Employees and independent contractors

The California Labor Commission recently ruled that an Uber driver was an employee. Until now, Uber has treated its workers as independent contractors, thereby avoiding paying them employment taxes to cover benefits like unemployment, Social Security, and health insurance.

The ruling was made for a single employee in a single state, and Uber is appealing the decision. As a result, it’s not confirmed, and may not apply for the specific circumstances of other drivers and other states. However, for the first time, there is a real possibility that on-demand companies will need to reclassify some or all of their workers as employees. Estimates suggest that a full reclassification would increase their labor costs by around 30%. They could try to recoup some of this cost increase by raising the price they charge consumers and/or increasing their take rate but these would negatively impact demand and supply respectively.

A few days later, online grocery delivery service Instacart announced that it will be reclassifying its shoppers from contractors to part-time employees. Note that this is valid for Instacart’s shoppers and not their drivers who they will continue to treat as contractors. The reclassification is also taking place from contractor to part-time employee, not full-time employee. I don’t know if the timing of this announcement has anything to do with the Uber ruling, but it could be an effort to pre-empt a similar ruling for Instacart.

Beyond Uber and Instacart, the ultimate outcome of these rulings will impact other companies in the on-demand space like Lyft, Postmates, and Shyp. There is a lot at stake. The ultimate solution is very likely to be different from the status quo where these workers are treated as independent contractors. I think that there are two possibilities which stand out. The final outcome may also be a combination of the two.

The first option is that some workers are treated as employees whereas others remain contractors. For example, the workers that meet the base demand for a company’s offering (and thereby work exclusively for the company) may be treated as employees, and the workers that need to be brought onboard to meet peak demand (and thereby work for the company on a flexible basis) may continue to be treated as contractors.

The second option is for a new, third category of worker to emerge. This category would fall somewhere between an employee and an independent contractor. In discussions so far, they’ve been called dependent contractors. Dependent contractors would receive an hourly wage like independent contractors while they’re working for a company. However, their benefits like unemployment, Social Security, and health insurance would be unbundled from the companies they work for, and paid for by these companies on a pro-rata basis according to how much time the worker spends serving each company.