If you have an on-demand platform, paying your producers as 1099 workers will provide you with the lowest costs and most flexibility. Classifying your producers as W2 workers, even if they are part-time W2 workers, will be more expensive and less flexible. Legally, 1099 classifications open your business up to class-action lawsuits from workers that will claim they have been misclassified. Philosophically, we believe that compensating your producers as 1099 contractors is the appropriate way to model your on-demand platform. Let’s review the pros and cons of either approach and provide some examples.
At an Applico Meetup (March 2016) focused on the On-Demand Economy, Handy CEO Oisin Hanrahan shared the following stats; 80% of Handy’s producers work 20 hours or less per week and 50% of the platform’s producers work 10 hours or less per week.
Similar producer workforce stats are seen from Uber. Over 50% of Uber’s 1mm drivers work less than 10 hours a week (source).
A 1099 classification will provide the platform with a core base of workers who work more hours than others; however, a lot of hours will be worked by producers that use the platform for only incremental income. By classifying your producers as 1099 contractors, your platform will have full flexibility in allowing producers to work whenever it suits their schedule and availability.
A platform that classifies its workers as 1099 is not responsible to pay taxes on behalf of those contractors. That tax responsibility lies on the contractor. This is one of the reasons that the government is on edge about producers being classified as 1099 contractors because there is the increased risk that taxes aren’t paid by individuals. A company paying their taxes on-time and accurately is a lot more reliable.
Additionally, the platform isn’t responsible for paying payroll taxes, unemployment insurance, healthcare benefits, workers comp and vacation and sick pay. All of those savings mean that paying your producers as W2 employees costs about 30-40% more than paying them as 1099 contractors. In many on-demand platforms, that cost increase renders the business model useless because the unit economics don’t provide enough value to either side of the ecosystem. For example, if Uber were to pay their producers as W2 employees, they would have over $2 billion in annual expenses.
Producers prefer 1099.
A recent study showed that 80% of on-demand workers surveyed preferred 1099 status. It makes it easier for producers to work multiple jobs and work for certain platforms purely for incremental income. Also, producers can be paid faster as 1099 contractors than W2 employees. Currently, there isn’t a payroll company that is setup to do dynamic payroll runs within 24 hours. Payroll usually happens on a bi-weekly or weekly basis. Not 3, 4 or 5 times a week. Payment platforms like Stripe and Adyen have easy API integrations to pay 1099 contractors next day. These platforms are rumored to be building a similar product designed for W2 payroll payments, but currently it does not exist.
With great success, lawsuits are inevitable.
Since on-demand platforms are still relatively new, laws and regulations haven’t been updated to account for the innovative services these companies provide. Be warned, there are still gray areas in the judicial system that could result in turbulence as the platform scales.
With larger rounds of institutional investment, your platform will become an easy target for labor and tax lawyers to file lawsuits against, even class-action lawsuits. These lawsuits distract you and are expensive, but anyone can file a lawsuit in the United States, regardless of whether or not you have actually broken the law. Venture capital firms should be aware of these risks and won’t be deterred as long as your platform is built on sound fundamentals.
Filed under: Platform Innovation | Topics: 1099, on-demand, platforms, W2
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