Worker classification problems have plagued the share economy lately.
First, Uber and Lyft came under legal fire for classifying their drivers as independent contractors rather than employees. California regulators already decided that one Uber driver is in fact an employee and must be compensated accordingly. Now Handy Technologies, an on-demand cleaning company, joins the fray.
According to Business Insider, Handy's employee filed a lawsuit against the company, stating that she should be classified as an employee and is entitled to minimum wages and reimbursed expenses. The report states…
- The cleaner was often paid less than minimum wage, especially after the cost of cleaning supplies.
- Handy said its workers make an average of $17 an hour per job, but the cleaner alleges she worked more than 30 hours one week and only made $14.
This case is one of multiple lawsuits against Handy Technologies and seeks class-action status, but the Massachusetts court will decide on that.
Regardless of the outcome, the Handy suit reinforces what the share industry has known for a while: the independent contractor model may offer more flexibility, but it's also a legal minefield that could be full of unexpected expenses.
Lesson Learned: 1099 Compliance Is Harder Than You Think
As Handy and its ilk are discovering, the 1099 business model has many complications. Namely, if you're going to use independent contractors, you have to comply with the laws on how those workers are treated. In short…
- You can't control the manner in which they do their work.
- Their work must be supplemental, not the primary function of your business.
- They must be able to set their own hours and rates.
These classification rules may seem as though they leave room for interpretation, and they do. But where these tech companies keep running into trouble is the second and third point.
For example, would Uber or Handy even exist without their drivers and cleaners? Though these companies may stake their classification defense on the fact that they are tech businesses that simply connect app users to a service, it's safe to say there would be no demand for the app or service without the drivers or cleaners.
Another glitch in the 1099 defense: Uber determines the rate its drivers must accept for the ride, and Handy sets the rate for the cleaning or repair job. Again, a true 1099 worker would be able to give their own rate for the work they do.
Why Worker Classification Is Kind of a Big Deal
If you actually follow the 1099 rules, you would not have much control over the services your business offers. So why do share-based companies insist on using contractors instead of just hiring employees? You already know the answer: it saves them money.
The business doesn't have to pay for a contractor's…
- Employment taxes.
- Workers' Compensation Insurance benefits.
- Unemployment insurance.
- Healthcare insurance (which may be required for companies with 50 or more employees).
But here's where karma comes into play: businesses that misclassify workers as contractors may end up paying for all these expenses and more if they are sued. For example, if the court decides Handy's cleaners are employees, the company may be ordered to pay back taxes and overtime expenses, offer benefits, and reimburse workers for their cleaning expenses.
What's worse, the company could also be fined for not carrying Workers' Compensation Insurance, which employers are required to carry in most states. (See "State Sues Small Business over Workers' Compensation Insurance Violation" for more details.) That's in addition to all its legal expenses, and no commercial liability insurance can help cover the cost of worker classification lawsuits.
All those costs may be enough to sink even successful businesses, so be sure to consultant a lawyer before relying on contractors to fill essential roles.