While Uber and TaskRabbit have become household names, and the on-demand economy continues to boom, the problem of worker classification continues to bedevil companies in the on-demand marketplace.

For new startups looking to enter this exciting landscape, there are many lessons that can be learned from the demise of companies like Homejoy, as well as from companies like Instacart and Luxe (among others) that are changing their business models midstream. The pioneers in the sharing economy have certainly blazed a trail for others to follow, and have learned some hard lessons along the way that apply to the ongoing 1099 versus W2 debate.

When it comes to how their workers should be classified, entrepreneurs looking to build the next on-demand marketplace need to:

  • Start with a clear vision of what they want the end customer experience to be, and determine the degree of worker control that is needed from there;
  • Consider if differentiation comes from their technology or their workers; and
  • Build an open and flexible platform for their workers.

Clear Vision

How a company decides to classify the type of worker it needs to run its business is really driven by what unique value the company is delivering to its customer. The recent string of startups that have chosen to convert their independent contractors to employees have stated that it was important for them to own the end-to-end customer experience. This makes sense when you examine how they “managed” their independent contractors:

  • They required uniforms.
  • The required independent contractors to display the platform branding to customers.
  • They required them to buy supplies or materials from the platform.
  • They required training independent contractors on how to interact with customers.

They wanted the interaction between their workers and customers to be highly curated and consistent. Their customer benefit was tightly integrated with the end-to-end experience. Platforms that aspire to deliver an end-to-end experience will be at risk (for misclassification lawsuits) if they elect to deliver their product/service via independent contractors, because they will need to exert strong control over how independent contractors perform their role.

The human element of the on-demand economy is undeniable.

Instead, startups should plan from the outset to hire their brand “ambassadors” as employees, so they can control the customer experience where it matters most — when ambassadors are the customer experience.

Recent guidance from the U.S. Department of Labor commented on the nature and degree of control over a worker in such situations:

“Technological advances and enhanced monitoring mechanisms may encourage companies to engage workers not as employees, yet maintain stringent control over aspects of the workers’ jobs, from their schedules, to the way that they dress, to the tasks that they carry out. Some employers assert that the control that they exercise over workers is due to the nature of their business, regulatory requirements, or the desire to ensure that their customers are satisfied. However, control exercised over a worker, even for any or all of those reasons, still indicates that the worker is an employee.”

Taking the time up front to consider the role workers play in the overall customer experience is a critical step in getting set up for success.

Consider Differentiation

The human element of the on-demand economy is undeniable. If, however, the main competitive advantage of a platform is in the application of technology, a proprietary algorithm or big data, a startup will be better served by exerting control over ensuring the technology performs as advertised, e.g. convenience, speed of delivery or personalized selection versus controlling the worker who plays a role in the delivery chain. In this scenario, the worker is not as integral to the platform’s business, nor the customer’s satisfaction. This is a positive factor when determining whether a worker is an independent contractor or employee.

It’s important to note that just because a platform decides it must control certain key aspects of the customer experience does not necessarily lead to the conclusion that all workers will be classified as employees. Take, for example, the issue of customer safety. If the nature of a platform’s product or service requires that customers trust those providing the service, it is reasonable for the platform to take measures to ensure customer safety.

The on-demand economy is an exciting space fueled by the entrepreneurial spirit.

Performing background checks, requiring proof of certifications, setting minimum standards and conducting safety training are practical activities for a platform to undertake with its independent contractors. These steps are not necessarily mandating how an independent contractor must deliver the service, but rather demonstrate the standard of care required to safely perform the service. Where platforms run into the risk of misclassification is when they combine the above activities with other requirements that tip the scale of control.

Really ask yourself, what is our differentiator? Is it based on the technology, or the customer experience that workers provide? Focusing on this core question can help determine how workers should be classified. Additionally, this approach can serve the dual purpose of minimizing legal exposure while providing laser focus on what matters to customer the most: the benefit.

Build An Open And Flexible Platform

Market trends have consistently shown that open technology platforms tend to outperform closed ones in the long run. These closed technologies didn’t take advantage of the ability for others to improve their product or service and ultimately failed because of their closed nature.

The same may be true about on-demand platforms that attempt to be “closed” by prohibiting workers from working with other marketplaces. The more flexibility you provide to a worker about when and how they work, the more you improve your position that they are properly classified as independent contractors. One of the key ways that a platform can demonstrate flexibility is by allowing workers to set their schedule and work for other platforms.

This may seem counter-intuitive given the amount of time platforms spend to identify, recruit and onboard workers who meet their standards. But, the tradeoff of potentially “sharing” workers with another platform outweighs the very real threat of class action lawsuits in the current environment. Instead of restricting worker mobility, platforms would be better served by focusing on creative incentives to instill worker loyalty, e.g. higher pay, access to resources and larger pools of customers or projects.

The on-demand economy is an exciting space fueled by the entrepreneurial spirit. Though some pretty large flags — the Ubers and TaskRabbits of the world — have already been put in the ground, there is still plenty of room for further exploration, innovation and creation. What’s key now is that new startups consider the lessons of the on-demand pioneers who came before them, and ask the critical questions about worker classification now.

By considering the above advice, entrepreneurs will build companies that not only profitable and provide customers with a valuable service, but will also win the favor of their workers, whether they are classified as independent contractors or employees.

Featured Image: Vivi-o/Shutterstock

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Three Tips For Worker Classification For The Next On-Demand Startup