Tech’s push to “disrupt” workers is a legal & social timebomb

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Startups that push the limits of labor law are getting socked by lawsuits, and risk paying out big to employees and the IRS. These episodes are not just a threat to the business model of many tech ventures.

The labor flare-ups are also a stubborn reminder of a growing, and possibly permanent, servant class who are powering the tech industry’s dreams of disruption.

The contractors who clean toilets

When two sisters sued maid-on-demand service Handy last month over alleged labor law violations, the lawsuit felt almost inevitable. Not only had Handy been filling Facebook feeds with ads to clean homes for the improbably low price of $29, the startup also adopted the bold legal stance that the workers who do the clearing are not employees but “independent contractors.”

This notion of a “contractor” wearing a uniform and scrubbing toilets for $29 may seem far-fetched (Handy, for its part, claims it pays $15-$22/hour and doesn’t require uniforms). But it’s just one of the more striking examples of a phenomenon in which more and more companies are re-classifying their workers as contractors in order to save costs associated with having employees.

“When the market tanked in 2008-09, we started seeing more independent contractor situations. We first started seeing it in landscaping and construction, then it spread to different industries,” said Nicholas Woodfield, a general counsel at the law firm Employment Law Group.

The upshot is that the traditional notion of a contractor, which invokes images of a skilled tradesman with tools, has expanded to include laborers, maids and, well, anyone — especially in Silicon Valley.

As New York magazine reported in September, the Valley is now awash in so-called “1099 companies,” a reference to the IRS tax form filed by independent contractors. These startups include well known firms like Uber and TaskRabbit as well as a slew of smaller outfits like Handy, Homejoy and Washio. All of them take a category of services normally performed by employees — washing, cleaning, driving and so on — and repackage it as a web-driven platform powered by contractors.

And for many people, this has been a boon. For consumers, the slew of contractor-driven companies means prompt and easy access to an unprecedented array of services. Meanwhile, for workers, the 1099 business model offers an easy way make a few extra bucks without the constraints of a formal job.

The trouble, however, is that many in this new worker army look more like conscripts than contractors. And their teeming ranks pose legal and ethical challenges to one of Silicon Valley’s favorite philosophies.

Disruption and its discontents

Transforming toilet cleaners into contractors is one example of how the tech industry is shaking up the labor market. But more broadly, Handy’s unusual arrangement also embodies a Silicon Valley ethos that tech boosters like to call “disruption,” and that detractors call “regulatory arbitrage.”

The basic idea is that a startup takes a run at a regulated industry and tries to break it with the help of cool tech and a big pot of venture capital dollars. If regulators object to its business model, the company often deploys a PR charm offensive to portray its would-be overseers as anti-progress — and to dissuade them from enforcing laws until the startup is too big or too popular to be stopped.

Examples abound: Airbnb flouted city zoning laws to compete with hotels in many cities; Uber and Lyft thumbed their nose at taxi regulations and are now a fixture of urban transport; messaging service Snapchat played fast and loose with privacy rules but became a hit messaging service.

Not every attempt succeeds, of course. Aereo, the startup that sought to challenge outdated TV rules, had to shut down after the Supreme Court found that its business violated copyright law. But many other companies are winning the arbitrage game, staving off lawsuits and persuading the public, and often politicians too, to take their side against fuddy-duddy regulators.

Skating over legal lines comes with a price, of course, but many of these companies are able to pay it. Uber and Airbnb, for example are up to their eyeballs in court cases but, since they are now super-charged by VC money and riding an enormous user base, it’s a safe bet they will survive whatever punishment comes their way.

And whatever you might think of such tactics, it’s hard to deny that consumers are often the long-term winners of the disruption that comes with regulatory arbitrage. After all, few would dispute that Uber’s app is way more efficient than a taxi dispatcher, and Google’s digital library (which you can call a copyright disruption) has been a godsend to readers and scholars everywhere. In short, whatever legal ripples these companies create, most of them deliver an overall net benefit to society — which is part of the reason they ultimately prevail.

In the case of many contractor companies, however, the net benefit to society is harder to see. Meanwhile, the penalties they are courting while skating on the edges of labor law could hurt far more than those that befalls other types of tech disruptors.

Disrupting wages… and the IRS

Abraham Lincoln reportedly asked, “If you call a dog’s tail a leg, how many legs does a dog have?” His answer was,
“Four. Calling a dog’s tail a leg does not make it a leg.”

The quote is from a California appeals court decision this summer, in which judges threw cold water on the idea that employees stop being employees if you call them contractors.

The case concerned the huge package company FedEx, which had insisted that its delivery drivers were independent contractors — never mind their uniforms, logo-clad vans and the company’s control over the drivers’ schedule and pay.

And FedEx isn’t the only delivery company to run afoul of the employee/contractor divide: Lasership, the company responsible for many of Amazon’s shipments, settled a similar case with drivers in Massachusetts late last year. Google, meanwhile, conceded under pressure last month that its security guards are employees, while Uber now has its own contractor case on its hands.

Disputes over employees versus contractors are hardly new, of course, and the court cases continue to revolve around a 1947 Supreme Court case that provides a series of factors to determine that classification. The question now is how those factors apply to the army of “contractors” powering the Silicon Valley startups.

Legal scholars suggest that these companies — the Task Rabbits, the Handys and so on —  lie on a continuum. On one end will be those where the worker brings capital or a specialized skill, and exercises considerable control over how the work is done. On the other end is, well, the maids.

“Arguments that janitors are independent contractors have mostly been rejected,” said Cynthia Estlund, a labor law professor at New York University. “With cleaning people, it’s definitely pushing the line.”

So what happens if courts conclude Handy and other companies have crossed that line? For starters, the companies will not be able to rely on their own contracts as a defense against lawsuits. As Estlund pointed out, federal labor rights are like anti-discrimination laws in that courts will not allow companies to claim that employees have opted out of them.

And the situation is more serious still since alleged labor violation by the likes of Handy would translate into real money owed to real individuals. Unlike others forms of tech disruption that fall afoul the law, such as those involving zoning or transport or privacy rules, the damages at stake are not abstract.

In the latter type of cases, companies can often cop to a symbolic settlement with an agency, since the harms are hard to quantify. In the case of underpaid maids, however, the damages can be easily calculated from business records in the form of dollars per hour, and would very likely be valued at hundreds or thousands of dollar per person.

And that can be just the first financial ordeal that befalls a company caught on the wrong side of the employee/contractors divide:

“The misclassification of employees is a substantial tax dodge that hits the Treasury,” said Woodfield the labor lawyer, who noted that fewer bona fide employees in the workforce means fewer payroll taxes for the IRS.

Woodfield said that the IRS is on the lookout for companies that disguise employees and contractors, and that it can impose fines and even criminal penalties on violators. In the worst case scenario, then, reimbursing maids for unpaid overtime could be the least of Handy’s worries.

Silicon Valley’s labor law disruptors thus face a unique and severe form of financial penalty, even if their move-fast-and-break-things ethos is not particularly worse or different than other disruptive companies.

Is there a solution to superfluous people?

Silicon Valley is incredibly good at solving some of society’s hardest problems, and its ambitions span everything from driverless cars to personal medicine to reusable rockets. Yet, there is one problem that the tech industry is not only bad at, but is actively exacerbating.

That problem is what to do with the legions of superfluous people that digital disruption keeps producing — and who now serve as spare parts to power Handy, Uber, Task Rabbit and all the other piece-work mills. While there’s no doubt such gigs are ideal for some types of workers, reports by the New York Times and others make clear that many people take them because they have no other choice, and are regularly exposed to fear, uncertainty or exploitation.

In tech land, however, the response to the rise of mass under-employment often ranges from indifference to outright insensitivity: behold the VC in Forbes who extolls the Handy workers of the world to salute their “uncollared” status. Or the well-meaning but hairbrained attempts to address homelessness by encouraging the indigent to act as Wi-Fi beacons or mine bitcoin.

Let them eat digital cake, in other words.

It’s true that no one has the an obligation to solve the surplus worker problem. The CEO of Handy has no more duty to fix structural unemployment than I do to cure cancer.

Still, given that Silicon Valley disruption is upending full-time jobs in a raft of industries, from media to movies, it seems fair to ask why someone, somewhere can’t make solving unemployment the next “moonshot” to go with health-monitoring nano-particles or bringing airborne internet to billions of people.

For now, however, it appears that the fate of the Handy “contractors” will not be resolved by a tech miracle, but by a slow grind in the courts. As the labor law professor Eslund suggests, the starting point may be to remember the maids of Handy deserve a real place in the workplace to begin with.

“These people should be treated as the employees of somebody. The appeal of this claim is to bring them into a system that they should be in.”

9 Comments

Michelle

I am a home cleaning service provider with Handy.com. I have been since July 2014, I started out earning 15.00 an hour and by September I was and have been earning 20.00 an hour. They provide me with a paid android cell phone which I use daily for navigation to clients homes and for contacting them. Which helps greatly. I have the option to wear one of their logo blue shirts but am not required too. Not once in my orientation was I told I had to knock on door and announce my name and from handy, nor was I ever once told that I had to ask permission to use a bathroom. ( which is redicioulus because I am cleaning it anyways. Like any maid with common sense is going to clean a bathroom then leave it dirty after having to use it.) I do not have to use their cleaning supplies but have the option to order the “green clean” products they offer through them at a discounted price.

For me handy.com is a win win situation. Customers get back round checked professionals and I don’t have to work twice as hard to find my clients anymore. I used to have my own business and it was costly for me to advertise for new clients, and if I offered a 29 dollar special ad on FB. I would be pretty much working for free in hopes that maybe 2 out of 10 would become repeat customers and for more than 2 hr job. With Handy they have the backing to do those kinds of offers and advertise…plus when it comes down to the fine line on avg they make 15.00 off of each job I do. For me that pays for marketing, dealing with the occasional client complaint, collecting payments, dealing with any non payments later on (which I am paid regardless of what happens when payments are disputed) and direct depositing my payments and providing me with a phone, and liability Insurance. I would also like to point out that starting pay at $15 an hour is above what merry maids and other companies pay their employees which start at $9 an hour with experience and take 6 months to get a .50 cent raise if your lucky.

A B

In my mind “contractor” means “paid a flat nominal wage in exchange for service X”, and I see nothing immoral about it. I feel it should be a company’s right to offer such a system of remuneration, and a worker’s right to accept or reject that offer. Courts telling companies they must classify their workers as “employees” seems to trample on the right of private contracts and on the freedom of the labor market.

ferrell parker

a fine well written statement of truth,if we could only excuse the human part on both sides.

Oliver Diaz Blum

Lucky there are also some company’s that are doing it right like ManagedByQ.com (office cleaning company) and GoGreenRide.com (taxi company). Check them out.

Doug Schwartz

Companies want to skirt taxes, employment laws, insurance, health care by magically calling people independent contractors instead of employees? Fine, then pass a law that the minimum wage for contractors must be 150% of the wage of the average employee doing the same work in the same industry.

Carl

Very well written article. The point at which free market capitalism vs the idea of society meet. Economically, slavery makes much more sense (zero cost) than paying wages. But you can’t sell products to the 70% of the economy that is the consumer if they have no money. Time for a rethink, perhaps? profit maximization alone will kill itself for this very reason. Indeed, countries themselves have this problem: when a country runs a surplus, then it is exporting more than it is importing. Under the gold standard, the trading partner(s) running the deficit (buying the exports) historically ran out of gold, and thus social change and war often ensued. The Bretton Woods conference was set up by Keynes and Harry Dexter White to solve this very problem via new institutions (IMF, Worldbank), but unfortunately, it failed before it started and the regime that was agreed upon failed in 1971. Just thought I’d throw this in there, because its interesting: mathematically, I’d say that profit maximization is like the first component of a free capitalist function. It needs other derivatives to ensure that liquidity in society is sufficient to power ‘growth’ which intuitively must involve a redistribution of wealth. The ideology of free markets as we currently have it is incomplete. Hopefully the economic renaissance being driven by big data/data science will thrash out the missing components of the free market equation.

Jeff John Roberts

Thanks for the kind words, Carl, and for your sophisticated perspective on the larger economic issues here. I hadn’t considered how workers’ low wages might result in a lack of purchasing power, or how this is akin to trade imbalances or flawed monetary policies — but the analogy makes sense. Let’s hope the big data industry turns its attention to solving this part of the free market!

Gene Zaino

Well done article Jeff. This is topic that I have spent a lot of time working on in the professional space.

I am convinced it’s time for a new infrastructure that supports contractors and helps them pay their taxes, provides them access to benefits, and educates them and their customers on the costs that need to be funded as part of the fee for their service. Consumers of the these contractor services much pay for the full burdened cost. Then the risks of misclassification, class actions, and tax penalties can be greatly reduced if not avoided.

At our company. we have created such a platform and we call it “portable employment” and it is part of an entire “Business Operating System” for Independent Contractors. We help the one-person business act like a real business, funding all the costs required for proper employment. I believe it’s OK to work for many clients at once (in fact this is a way to diversify your income stream and we are not going to stop this from happening), but we need the systems and funding mechanisms to keep the costs and benefits where they need to be. You cannot dis-intermediate taxes and worker required benefits.

Our society depends on taxes and worker benefits and it is best for private industry to figure out how the new economy will fund these, rather than think it can be avoided, dis-intermediated, disrupted or hope that government will fix it. Government can only develop a broken, one-size-fits-all solution. The right solutions need to be tailored to particular industries and occupations and fit the needs each group. A great opportunity. You can check out http://www.MBOpartners.com because we have started doing this already.

Gene Zaino

Mark

Pretty much everyone who is called a contractor is not. You have to work where they say, when they say and use what they say. That is an employee. Look at pretty much any tech job listing.

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