Gig Companies Go Old School and Hire Workers

Over the last few years, investors have poured money into gig companies like Uber and TaskRabbit that rely on armies of contract workers. Now, some smaller gig companies are changing course and doing what most businesses do. They’re actually hiring their workers.

Trust Factor

For some companies ditching the gig model, the decision is about making clients more comfortable with workers. Honor, for instance, provides elder care. You can see why someone might feel better hiring a regular employee rather than a freelancer to take care of an elder loved one.

But other companies moving from contractors to employees offer much more standard app-based gig work like on-demand food delivery or help shipping a package. For them, hiring employees boils down to economics. In the long run, these companies believe it will be cheaper to hire workers rather than rely on contractors.

We’ve got two audio pieces about the shift some gig companies are making. The first is a story about a company called Trusted, which offers on-demand child care and decided to hire all of its employees from the start. To follow up, we spoke with the CEO of Shyp, an on-demand delivery company that used to have the gig worker model but has now hired its employees. First, the story of Trusted.

The Economic Argument

The nugget of the Trusted story is that the decision to hire workers is an economic one. The CEO of Trusted, Anand Iyer, calculated he would actually save money by hiring employees instead of getting gig workers.

Here’s the logic. In the short term, employees cost a business more. Companies have to pay higher taxes and offer benefits like workers’ compensation. But Iyer says employees tend to stick around longer and fewer quit. There is less “churn,” or worker turnover, which means less money spent on finding and training contractors to replace the ones who stop working.

Iyer ran the numbers and found that employees would save him money in the long run. “The math,” Iyer says, “totally checks out.”

Gig companies are realizing that employees can save them money. Other new businesses one might assume would go the gig-worker route have come to the same conclusion. There’s this story about Q, the office cleaning and management company.  And here’s a piece about a real estate company called Redfin that hires its agents in an industry where they are usually independent and earn commissions.

Employee Vs. Contractor

Some gig workers are railing against how little they are paid and the way they are treated by their companies. Lawsuits have piled up against companies like Uber, TaskRabbit and others. One of the main issues is that workers believe they are being misclassified as independent contractors when they’re really employees.

This is an important distinction. As employees, workers have access to more benefits like workers’ comp and potentially a company health care plan. They also pay less in taxes. Independent contractors face higher tax rates. They can lower how much they pay by working some deduction magic come tax time, but that itself takes time and work. For gig workers, it can be especially complex.

Palak Shah is from the National Domestic Workers Alliance and oversees the Good Work Code. It’s a set of guidelines for treating workers well in the digital age. Shah says employment is generally a better deal for workers than gigs are, but she says handing out W-2s does not automatically fix the generally precarious position of workers in the gig economy.

“The W-2 status can serve as a really important floor,” Shah says, “but there’s a lot of other dimensions like safety and shared prosperity and whether the voices of workers are heard.”

Shah says workers in the gig economy often aren’t getting a big share of the prosperity, have limited voice and suffer a large amount of instability. The rules can change overnight for gig workers, and they can start taking home less income or have less flexibility. See this story about Instacart workers for details. The unpredictability for gig workers is the flip side of doing a job for companies where you can work just by switching on an app.

Switching Gears

Now Trusted is no Uber. It’s infinitesimal by comparison. It has a little seed money and is just getting started in the Bay Area. It remains unclear if its model will make it successful or allow the kind of growth that has made other gig companies so attractive to investors. But at the same time, some of those gig companies that drew investment have now ditched the gig model altogether.

Shyp and Sprig are two examples of companies that began with an “Uber for X” gig workforce model and now hire their workers. Shyp is an on-demand parcel shipping service and Sprig does food delivery. We talked with Shyp’s CEO, Kevin Gibbon, about why the company made the shift to employees and what that has meant for his business.

Gibbon ends the interview by bringing up another economic worry with the contractor model: lawsuits.

Gibbon says investors are starting to question whether a new venture can handle the kind of employment lawsuits Uber is battling. Does the new company have the funds to be sued over something like misclassifying workers?

Gig companies have to make the argument that the short-term economic return of a flexible, contingent workforce is worth the cost of lawsuits, churn and looming uncertainty over the legality of the gig labor model. Gibbon thinks that is a harder sell to investors than it used to be a few years ago.

Gibbon says the employee model works for Shyp in part because it allows for better customer service. Workers can be trained to give clients what they want. Even with something as simple as shipping a package, this is vital.

So, Gibbon has this advice for new companies offering on-demand services: Consider actually hiring your workers. It will cost more in the short term, but it could end up saving you a bunch of money in the long run.