Some workers comp lawyers say the sharing economy is not fair. The so-called sharing economy has been a bright spot amid America’s growth malaise, with ride-sharing app Uber announcing last week that its latest financing round values the company at a cool $50 billion. But the political backlash is already building, and last week it claimed a casualty with the closure of fast-growing house-cleaning service Homejoy Inc.
The startup had raised some $40 million from venture capitalists including Google Ventures and operated in more than 30 markets. But CEO Adora Cheung said a lawsuit made it difficult to raise more funds to grow.
The assault on Homejoy is part of a much larger and increasingly organized attack on sharing economy startups by plaintiffs attorneys, Big Labor and the political left. No less than Hillary Clinton bowed to this movement last month when she lamented that the “so-called ‘gig’ economy” is “raising hard questions about workplace protections and what a good job will look like in the future.”
In the last year such companies as Uber, Lyft, HandyBook, Instacart, Postmates and Try Caviar have been slapped with lawsuits arguing that they have misclassified workers as “independent contractors,” which aren’t covered by most federal and state labor regulations. The lawsuits demand backpay for overtime, workers compensation, unemployment insurance, unpaid meal breaks and business expenses. Homejoy was accused of not providing 30-minute meal breaks every five hours.
This can raise labor costs by upward of 20%, and far more in California where workers-comp premiums exceed 14% of payroll in the transportation industry. Companies with 50 or more full-time workers would also have to provide health insurance under ObamaCare’s employer mandate. Some lawsuits claim that the time workers spend driving to jobs and making phone calls counts as “work” and must be compensated under minimum-wage and overtime laws.
Labor groups are driving this assault because independent contractors can’t unionize. Startups are also disrupting the market for services, providing efficiencies and cost savings that often out-compete unionized businesses.
Yet these businesses are multiplying precisely because they meet a consumer need with a supply of willing workers. Uber and competitor Lyft are well known, but Instacart, Postmates and Try Caviar deliver groceries, office supplies and restaurant meals for a small charge. TaskRabbit’s contract workers can fix plumbing, set up for parties, wait in line for tickets and help with moving.
The sharing economy has also been a boon for under- or unemployed workers, particularly young people and minorities. Workers get flexible schedules and expanded opportunities for their time and skills.
Workers typically get paid per job at rates that well exceed state and federal minimum wages. HomeJoy workers earned $15 per hour of cleaning but could boost their pay by performing more jobs and getting high customer ratings. Uber drivers receive 75% to 80% of rider fares but can make more by working peak hours. These incentives encourage productivity and better performance.
As part of the deal, workers must agree to certain terms and conditions—such as passing a background check and accepting the company’s pay rates. Uber drivers must use registered cars less than 10 years old. Some companies instruct workers how to dress and interact with customers.
The lawsuits claim that these requirements make workers employees. However, contracts are by nature prescriptive, and the distinction between independent contractors and employees is unclear because there are so many different government scripts.
For tax and ObamaCare purposes, the IRS uses a “right to control” test that weighs 20 factors. Yet for minimum-wage and discrimination cases, the feds consider how economically dependent workers are on employers. The National Labor Relations Board adopted a new 11-standard test last year, while asserting that the ultimate determination “will depend upon the factual circumstances of the particular case.”
States apply their own ambiguous and often inconsistent standards. In June the California Labor Commissioner glossed over the state Supreme Court’s 11-factor test and ruled that an Uber driver was an employee because her services were “integral” to the business. This slippery standard could cover Airbnb hosts too. Uber is appealing in state court, but unions hope it will bolster class-action lawsuits against sharing companies. The Teamsters are trying to organize Uber drivers in southern California.
It’s no accident that the attorney who sued Uber, Lyft and Homejoy— Shannon Liss-Riordan of Boston—spearheaded previous misclassification litigation against FedEx. Last year the Ninth Circuit Court of Appeals reversed a lower court ruling and held that FedEx drivers are employees. FedEx agreed to pay $228 million to settle worker claims, and the NLRB soon ruled that FedEx must bargain with the Teamsters.
With its $50 billion valuation, Uber can afford to resist this shakedown, but hundreds of other startups aren’t as well-endowed. Some sharing companies like InstaCart and Shyp are pre-emptively giving in. Unions and plaintiff attorneys hope to make a killing from the lawsuits, but the victims will be consumers, workers and the U.S. economy.