This article originally appeared on Inc. for Applico’s guest column, Tipping the Scales.
Tech companies, specifically, platform companies are creating the most value in the 21st century. The United States has 84% of its workforce providing a service. That means trillions of dollars each year are spent on services. On-demand service platforms are driving innovation and growth in this market. However, government has been unable to institute policies in support of these platforms and their innovative business models.
Furthermore, government isn’t providing any meaningful guidance to these companies coming under attack by class action lawsuits for allegedly misclassifying 1099 contractors. This directly threatens our industry’s pace of innovation.
Here’s a list of the many beloved tech companies under siege:
They’re the victims of the United States legal system and a lack of forward-thinking leadership in Washington. They all have class-action lawsuits filed against them because they’re accused of “misclassifying” their 1099 contractors. The plaintiffs claim that these platforms should have classified their producers or workers as part-time W2 employees instead of contractors. The average commission taken by leading service marketplaces is 15%. With a move from 1099 to W2 employee classification, these platforms can expect an increase in cost of 15-20% (according to Maren Donovan, founder of Zirtual, an on-demand virtual office assistance company, Bloomberg). This essentially eradicates any potential profit for these platforms.
Considering, half of the unicorns reported by the WSJ are service marketplaces, the lack of government action is creating a big issue for the tech industry. Not to mention the consumers who loves the convenience of these mobile apps and the producers who rely on these platforms for their main or supplemental income.
Basically, none. Except the IRS is happy because they receive more money.
Yes, the employer pays payroll taxes, workers compensation and usually has stricter vetting requirements (background checks, drug tests, etc.). You pay the 1099 contractor a set fee and they are responsible for all taxes. What are some commonly asked questions to make a decision. Visit this quick quiz from Quickbooks:
On-demand service marketplaces have introduced a new type of working relationship. They can disperse a lot of small, individual jobs to workers. Large-scale coordination and routing of resources coupled with the instantaneous nature of a consumer’s request requires the use of modern technology.
These platforms use labor like Toyota used raw materials for its cars: just in time. If the IRS has its way, Fortune estimates Uber would have an increase of $4bn per year in expenses. This would kill its entire business model. It would wipe out the low costs to consumers and therefore the increased demand for drivers (i.e. more jobs).
Similarly to Toyota, a platform’s producers are interchangeable, just like the raw materials used in car manufacturing. Individually, they are not core to the business’ success because of the part-time nature of their work. A platform’s full-time employees are dedicated to ensuring their company can enable the transaction between consumers and producer. The platform business is a technology company and not a service provider. It merely facilitates the exchange of a service.
Legal fees are expensive for platforms. Forbes estimated that Uber was spending as much as $5 million in legal fees and another $5 million in lobbying per month. Not to mention, the time, energy and distraction these lawsuits create for founders. These lawsuits also scare off investors, which is one of the reasons Homejoy went out of business.
Shyp, Eden, Instacart, Luxe Valet, Sprig, Managed by Q, Munchery, Maple, Chariot, Parcel, Alfred, Enjoy.
This is the list of service marketplaces that are no longer platforms. They fundamentally changed their business model to absorb the cost of producers as employees. Will these companies face a similar fate as Zirtual? When the service providers are now your employees, you are no longer a facilitator of value. Instead, you are a glorified service provider with fancy, expensive technology.
Many of these companies haven’t even been sued yet. They are pro-actively building the old, linear business model to avoid a lawsuit. This is the definition of government regulation stifling innovation. A new type of conversation needs to happen in Washington and our industry needs to have a seat at the table. To read more about platforms visit Applico and read more about our book, Modern Monopolies.
Filed under: Platform Innovation | Topics: 1099 vs. w2, on-demand