Start-ups now find the best employees

California Labour Commission recently ruled that an Uber driver should be classified as an employee, not a contractor. While the ruling does not set a binding precedent, it may push some in Silicon Valley to look for alternatives to the contractor model

When Ron Johnson was pitching his idea for an e-commerce delivery company to venture capitalists last year, one of the sticking points was his vision for how to treat employees.

Johnson’s company, called Enjoy, sends experts to deliver and set up tech products in homes and offices. But rather than requiring people to work as independent contractors, a practice championed by most socalled on-demand companies, including ride-hailing app Uber, Johnson wanted to actually employ the people who would be working for him.

“I said there’s a good chance that one day there could be a change in how the law qualifies these contractor jobs — and I’d rather be taking the high road from Day 1 and not be subject to that business risk,” said Johnson, the executive who founded Apple’s retail division and later ran J.C. Penney. The risk of relying on independent contractors became more salient with the revelation last week that the California Labour Commission recently ruled that an Uber driver should be classified as an employee, not a contractor. While the ruling does not set a binding precedent, it may push some in Silicon Valley to look for alternatives to the contractor model. Johnson’s company is among a handful of app-based outfits that suggest there may be another way.

Although the start-ups that are avoiding the independent contractor system are far smaller than Uber, which has contracted with hundreds of thousands of drivers across the world, their nascent success offers hope that on-demand companies will be able to offer stable careers rather than an unpredictable patchwork in which people stitch together app-based tasks to make a living. But it isn’t just the murky legality — or even what Johnson calls a moral obligation to do the right thing for workers — that has pushed these businesses to part with Uber’s vision for the future of work. Instead, they argue, real employees are better employees.

“We’re providing a personal service — our product is a person,” Johnson told me. “The vision says that it’s really smart to make them employees, so we can get the best people to deliver the best service.”

If you’ve ever wondered why there are such vast differences in quality between Uber rides you’ve taken, this is why: Beyond customer ratings and warnings, Uber can’t tell drivers what to do.

A key feature

Under the independent contractor system, workers are considered to be tiny businesses responsible for their own expenses and taxes. A key feature of an independent contractor relationship is autonomy. According to the IRS, a business that hires an independent contractor is not entitled to dictate how or when the contractor performs a job. This limits a company’s power to train and schedule its workers.

The on-demand companies that have embraced the old-fashioned employee model all say they aim to deliver an experience that wows customers. The best way to do that, they say, is to train and systematically deploy their workers — a practice that can be accomplished only with actual employees.

“This is MBA 101 stuff,” said M. Diane Burton, a professor of human resource studies at Cornell University. “When people are your source of competitive advantage, it’s clear that a long-term employment relationship and what we would call a ‘good job’ is good for the workers and good for the companies.”

At Beepi, a company that lets customers buy and sell used cars online, new auto inspectors are trained for three months to become “Beepi Certified” — a system that would not have been possible under the independent contractor model.

“The promise of our brand is that we are going to inspect every vehicle as if it’s one you’d sell to your mother or a good friend,” said Ale Resnik, the co-founder and chief executive of Beepi. “For that, you need people who are invested in the customer. They need to really care — and they only care when you invest in them.”

Tech people like to talk about “full-stack start-ups,” a new trend in entrepreneurialism in which companies aim to control every part of their service rather than just the technical aspects. Hiring front-line workers is the ultimate expression of the full stack.

“Fundamentally what it boiled down to was that we had to create good jobs to make sure that our operators were vested in our company,” said Saman Rahmanian, a cofounder of Managed by Q, a start-up that provides commercial cleaning and supply services.

Creating ‘good jobs’

Of course, creating “good jobs” entails costs. Managed by Q’s workers get an “above market” wage, plus full medical benefits. “They are the same benefits that our programmers and engineers get,” Rahmanian said, because “we didn’t want to create a company that had a divide between people that worked in headquarters and the others.”

Munchery, a dinner delivery service, pays drivers a base wage that exceeds the minimum wage, plus their driving expenses, plus tips. Taken together, it comes out to about $23 an hour in San Francisco, far higher than most other delivery jobs. Those who work more than 30 hours a week also get health and retirement benefits.

Beepi’s auto mechanics and delivery people get an above-market salary, overtime pay and medical benefits. MoveLoot, a startup that sells and delivers used furniture, also provides above-market wages and benefits to its workers.

And at Enjoy, which began operating in San Francisco and New York this spring, delivery experts are paid either a full-time or parttime salary, not a per-customer fee. Johnson declined to specify the salary, but he said that it was above what workers at high-end technology retailers might make — meaning around $40,000 to $50,000 a year. Enjoy’s employees are also given benefits like health coverage and retirement plans, and they even get stock in the company.