Exploitation in Silicon Valley: Tech start-ups abuse independent contractors

With transportation start-up Uber enjoying a valuation increase from $18 billion to over $41 billion in a matter of months—jumping as much as $15 billion in a single week—the “digital middleman” labor model is on the rise. Like many recently successful start-ups, the company operates by providing a platform for independent contractors in place of hiring employees, a system that appeals to people seeking to earn money outside of traditional long-term, hourly employment. However, recent class-action suits have proven that this model opens the door to worker misclassification and provides potential opportunities for employers to take advantage of their workers.

The new trend of coordinating independent contractors through web platforms like Uber, Airbnb, Homejoy, and TaskRabbit means that companies can classify their employees as 1099 contractors instead of W-2 wage earners. On the companies’ end, this is beneficial in a number of ways: workers are paid only for their time spent providing services, which means no overtime pay, no health benefits, no unemployment insurance, no worker’s compensation, and no retirement plans. Despite the convenience and ultralow costs associated with the managed-service model, however, independent contractors are increasingly being treated as employees, creating legal gray area for Silicon Valley.

The classification of a worker as an employee is determined by the company’s degree of control over the worker in matters such as scheduling, job site, uniform, job training, tools used on the job, and degree of supervision. Often, companies seek to exercise a degree of control over workers’ behavior that is too excessive for 1099 contractors.

Recently, a group of approximately one thousand New York-based Uber drivers threatened to strike when the company began to penalize them for declining lower-cost fares in favor of fares that would earn them more money. Eventually, Uber backed down and revised its policy, but the company still faces opposition from those who believe that the legality of its practices is dubious when workers are forced to cover their own maintenance costs or injuries are sustained on the job. The company is currently facing a class action suit from workers in California and Massachusetts, who allege that Uber is misclassifying them as independent contractors when they should be considered W-2 employees.

Although using contractors eliminates overtime pay and results in lower costs, such highly profitable companies can afford to bring contractors onto payroll—and if workers are discovered to be wrongly classified, companies will owe thousands of dollars in back payroll taxes and overtime pay anyway. Federal court recently found that FedEx delivery drivers in California were misclassified as contractors due to the company’s broad control over their schedules and methods. The court found the employees entitled to benefits such as overtime pay and reimbursement of expenses.

The benefits of a freelance marketplace are flexibility of schedule and scope of work, yet the freelance model is frequently abused. Silicon Valley’s overt dependence on independent contractors could come to a head when labor laws are demonstrably violated. For noncompliant companies, lawsuits brought by contractors could force an overhaul of practices, and reward mistreated workers with the benefits they are due.