On-demand startups get more heat over using contractors

July 2, 2015, 12:38 AM UTC
Photo credit: Shyp

Startups in the so-called “on-demand economy” that act as taxi and delivery services are slowly starting to give employee status to their contract workers. But the reason may be more about legal threats than kindness.

This week, employment lawyer Shannon Liss-Riordan filed a lawsuit on behalf of customer service contractors for Washio, Postmates, and Shyp along with a second lawsuit targeting Instacart asking that they be designated employees, according to Business Insider.

Liss-Riordan’s suits follows similar litigation she filed against ride-hailing companies Uber and Lyft; delivery services Caviar and Postmates; and home cleaning service Homejoy.

The complaint against on-demand startups, a fast-growing category of Silicon Valley companies, is that they use of contractors instead of employees to lower their costs. It’s not exactly a new tactic. And companies insist that workers generally prefer the flexibility that comes with being freelancers. But the practice is getting renewed scrutiny because of widespread adoption by companies that, in some cases, have raised hundreds of millions of dollars.

Amid the increasing legal pressure, some startups that use mostly contractors have started to reverse course. Last week, Instacart said it would convert its contractors in Boston and Chicago to employees. An Instacart spokeswoman also told Fortune that its decision had nothing to do with the lawsuits and had been in the works for months. She declined to comment further about the lawsuit.

Meanwhile, on Wednesday, Shyp said it would convert all of its couriers from contractors to employees, saying it would improve customer service. Shyp also denied that the recent lawsuit had any impact on its decision and echoed that the change had been planned for some time, before any legal paperwork arrived.

Postmates CEO Bastian Lehmann told Fortune last week that his company is aware that it may eventually have to follow suit. He added that the company has already looked into the business ramifications.

Postmates and Washio did not return a Fortune request for comment on Wednesday.

And while it may be heart-warming to believe that startups are changing their tune to make employees happy, it’s hard to ignore the influence of potential litigation. Yes, they may have decided to convert contractors to employees before this week’s lawsuits. But they were surely aware of the changing potential for lawsuits and more strict regulation.

Two weeks ago, the California Labor Commission issued a non-binding ruling that a former Uber driver should have been classified as an employee and was entitled to have her expenses reimbursed. The decision, no doubt, resonated among startups using a similar employment strategy.

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