The war of words (not to mention lawsuits) surrounding the debate over worker classification in the on-demand economy has reached a fever pitch over the past six months, with a California judge recently granting a class action suit against Uber.  Until now the debate has overwhelming supported the implication that employee/W-2 status is unquestionably better than contractor/1099 status for any number of reasons, the main one being the benefits received by W-2 employees but not by 1099 workers.

It is widely understood that 1099 status is employer-friendly, saving on a number of employee- and back office-related costs, such as the above-mentioned benefits and the oversight needed to manage them.  Less well understood is that 1099 contract work actually serves the needs of a growing percentage of working Americans better than the W-2 system.

Below we hope to bring some balance back to the debate, arguing why 1099 classification is a good thing not just for startups but also for their workers.  Additionally, we’ll make the case that a regulatory overhaul is still necessary to provide the optimum level of direction and clarity for both businesses and workers moving forward.

A powerful tool for innovation

The 1099 system can be a powerful tool to help grow early-stage startups, especially in the on-demand space.  The 1099 system facilitates:

  1. Cost savings.  Most evident in the debate so far, 1099 contractors save employer costs by approximately 20-30% over W-2 employees (who get benefits, insurance, etc.).  Young companies can reinvest these savings in their business to a) extend their runway/lifeline and b) make themselves more attractive to investors in later rounds.
  2. Scale.  On-demand startups are two-sided marketplaces that face a chicken-and-egg problem: they need both users and service providers for their platform to click.  While free offers are often used to gain scale on the user side of the marketplace, hiring 1099 workers over W-2 employees can facilitate scale on the service provider side of the marketplace, especially for young companies with tight budgets.
  3. Wiggle room.  Lastly, the 1099 system provides a startup with the ability to hire, fire, and change wage structures at will and without cost penalties.  This wiggle room is an important life preserver as markets fluctuate.

Workers benefit too

Just because companies benefit from the 1099 system does not mean that workers necessarily lose out.  The 1099 system gives workers:

  1. Flexibility.  Under a 1099 system, workers govern their own schedules (employers mandate regular hours under a W-2 system).  Workers value this flexibility for any number of reasons, including childcare needs, elder parent care, pursuing an education, or simply just personal preference.  In fact, in a survey of Uber drivers, two of the four top reasons for joining Uber were “to be my own boss and set my own schedule” (87%) and “to have more flexibility in my schedule and balance my work with my life and family” (85%).  The freedom to work when and where one likes can lead to a more meaningful work experience and engaged workforce.
  2. Additional income.  Not everyone with a full-time W-2 job is making ends meet.  The flexibility in the 1099 systems allows for those W-2s who need additional income to take on extra work without schedule friction.  The two other top reasons for becoming an Uber driver in the survey above were “to earn more income to better support myself or my family” (91%) and “to help maintain a steady income because other sources of income are unstable/unpredictable” (74%).
  3. Meaningful income.  Lastly, additional 1099 income is often at a higher wage than W-2 work.  On average, contract workers, specifically 1099s at on-demand startups, earn more than double ($16.31) the average state minimum wage ($8.10) in the U.S.  Wages are so good that 36% of full-time employees who moonlight as freelancers have considered quitting their W-2 jobs to freelance full-time.

On-Demand Wage Graph

Regulators need to catch up

“The idea that having a good job means being an employee of a particular company is a legacy of a period that stretched from about 1880 to 1980.” – The Economist

The world is no longer the same place it was in 1980, much less 1880, and yet our employment regulations have yet to evolve.  The current regime fails on two counts: unpredictability and inflexibility.  It is unpredictable in that employment status is ultimately determined after the fact, in the courtroom, based on a laundry list of over a dozen factors, with no single one being dispositive.  This leads to the appearance of unforeseen high costs that can lead to the ultimate death of a startup (See Homejoy).

Our regulatory system is inflexible in that it fails to address changes in modern workers’ values in a fair and balanced manner.  Although Instacart, Shyp, and Luxe have been praised for switching their 1099 workers to W-2 status, the most likely outcome of this is the creation of a small number of part-time, hour-capped, low-benefit jobs at the expense of a larger number of all-you-can-work, independent, high-wage opportunities.

To address this dysfunction, we need at least a third form of worker classification.  This third classification could take a number of forms: a public-private partnership similar to the Affordable Care Act or an hour bank being two of the more popular proposals.  Investor Nick Hanauer and labor organizer David Rolf have recently come out offering a Shared Security System solution to provide benefits to on-demand workers.  In any case, the third option should clearly state the level of control allowed on the part of the employer before the fact, a level likely higher than under a 1099 classification, while providing some of the employee benefits of a W-2 classification.  This would strike a balance between innovators’ need for cost savings, workers’ desire for independent, meaningful work, and their needs for employment protection.

Whatever form modernization takes, we have to assume regulators will eventually catch up to the massive shift our economy is undergoing.  We can only hope the wait is short.

Featured image courtesy of joiseyshowaa via Flickr.