Popular startups that rely on freelancers to perform on-demand services in a two-sided marketplace are having to re-examine whether their workers are in fact employees amid lawsuits across the country challenging their practices. The contractors, on the other hand, are simply standing up for the wages that they should have been paid all along under the Fair Labor Standards Act and have to this point been denied at the hands of those exploiting their need for a job.
Many startups have paid these workers via 1099s, the IRS form that companies report taxable income on their independent contractors. If a worker is a contractor, then businesses do not have to pay minimum wage, overtime or benefits to them. The company also does not have to pay employment taxes to the IRS based on their income.
The Department of Labor recently issued an interpretive memorandum that expressed the opinion that most workers are actually employees under the FLSA. The Wall Street Journal article published today essentially suggested that every startup paying workers on 1099s should expect to get sued. According to the article, many are already planning to make their freelancers into employees following the lawsuits and DOL guidance.
Venture Capitalists quoted in the WSJ article suggested that it might be tough for many of these startups to continue operating if they have to absorb increased labor costs. Housecleaning service Homejoy shut down after they were unable to raise additional funds from investors under the cloud of threatened wage and hour lawsuits. Transportation app Uber has some 200,000 contract drivers and has already been the subject of both protests and lawsuits.
These aren’t the only startups that have run afoul of the nation’s employment laws. LinkedIn paid $6 million in back overtime and damages last year following a Labor Department investigation into. According to news reports, the company’s sales force, who are non-exempt workers under the law, were working off-the-clock and the company was not paying them for that time.