlers to take care of errands like grocery shopping and laundry service for its clients, to personalize its service–to remember where to unpack the groceries and where they prefer you to leave their laundry–if it allowed any available worker on a platform to accept tasks on a per-gig basis; each person would likely do the job a little bit differently. Assigning workers to routes also suggests they are employees. So Alfred hired them. “They are your walking, living, breathing brand ambassadors, and we should treat them that way,” says the company’s CEO, Marcela Sapone. “At the end of the day, what our service provides is a relationship.” The benefits of committing a worker to repeat the same route also has efficiency advantage. “They can deliver a lot more deliveries per hour because they’re really familiar with where you are located and how you want it done,” Tri Tran, the founder and CEO of Munchery, says of the company’s couriers and drivers.
Training employees is another legal risk for companies that pursue a 1099 workforce. In a recent class action lawsuit against on-demand cleaning service Handy, for instance, the plaintiffs who allege they were misclassified as independent workers cite being given a uniform, being asked to clean in a specific way, and being told how to interact with customers as evidence of allegedly being treated as employees. Not providing this type of guidance, however, can make it difficult to create a consistent experience for its customers. Even when 1099-powered startups offer customer support, they legally have little control over how a provider does the job, which can lead to complaints like hit-or-miss service, no-shows, and poor quality, even if some providers are doing a great job.
Some on-demand companies, like Uber, have done impressive gymnastics to get around labor laws, like providing training from outside vendors. Office cleaning service Managed by Q decided it was worth the additional cost to hire cleaners as employees instead of scheduling independent contractors. Before the startup’s 130 or so cleaners (or “operators,” as the startup calls its workers) are dispatched to offices, each of them completes more than 20 hours of paid training, including three hours of one-on-one on-site instruction and a 60-question exam. Alfred has 50 “client managers” in Manhattan complete five levels of training partly based on the program that Starbucks uses to train its baristas. Part of the process involves shadowing an existing client manager for two weeks. Because Alfred managers are employees, they can be instructed to do the task in specific way–when they enter a home, for example, they’re told to knock and remove their shoes–without fear of legal reprisal.
As on-demand services creep further into our lives, trust is another factor that is pushing some companies to consider employees over on-demand labor. As long as someone who gives us a ride to the airport doesn’t have a record of serious safety violations or, you know, sexual assault, we might not care whether they’ve been extensively vetted and trained by a company. But that calculus becomes a bit different when we’re asking someone to manage our personal emails, allowing them to transport our children, or handing them keys to our home. “There’s a threshold,” says Semil Shah, an investor at a fund called Haystack that has made investments in both Managed by Q and DoorDash, which uses on-demand workers to make deliveries. “If somebody comes into your home to do something, the threshold is higher than bringing something to your doorstep.”
But even in these latter cases, trust is not meaningless. Asking users to decide–based on past reviews and ratings–whether the person who they’re hiring will do a good job can impact the user experience. “I think there’s going to be very few instances where you won’t want a degree of trust or quality in the on-demand service,” says Hunter Walk, a partner at Homebrew VC who has invested in both on-demand companies that use independent contractors, as well as on-demand companies that hire employees. “The greater extent that the company and its brand can stand for that, as opposed to having to worry about the individual rating of any one participant in the system, I think that the less friction there will be for developing a habit using that product.”
And that trust can go both ways. “If we invest in training, career growth, and give them a job they love and want to keep, then they are going to stay committed–they will invest in a relationship with the managers at that [client] company and want to do a job and stay a long time,” says Laura Castaing, Managed by Q NYC’s general manager. “With independent contractors, it would be hard to guarantee that quality.”