Why These Startups Aren't Betting on the Uberization of Work

In July, Kevin Gibbon made an announcement that could turn out to be the best, or worst thing to ever happen to his startup — depending on who you talk to.

Gibbon is the founder and CEO of Shyp, a three-year-old package delivery startup with $62 million in funding. The app-based service, lauded by many as the “Uber for shipping,” allows users to summon a courier to their door and pick up anything that they want to ship across the country. Initially, the 31-year-old founder relied on contractors to do this work “for all the reasons all the big startups do,” he said. Gibbon liked that the employee model would allow him to scale quickly, and Uber’s colossal success proved that a big workforce wanted contract employment. Or so he thought.

But after two years running the San Francisco-based business, Gibbon realized the super-scalable model of employment that Uber is now famous for just wasn’t going to work for Shyp. He needs to train his couriers and tell them where to be at a certain time —  both requirements that contract employment forbids. And while Uber or Lyft can handle any million-dollar lawsuit thrown its way for not hiring its drivers as full time workers, Gibbon says his still fledgling startup can’t afford that risk. So this summer the founder told his couriers that everything about their jobs would soon change. He would be transitioning his entire 245-person staff to W-2 employment. Part-time couriers would receive paid vacation, lunch breaks, workers’ compensation, and more. Full-time couriers would get healthcare benefits as well.

Is this new economy moving us forward or backward?

For some employees, this announcement was cause for celebration. Some even cried tears of relief — finally they had job security, benefits, and perks. One courier, however, quit. To the outside world, the perks of being a W-2 employee sound good. But the biggest on-demand startups — like Uber and Lyft — argue that their workforces are happy as contractors because of the flexibility and independence that comes with that designation. Also known as 1099 employees, contract workers can work for multiple firms, set their own hours, and come and go as they please.

This polarized reaction did not come as a surprise to Gibbon. He is, after all, at the center of the debate over how the on-demand economy is reshaping the future of work. “I do worry about what these jobs mean for the future of employment,” he said. “I’d be curious about how happy the people in the thick of it really are. Is it something they just have to do? Were they pushed out of something else? I just don’t know.”

The decisions these companies make now will have dramatic implications on the future of work. By 2020, the pool of Americans working on-demand jobs is predicted to grow from 3.2 to 7.6 million. Startups like Handy, Postmates, TaskRabbit, DoorDash, and Washio, continue to treat a vast majority of their workforce as contractors; others like Luxe, Alfred, Instacart, and Kitchensurfing are reversing course. And as these venture capital darlings walk the fine line between saving on labor costs and breaking the law, regulators and politicians are watching, and critiquing, their every move. The lines being drawn here raise critical questions: Should workers embrace the freedom the digital world offers? Or should they try to hold onto the rights that their predecessors fought over 100 years to win? Is this new economy moving us forward or backward?

‘A legal gray zone there’

“There is a big difference between delivering food and picking up a package,” Gibbon explained to me while sitting at his company’s headquarters in downtown San Francisco. The Canadian startup founder has been in the U.S. since 2012, but still has an accent that at times gives away his Vancouver roots. Once Gibbon launched his app, most of his users had tons of questions about their packages, ranging from how it would be boxed up to when it would be delivered. Complaints piled up, but the founder could largely do nothing about it. To put his employees through training, he’d have to take on the additional cost of employing them as well.

Before speaking with his investors about the potential decision to move to W-2s, Gibbon asked his team to crunch the numbers. While there would be a clear uptick in labor costs, Gibbon said that the decrease in employee attrition and the increase in customer satisfaction almost outweighed that budget item entirely. Shyp also has the liberty of some flexibility with this cost structure that other on-demand startups don’t have. Although Shyp users pay a $5 pick-up fee plus retail rates to ship their packages, Gibbon negotiates highly reduced and undisclosed shipping rates with UPS, FedEx, and USPS. This allows Shyp to make money on every single shipment, Gibbon says, leaving more money to support W-2 workers and a robust training program.

A Shyp worker packaging an item in a delivery warehouse. 

“A lot of these businesses that are delivering food or doing home services are operating on razor-thin margins,” he said. “They don’t have a choice. If they go down this W-2 route, they will go out of business. That is why they are pushing for it.”

After putting his couriers through a two-week training program, customer service tickets from users about the pricing model went from being the vast majority of complaints to less than 1%. It is operational efficiencies like these that make Gibbon bullish that he made the right decision to make the switch. Gibbon also recognizes the legal costs he likely skirted by making the move. Around the time he made the announcement of his employment switch, Instacart, Luxe, and Uber were all facing lawsuits from workers for not being classified as employees. In 2015, Uber alone faced 50 lawsuits — 17 from drivers.

“When you are looking to raise more money, there is a legal gray zone there,” he said, visibly shaken about the possibility of having to fight an Uber-size legal battle himself. “Do you want to be in that? A lot of these businesses have high revenues and are looking toward IPO. What if the regulators come down hard? Will they make it so you can’t continue business? Why would we take that risk?”

No ‘haphazard’ switch

Risk is something that Curtis Lee, the founder of on-demand parking and auto services startup Luxe, forced himself to experience. After stints at Google, Zynga and Groupon, the Wharton MBA grad founded Luxe -- his first startup -- in 2013. The 38-year-old has the calm and collected demeanor of a business school grad, but startup culture has rubbed off on him as well: He has a French bulldog named Oliver that follows him into meetings and his office is complete with a two-story slide.

Soon after the California Labor Commission came down hard on Uber for not treating its drivers as employees, Lee hired an army of ex-management consultants to consult him on what to do. His app — which connects users with valets who can park their cars — was supported by more than 1,000 contractors. That model allowed Luxe to scale to six cities in two years, but it also made the startup a sitting duck for future legal action.

“Hiring independent contractors is just what everyone did, and because everyone did it, it just seemed like that was the right thing to do," she said.

After his general managers ran the numbers, Lee came to the same conclusion Gibbon did: The benefits of employing his valets outweighed the costs. The W-2 designation allows him to not only hold valuable trainings, but also set work hours and require employees to wear a uniform.

“We didn’t haphazardly say we wanted to make the switch,” said Lee. “We realized we are different than other on-demand startups.”

It took “some selling” on his part to convince his investors why they had to make the move, Lee said. But it works to Luxe’s benefit that its insurance costs for valets are a fraction of what Uber or Lyft would have to pay for its drivers. The main item Lee needs to insure is the blue scooters that some of the valets ride. This reality got his backers — which include Redpoint Ventures, Venrock, Google Ventures, Sherpa Ventures, and Lightspeed Venture Partners — on board with the decision pretty quickly.

A Luxe valet in downtown San Francisco

Yet other startup founders haven’t been so lucky. Marcela Sapone, the co-founder of the New York-based on-demand butler startup Alfred, has a vivid memory of an investor making her go line by line through her model to explain how she could scale without using contractors. For training and retention purposes, Sapone was adamant from the start of her company that all of her butlers sign W-2s. Yet most investors initially couldn’t wrap their heads around how that could be a good idea.

In an era when Uber is the crown jewel of the on-demand startup, it’s almost as if investors forgot that there was another employment model at play, she said.

“Hiring independent contractors is just what everyone did, and because everyone did it, it just seemed like that was the right thing to do,” she said. “If you’re a new on-demand startup saying you are going to do it another way, you’re going to hear about the 30 other on-demand startups who have hundreds of millions in venture funding that aren’t doing it your way.”

Marcela Sapone and Alfred co-founder Jessica Beck

Sapone views having a “loud voice” on this issue as crucial to the future of her business, and she isn’t alone. Total lobbying spent nationally has decreased over the past five years, but Internet companies have tripled their lobbying dollars over the same period. Unlike Gibbon who is somewhat pessimistic on how contract roles will shape the future of employment, Sapone is confident that a third classification of workers will emerge that relieves the tension with the current system.

In meetings with Senator Elizabeth Warren and Congressman Eric Swallow, both public figures on this issue, Sapone has advocated for policies that will develop protections, benefits, and trainings for 1099 workers and bridge the current gap between the two. Meanwhile, the Portable Benefits movement — an effort led by tech, labor, and policy leaders like Lyft Founder Logan Green, President of the New America Foundation Anne-Marie Slaughter, and others to create new protections for contract workers — is gaining ground.   

As we transition into a constrained funding market in 2016 for startups, only the on-demand founders who can navigate the current scrutiny around employment will make it, Sapone added.

“You just have to survive right now. It’s going to be a hard year,” she said. “This is the year to be heads down, focus on your business and product, and endure. Things will get worse before they get better, but as a result we are going to be creating businesses that will be around for the next five to 10 years.”

‘Nobody had specific responses’

But just when an alternative employment model for on-demand startups will emerge is still very much in the air. In July, presidential candidate Sec. Hillary Clinton came to the San Francisco office of Munchery and met with Gibbon and on-demand execs from Airbnb, Instacart, Luxe, and more. The close door discussion largely centered on how these businesses are navigating the 1099/W-2 debate, with Clinton appearing genuinely interested in coming up with solutions together.

Right around the time of the meeting, Clinton said she would "crack down on bosses who exploit employees by misclassifying them as contractors or even steal their wages." While she didn't mention Uber or other 1099 startups by name, the connection appeared to be implied given the timing of the speech. "Fair pay and fair scheduling, paid family leave and earned sick days, child care are essential to our competitiveness and growth," she added.

“Hillary wants to do what is best for workers, and there is a lot of complications to do that. Growing up, I would've loved to do an Uber, but on the other side if these are the next generation of jobs, you don’t have any security,” Gibbon said. Meanwhile Jeb Bush — who rode around in an Uber the last time he visited the Bay Area — seems to be lobbying for fewer regulations surrounding employment as opposed to more.

At the end of Clinton’s startup session, she asked Gibbon and his fellow entrepreneurs to tell her for concrete ways they think the government can help spur innovation in the on-demand space. Their answer? Largely silence.

“Nobody had specific responses,” Gibbon said.

This post is part of a monthly series on the future of work. Want to join this discussion? Write your own post here and include #NewEconomy somewhere in the piece.