Silicon Valley May Be Liable for Huge Labor Claims

“Entrepreneur” is a French word for one who gets in the middle between a buyer and a seller. In the last couple of years, Silicon Valley start-ups such as Uber valued at $18 billion, Airbnb valued at $10 billion, and a string of other personal service providers have perfected the middleman model of “managed-service” labor that is converting millions of employees into “independent contractors.”  

Although most of these companies have operated at the low dollar end of the pay scale, many have big plans to move up the value chain to convert traditional high-paying full-time or part-time jobs fields like law, health care, and investment banking to contract labor. 

There are over 10 million independent contractors, according to a recent Harvard University research report.  The IRS publishes rules regarding determination self-employed status. “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.” The IRS emphasizes that a person is not an independent contractor “even if you are given freedom of action.” 

But according to a New York Times article regarding a study by venture-capital firm SherpaVentures, which has invested in start-ups like Washio (Uber for laundry), BloomThat (Uber for flowers), and Shyp (Uber for packages), “estimated that venture capitalists invested $1.6 billion in so-called “on-demand” start-ups in 2013 alone.”

SherpaVentures predicts that what they call the “freelance marketplace” is about to revolutionize work away from traditional full-time or part-time jobs, because “Perpetual, hourly employment is often deeply inefficient for all parties involved.” 

As someone who is an independent contractor; I meet the IRS independence requirements because I generate my own consulting clients, set my own hours and provide my own product.  But a low income person being told by a Silicon Valley corporation where and when to go do laundry, flowers or packages for the corporation’s customer doesn’t sound very independent.  

The real game in the freelance model seems to be that the workers are being treated as if they were on payroll without getting any of the benefits afforded to payrolled employees. Some Silicon Valley insiders, according to the Times article, are beginning to “worry that start-ups overreliance on contract workers could come back to haunt them if they run afoul of longstanding labor rules. If that happens, these high-flying disruptors could be facing serious disruption themselves.”

This year’s TechCrunch Disrupt conference in San Francisco focused in on what they called the “1099 economy” as a way to innovate labor practices of Silicon Valley start-ups. Uber, Homejoy, Lyft, Handy, Postmates, Spoonrocket, TaskRabbit, DoorDash, Washio, and dozens of others claim only to provide “leads” and thus do not file a W-2 with the IRS for the workers they direct and pay for the service. Instead, they file the 1099-MISC independent contractor form with the IRS.

Homejoy, who provides maid services, insist that its method is better for workers. “Our partners are free to create their own availability and scope of work,” CEO Adora Cheung said to the Times via email interview. “That flexibility is one of the main appeals of the platform.” As for the homeless cleaners, Homejoy says its Bay Area contractors earn, on average, between $17 and $20 an hour, well above minimum wage. “While we sympathize with anyone who is in an economically difficult situation, we don’t think that relating that to Homejoy’s website or its practices makes sense,” Cheung says.

The benefit of a corporation opting for 1099 contractors over W-2 wage-earners is obvious for the employer. It lowers your employment costs, because contract workers aren’t eligible for health benefits, unemployment insurance, worker’s compensation, or retirement plans. And contractors also don’t need to be fired if they fail to perform or the company wants to do a mass layoff. 

But the IRS has fought these issues in the past and has a 20-factor test to determine whether businesses are treating their service providers like contractors or employees. It seems that eventually these companies are going to be attacked for their labor practices, vulnerable to huge tax bills and potentially mass tort lawsuits from employees.