Why Some Gig Economy Startups Find Salaried Workers Are More Productive Than Contractors

Because organizations, even startups, feel they will get more of a return from investing in training and incentivizing full time employees, those people become more skilled, enhancing their ability to become more productive - and of greater value to the enterprise. JL

Susan Taylor reports in Fast Company:

While hiring employees over contractors may appear more expensive on paper, it makes financial sense. “Because you have a more knowledgeable and more productive staff, you end up being able to deliver a better product at a competitive wage. We could invest in our employees and train them, not something you can do with 1099 contractors.”But it’s a long-term play. It’s not the cheap, quick answer.”

On-demand startups have weathered criticisms for (among other things) classifying workers as independent contractors and avoiding the higher costs associated with providing benefits and covering payroll taxes for full-time employees.

Uber has fought several class-action lawsuits over worker misclassification. Earlier this year, a Los Angeles judge rejected a settlement that would have paid just over $1 to 1.6 million California drivers. Following disputes with its contractors, grocery delivery startup Instacart changed its model to offer employee status to its contractors.

Some gig economy startups have taken the opposite approach by hiring W-2 employees and providing benefits early on instead of relying on contract labor. Here’s a look at some of these startups and their rationale.

When You Want Employees To Build Trust With Customers

Hello Alfred is a New York-headquartered home management startup that sends assistants called “Alfreds” to pick up customers’ dry cleaning, clean their apartments, ship their packages, or perform other home management tasks. CEO and cofounder Marcela Sapone says when the startup first launched in September 2014, they chose to hire Alfreds as employees so that customers could trust them to act as their proxies. “We needed to make sure we’re hiring really trustworthy people and giving them the skills to deliver on that value proposition,” she says.
Arun Sundararajan, a professor at New York University and author of the upcoming book The Sharing Economy, says that Hello Alfred has a business model that lends itself to hiring employees. “It doesn’t make sense for them to use contractors on-demand because they’re trying to get individuals who keep going back to the same apartment,” he says. “There’s trust that needs to build up between the customer and the Alfred.”
Although this decision means 30% higher labor costs versus contractors and less flexibility to change pay rates or contractor agreements on a whim as some other startups do, Sapone feels the extra cost has paid off. “We chose W-2 [employees] so we could invest in our employees and train them, which is not something you can do with 1099 contractors,” she adds. Hiring employees over contractors also means Alfreds can advance within the company. Sapone says they’ve hired hundreds of Alfreds (she declined to share a specific number) and enjoyed strong employee retention, which is harder to ensure with a contract workforce.
“The other area where we see a big payoff is the customer feedback and the amount of customer service volume that we have to handle,” Sapone adds. Instead of operating on a pure on-demand model, Hello Alfred’s recurring service helps smooth out ebbs and flows in demand. “Alfreds visit [customers’ homes] once a week, every week on set days,” Sapone explains. “You can also add things in an on-demand way.”

Currently, Hello Alfred operates in Boston, New York, and San Francisco, with plans to launch in other cities. Scaling up in other markets can be a slower process when it requires hiring employees, but Sapone says this self-imposed “mechanical governor” also has an upside. “We have to grow in a sustainable, thoughtful way,” she says. “We have to find the right employees and train them in the right way.”

To Help Build A More Knowledgeable And Productive Staff

Mulberrys Garment Care is an on-demand laundry and dry-cleaning company launched in Minnesota in 2009, using employees for pickups, deliveries, and the actual cleaning process. The company now operates in Minnesota and San Francisco, with about 150 employees. CEO Dan Miller says hiring employees helps ensure a consistent customer experience and also aids with information sharing. “When you’ve seen a sequined gown before or know where a customer lives, those things all feed on each other,” he says.
While hiring employees over contractors may appear more expensive on paper, Miller feels it still makes financial sense. “Because of the fact that you have a more knowledgeable and more productive staff, you end up being able to deliver a better product at a competitive wage, but it’s a long-term play,” he says. “It’s not the cheap, quick answer.”
Mulberrys customers can order clothes to be picked up on-demand within an hour, so the company uses demand forecasting to ensure that they have enough staff to handle those requests, especially during spring cleaning season.
While this model isn’t as flexible for workers as, say, turning on an app when they have a free hour, Miller feels the stability offered to employees outweighs the desire for total flexibility. “For the majority of people, what they want is a great job that allows them a career path they can grow into and offers them some type of security,” he says.
Mulberrys currently offers employees health insurance, workers compensation, and vacation time, with plans to add an employee stock ownership plan later this year. “That makes it so much easier to recruit people because it’s something they can get excited about,” he says.

Offer Flexible Pricing To Avoid Wasting Time

When the cleaning company MyClean first launched in New York City in late 2009, they partnered with local service-based companies who had their own W-2 employees. MyClean then treated those employees as their 1099 contractors. The business started to gain traction, but it began to plateau around $60,000 to $70,000 of profit per month. CEO Michael Scharf says quality control was the main culprit.

“To really have better processes in place and do all the things that were required to consistently do a good job,” Scharf says, they pivoted in late 2010 to hiring their own cleaners as W-2 employees. “We slowly transitioned from using the companies we were using into using our own employees,” he adds. MyClean then launched in Chicago in 2014.
The obvious advantage of hiring contractors is that the company doesn’t have to pay them when there’s no demand or when they’re traveling between appointments, as they do with employees. To combat the problem of potential downtime, MyClean launched a flexible pricing tool to optimize cleaner’s time.
Most customers want a Friday 10 a.m. cleaning. “They want to let their cleaner in before they leave for work on Friday,” Scharf says. “If you’re cool with us coming Tuesday, you’re gonna pay a lot less than that person [who insists on a Friday cleaning].” Customers leave their keys with their doorman so the cleaner can come when they have a hole in their schedule. “We’re matching the supply and demand, Scharf says. “It’s like the anti-Uber surge pricing.”

Will This Approach Catch On?

Sundararajan says that depends on whether it makes for that company’s business model. He feels the problem is not that companies exploit 1099 contractors, but that our labor system hasn’t caught up with the new realities of nontraditional, on-demand work. “We should be spreading the benefits across all work arrangements,” he says. “Your work arrangement should have nothing to do with the fringe benefits you receive.”
He’d like to see the government create structures where nonemployees have an easier time setting a retirement plan and accessing other benefits. Congress may soon consider legislation in this realm, including a plan from Sen. Mark Warner (D-Va.) that would create more portable benefits for gig workers.
Of course, these changes wouldn’t happen overnight. “What we’ve constructed as full-time employment has taken a century,” says Sundararajan. “Employment didn’t come with all these good things attached to it. These were things that labor unions did in the ’50s, ’60s, and ’70s, and now we have to decouple it from that [traditional employment] model.”