Working on Work

December 9–10th, 2015 — Washington DC

This note captures my thinking on the worker classification debate as one of the first W-2 Employers in the ODE / Sharing Economy. It is a work in progress.


Washington is talking about the future of work this week. Yesterday, the Brookings Institution held a policy forum to release and discuss the first-ever proposal on creating a new worker classification. Titled the Hamilton Project, it was written by President Obama’s former Chair of the Council of Economic Advisors Alan Krueger and Seth Harris, the former U.S. Secretary of Labor. Meanwhile, the Department of Labor kicked off a two day “Future of Work Symposium” inviting diverse stakeholders to discuss new forms of employment relationships and what it could mean for public policy.

I had the privilege of being a panelist at both of these events and wanted to share my thinking going into these meetings.

I started a conversation on the topic in June of this year on Medium “The Cars Aren’t Driving Themselves Yet”. At the time, I was concerned that tech startups like ourselves were developing a transactional mentality towards the workers powering their platforms. In July, I explained why we were one of the first “ODE / sharing economy” companies to launch with W-2 labor and what that choice meant for us at Hello Alfred: Quartz, “The on-demand economy doesn’t have to imitate Uber to win”.

Since then the topic has caught on fire — In recent months, I have participated in many public discussions on worker classification and inadvertently became a face of the novelty of early-stage startups weighing in on major policy.

I am proud of the fast progress our space has made on employment practices and impressed by policymakers seeking to understand the ways in which new companies may be disrupting traditional work relationships. However, much of the public debate has been talk. We haven’t come up with solutions. For a summary of the debate to date, I suggest these thoughtful summaries by Justin Fox on Bloomberg View and Lydia DePillis in the Washington Post.

Why Are We Talking about Worker Classification?

The public debate on worker classification was driven by Uber — or rather has been driven towards Uber as a result of it’s 400,000 new independent contractors that power the platform. Lawmakers are asking if these contractors look more like employees. Like many I am in awe of what my colleagues at Uber have created - perhaps the most iconic, disruptive company we’ve seen in recent years. However, they are just a case study in a much broader theme.

The way we are working is changing. The way we view our time is changing. The expectations we have as consumers are changing, and it means employers like myself have to be thoughtful and pay attention to the responsibility we have to shape a new generation of jobs, which frankly have the potential to commoditize skills into transactions and sidestep hard won protections and benefits tied to current employment.

I could speak on the topic at length, but in this note I wanted to avoid the if or why change will happen, and instead focus on what should or could happen to address the specific worker classification issue at hand.

Our Experience at Hello Alfred

Hello Alfred is a home operating system that pairs you with a dedicated home manager that visits each week to take care of your to-dos from grocery shopping, dry cleaning, home cleaning, and more. We launched just a year ago, after winning TechCrunch Disrupt last September in San Francisco, but have quickly grown into a large employer across Boston and New York.

We offer the luxury of your time back through the combination of technology that links together available services and a frictionless in-home experience at the hands of our Alfred Home Managers — all of which are W-2 employees. Many work part-time on the platform while others work on a full-time basis and are therefore entitled to health benefits. Pay starts at $18/hour and can be as much as $30/hour for our Team Managers. While some rely on us to be their primary source of income, many see Hello Alfred as a way to supplement their household income.

When we established the business we went down a list of questions contained in the IRS guidelines designed to help an employer determine if they have independent contractors or employees. We came up 50/50. Essentially, we could follow the well-worn footsteps of Uber, Lyft, Instacart, Handy, Shyp and others to select 1099 workers, or take on the challenge of making our workers salaried. We accepted that challenge.

By our calculation, this choice has cost us an additional 30–40% and has had some difficult second-order consequences that point to the ways our platform is likely different than a traditional employer model that the laws were designed to oversee.

Some Color on The Debate

The press has written many articles on the topic, but I find they often lacked the nuance that explain why this simple act of picking what kind of workforce you have is such a complicated issue. Here are just a few points I have not seen highlighted that may add color to understanding the debate:

  • An employer cannot have two classifications of workers doing similar work under the same operating entity — we can’t employ 1099 Independent Contractors and W-2 Employees.
  • The current dialogue can sometimes present a false dichotomy of flexibility vs. stability— in which 1099 workers are happy with their status because it allows extreme flexibility to go on and off platforms in real time and the right to work for many companies at the same time. However, it should be noted W-2 employees can also work for more than one company, have flexible work hours, and as a result of W-2 status also be ensured income stability and protections.
  • The differences between 1099 and W-2 are extreme. Many know that as a contractor you don’t get health benefits, but a spouse with another job may provide this missing safety net. However, there are many other factors at play. 1099 platforms do not have to follow safety guidelines, fair hiring practices, anti-discrimination laws, nor do they have to pay minimum wage, overtime, or workers compensation if something goes wrong on the job. They can change wages at any time, and they do not avail workers of tax withholding, Social Security withholding, or unemployment insurance.
  • It is illegal for 1099 workforces to engage in collective bargaining or unions.
  • It is also illegal for 1099 platforms to provide training to their contractors.
  • By and large, opting into W-2 means the employer takes on more tax liability than if they were a 1099 platform.
  • The laws are very complicated, and there are different rules in different states that are currently in flux. It’s easy to step on a dividing line suggesting you are misclassifying your workers. Things like a 1099 employer doing a background check more than once may signal that they are instead a W-2 employer. Providing employees with guidance on how to speak to customers, or providing safe tools to help them carry packages may signal they are an employer. If tech platforms that are designed to optimize logistics suggest when and where you need to pick up two deliveries you are also getting into Employee territory.
  • 1099 platforms don’t have to have insurance or pay for travel time between jobs they schedule for the contractor.
  • Many startups want to do the right thing by the worker, but are worried about negative signals which could be used against them in ongoing misclassification litigation.

Thoughts on Solutions

Those thinking about these issue are mixed up in a raging debate that is asking a) if there in fact needs to be any change at all, or if labor laws simply need to be upheld and misclassification by companies litigated b) if a new classification should be made on the basis that startups like mine will provide a significant share of jobs in the future or c) if we need completely different proposal on employment structures altogether.

A few assumptions

  • W-2 is not inherently better than 1099.
  • I agree that it is too early to fully understand how the landscape will evolve, and that if regulation is needed, lightweight is better.
  • Policy was originally created, and should be focused on protecting the workers (and less on the employers).
  • It’s estimated that there are currently 600,000 gig workers today and that number may seem relatively small, but if you include all freelancers, there are 17M jobs (think writers, photographers, people selling things on Etsy, renters on Airbnb, etc) and an Intuit study suggests the number could grow to be 40% of the American workforce by 2020.
  • The venture-backed companies that are disrupting different sectors of the service economy are just a case study in what I see as a fundamental sea change in how we work and our economy.
  • Startups have a seat at the table because, by definition, with limited resources we are good at moving fast, experimenting quickly, testing and adapting. We can test new business models, ideas, and guidelines. I also believe we are going to be a larger driver of our country’s economic engine.
  • Tax collection will likely be the catalyst for regulators’ interest.
  1. Let’s Set the Table — A Proposed Framework

U.S. Senator Mark Warner (D-VA) has an impressive command on the topic and in the spirit of not knowing what we don’t know has suggested a “safe harbor” against misclassification litigation that would allow companies in the sector to evolve and actively experiment in cooperation with jurisdictions.

A consortia of tech companies, VCs and others also suggested a few “principles” to keep in mind as we address the issue. Their consensus is mostly on the issue of portable benefits.

My suggestion is that we combine these ideas, but go a little further. We should take the “regulatory timeout” that comes with a safe harbor, and rather than let things sit, actively work to establish intelligent benchmarks for companies to follow. New companies could look to these standards to educate themselves on what their platforms must provide. I think we need to actually address not only benefits but also protections and training. Protections, Benefits, and Training are the essential building blocks that form the gap between 1099 and W-2 contracts.

Here are a few suggestions I think many could agree on:

Protections

  • Safety standards based on type of work
  • Fair hiring practices
  • Workers compensation — perhaps pooled
  • Commitment to pay minimum wage or better

Benefits

  • Strive to provide benefits to workers who need them
  • Connect workers to third-party benefit providers
  • Share the perks you give to corporate employees with everyone

Training

  • Allow all platforms to provide training to their workforce
  • Strive to create career advancement pathways

And finally, and most importantly the employer needs to ask “is this a good job?”

If we do not ask this as the holistic question, we are ignoring the most important part of employing humans in our business models. It’s important to understand if we are our employee’s primary income, or supplemental income. Is it a part-time job or full-time? Are we providing a living wage?

2. Looking in Both Directions — Employer Classification

Instead of focusing on worker classification, why not focus on employer classification? Companies and business models may not fit squarely in either of the classification poles. Instead, they fall along a spectrum between the two. Why not provide guidelines for different categories of employers based on their size and model. Work on marketplaces like Care.com should be treated differently than the “on-demand”, real-time work available on Lyft, which is different than the work at Hello Alfred, where employees have schedules, but may work on a variety of things and have varying hours. The kicker would be to have the companies collaborate to set advised benchmarks within categories and across the full spectrum of work.

3. A New Classification — The Hamilton Project

Finally, what about a convergence between the two classifications. The idea posits a third category in-between current classifications, which provides some of the benefits recieved by full-fledged employees to an independent worker. The detailed proposal by the Hamilton Project is an excellent starting ground.

These are my suggestions prior to all the conversations I will have this week. I look forward to evolving and updating them. I personally take responsibility for them and continuing my education.

Respectfully,

Marcela Sapone, CEO & Co-Founder of Hello Alfred