Are Sharing-Economy Workers Contractors or Employees?

The success of companies like Uber and Airbnb can be attributed to one factor: independent contractors. A business model built around the sharing economy, it’s brought about a boom of cash flow in niche markets. But with new territory comes new challenges, and already these industries are feeling the heat for their approach to labor management.

Uber recently appealed a California court’s decision classifying one of its drivers, Barbara Ann Berwick, as an employee rather than a contractor. Berwick sought to have Uber cover expenses she’d accrued while driving as a 1099 contractor, such as gas money and wear on her vehicle.

Homejoy went out of business after it was unable to secure funding. Investors hesitated because of the uncertain future of sharing economy businesses that rely on 1099 employees.

Other companies have left the 1099 model entirely. Instacart and Shyp have begun converting their 1099 contractors into W2 employees, hoping to standardize the customer experience while avoiding the headaches popping up for companies like Uber and Homejoy.

When might 1099 be better? The popular sentiment is that companies should offer W2 employment to their contractors, but the reality isn’t so clear-cut. Both companies and employees stand to retain several advantages by continuing the contractor-company relationship:

1. Independence.

Employees defined as 1099 contractors enjoy significantly more freedom than their W2 counterparts. W2 employees are subject to employers’ demands regarding workflow processes, dress codes, location, and other factors. Some contractors would gladly give up these freedoms for the benefits W2 employment provides, but many who were attracted to the more relaxed 1099 standards would be less excited about changing classifications.

2. Flexibility.

If a contractor wants to take a week off out of the blue or start working nights instead of afternoons, he or she can do that with little to no hassle from management. W2 employees have more rigid schedules with less wiggle room. One of the primary draws of these positions is the ability to work as much or as little as the contractor’s schedule permits.

3. Take-home pay.

Not everyone makes more in a 1099 role, but plenty do. Because companies don’t pay for things outside of wages such as Social Security and Medicare, that income goes straight to the employees. The catch, though, comes with taxes. Contractors without benefits sometimes owe more than their W2 counterparts come filing season, so it takes some planning for 1099 workers to be ready when April comes along.

4. Company costs.

Without paying benefits to 1099 contractors like they do for W2 employees, companies enjoy vastly reduced costs in the sharing economy. If all 1099s were reclassified as W2s, the cost for these marketplaces would explode, thereby altering the entire business model. These costs would inevitably be passed on to the consumer, which could mean a loss of customers -- even the end of the company.

5. Smaller workforce.

With the additional rules and structure that come into play for W2 employees come restrictions. Full employment is more difficult to maintain than contractor status, which means fewer jobs to go around. When the employee pool is limited, users suffer. In Uber’s case, if all drivers became full employees, Uber couldn’t maintain the same size workforce it does today. In the end, users would have longer waits for more expensive rides.

The future of the sharing economy.

The tug of war between contractors, employees and companies rages on, and neither employee option will sustain the model for long.

With mobile technology helping companies like Uber boom, workers in the gray area are more common than ever. The marketplace needs a defined “full-time independent contractor” status to continue to function in a way that pleases both sides.

In the meantime, many companies will start to see a larger mix of 1099s and W2s in their workforces. It’s not a perfect answer, but until new legislation creates another option, it’s the only choice. And because that legislation is still a long way off, companies and employees in the sharing economy will continue to struggle in the weeks and months to come.