Is the Sharing Economy Due for Extinction?

Lawsuits against on-demand sharing economy companies for misclassifying their workers as independent contractors rather than employees are gaining momentum, particularly after recent rulings against Uber. The lawyer who sued Uber and Lyft for not classifying contract workers as employees is now representing workers against four more on-demand companies: delivery services Postmates and Instacart, laundry service Washio, and the shipping company Shyp. Workers from Postmates, Shyp, and Washio filed a lawsuit against their alleged employers on June 29th.

The idea behind the sharing economy, according to Wikipedia, is that “information technology [is used] to provide individuals, corporations, non-profits and governments with information that enables distribution, sharing and reuse of excess capacity in goods and services. A common premise is that when information about goods is shared (typically via an online marketplace), the value of those goods may increase, for the business, for individuals, and for the community.”

If it sounds too good to be true, that’s because it is, apparently. Sharing economy, on-demand companies set up business structures that guarantee independence and flexibility – there is not necessarily a set schedule, a desk to sit behind, or a boss to answer to, and sometimes there is an ever-present opportunity to take or refuse engagements as workers desire. In this way, it makes perfect sense that on-demand companies would classify their workers as contractors – the reins of control are loosened or non-existent. However, this means that guarantees of minimum wage and paid overtime, family and medical leave, and unemployment insurance are also non-existent. Likewise, because there is no employer-employee relationship with contractors, employers are not legally obligated to provide a safe or even harassment-free environment or other job protections. In fact, technically, contractors have no right to bring an employment lawsuit against employers at all. In order to sue for any of these things, workers must first allege that they are in actuality employees who were wrongly classified. Assuming that finding is made, a worker can then proceed with her other claims.

So why do the companies set themselves up for potential lawsuits? Well, the cost savings and ensuing low rates from creating contractors instead of employees is what enables many of these companies to survive and compete against their non-share counterparts in the first place. But there is a catch. As workers realize the reality of the lack of protections and benefits they have in the workplace, they become disgruntled, seek out attorneys, and file lawsuits. This is further complicated by the fact that traditional contractor vs. employee lines aren’t fully relevant to these non-traditional workplace structures. That’s why although the plaintiffs’ lawyer who is suing all these companies claims this is a workers’ rights issue, in reality it’s much more complicated than that. The workers who contract with sharing economy companies gain a freedom and quality of work life they might not otherwise have. But they give up things in the bargain. When they regret their choice, courts may be forced to decide an issue without precedent. In the Lyft case, U.S. District Judge Vince Chhabria said in his decision that he’s not sure if Lyft drivers fit in either category of California’s “outdated” employment codes. “The jury in this case will be handed a square peg and asked to choose between two round holes,” he wrote. “The test the California courts have developed over the 20th Century for classifying workers isn’t very helpful in addressing this 21st Century problem.”

Homejoy, an on-demand home cleaning company which uses independent contractors, is just the latest company to struggle with the ramifications of misclassification. Adora Cheung, Homejoy’s CEO and co-founder, announced that the company shut down after coming under fire for its worker classification. While calling its workers independent contractors, the company maintained a significant amount of control over its cleaners, including aspects such as the locations where they were assigned jobs, how many jobs to perform each day, which customers to see, the job start time and end time, and the amount of driving they needed to do. The full complaint is available here.

More to the point, though, is that Homejoy, like Uber, is completely dependent on its independent contractor workers for its product offering. Any time a company classifies its key product-producing workers as contractors, there is a serious risk of a misclassification lawsuit.

With four lawsuits against Homejoy, the San Francisco-based company had a difficult time raising money to continue operations. The prevalence of such lawsuits against on-demand companies across the country has caused investors to shy away from the risk in backing them. Cheung stated that the lawsuits against the company and their impact on fundraising were the “deciding factor” for the closure.

While these lawsuits are causing some companies such as Homejoy to close, others with similar business models are able to stay afloat. Handy, a home-cleaning and handyman startup, has also been sued over its independent contractor use. However, with over $60 million raised in private investment, the company is moving forward with business as usual. It’s even offering a $1,000 incentive for Homejoy professionals to register to work with Handy after Homejoy closes. Despite being sued, Handy has enough funding (like Uber) to stay in business nonetheless.

In addition to the misclassification activity in the courts, the U.S. Department of Labor issued a memo last week stating that “most workers are employees under the FLSA’s broad definitions.” With the increased scrutiny over the way that on-demand companies classify their workers, these businesses are faced with tough decisions about where to go from here.

Although it might seem like the solution is to never use independent contractors, it’s important to remember that the use of independent contractors is still a perfectly viable and legal option for companies, especially those that are risk-tolerant. However, if a company chooses to continue using independent contractors, it may want to consider restructuring its business and re-documenting its worker agreements to make sure they are compliant with existing classification guidelines. If it can’t do that, it’s better to leave workers as they are and factor in the risk of a lawsuit in expenses (getting legal advice as to extent of the risk) or reclassify independent contractors as employees instead. The trick for the last option is to phrase things in such a way that workers don’t attempt to sue for past misclassification procedures.

By: Diana Maier, Esq. – Guest contributor to the SHR Bulletin

Bay Area Human Resources Services

Retooling Performance Reviews – Part 2

In last month’s SharedHR Bulletin, we shared thoughts and ideas about the latest trends in Performance Management and our belief that there is still an important place for performance reviews. Today we will dive a little more deeply into two types of performance management strategies.

Formal Performance Management

The annual appraisal is the most common formal tool in the management of performance. We still consider this methodology minimum best practice. Without it, years can go by with no formal feedback to employees.

Your company may call them annual appraisals, personal development reviews, performance reviews or employee appraisals, but whatever term you’re familiar with a formal review consists of a meeting between the employee and the direct supervisor to review performance. During the appraisal meeting it is common to review the objectives sent at the beginning of the period, as well as providing direct feedback on overall job performance. If the meeting is annual, it is typically the time a manager should set expectations, objectives and a development plan for the coming period. Managers need training on your philosophy about performance and the process in order to provide consistency. We argue there are at least 3 parts to a good review:

  1. Feedback on base performance in the position (base pay);
  2. Feedback on goals (if they have been developed prior to the review period) [bonus or incentive pay];
  3. Discussion of employee development (career growth)

Many organizations have difficulty connecting strategy to actual goals and employee performance. While this is not an easy project, in our experience, those employers that invest the time and energy in this area receive outstanding returns on that investment. Once you have the strategic objectives – or even if not – goals should be developed to be clear, achievable and measureable. Setting goals is a practiced art and pivotal to outstanding team performance. We recommend something like the SMART model, which stands for Specific, Measurable, Achievable, Relevant and Time bound.

  • Specific: The goal should be unambiguous and specify what the expected outcome is. (Example: An increase in net revenue of 10% over the next 12 months.)
  • Measurable: You must be able to measure whether the goal is being met using specifications such as quantity, quality etc. (Sales can be measured against targets set on a monthly basis in order to achieve a 10% increase over the 12 month period.)
  • Achievable: The goal should be achievable. (The company should have the resources it needs to be able to increase sales by this amount over the 12 month period and ideally the employee should agree to strive for the goal.)
  • Relevant: The objective should be relevant to the person’s role and something that is ‘meaty” and meaningful to the organization. (An increase in sales revenue should be able to be influenced by the employee’s performance.)
  • Time bound: A specific time period should be agreed to have achieved the objective by. (Milestones by trimester for example.)

One complaint echoed recently is the trend to bash the performance review process stems from employees that feel that the annual appraisals are merely a paper exercise, and that they’re forgotten about from one year to the next. Quarterly reviews are very tough to maintain; trimesters are recommended and we believe 6- month reviews are a good minimum time frame. Frequency of review is the best way to exchange feedback and progress as well as to make amendments if unexpected issues or changes in circumstances have occurred.

Informal Performance Management

Although some type of system must be in place to manage compensation, some organizations prefer informal (and regular) feedback sessions. For instance, some organizations operate well by holding weekly or monthly team briefings and/or one-on-ones, setting monthly targets and setting and monitoring Key Performance Indicators (KPIs).

A time tested technique for managing performance on a day-to-day basis ‘Management by Walking Around’ (MBWA). Many managers are offsite or occupied and as a result have minimal interaction with their team, yet are surprised when problems occur due to communication issues. If you’re not obviously approachable, it is unreasonable to assume that people will approach you. You should initiate discussions about how they’re getting on at work, and at home if it’s appropriate. Managers must go out of their way to identify any issues or concerns, praise employee achievements (no matter how small) and work to be approachable. Feedback is a two way street and if you choose no formal process, managers must be trained and monitored on this critical activity.

Significance

We do not believe the performance review process should be abolished. On the contrary, it is as important as ever – particularly in the light of generally low employee engagement and high turnover. Tying performance to business strategy can frankly make all the difference. If you would like a fresh look at your review process or incentive plan, our team of experienced consultants can help.

Bay Area Human Resources Services