Lawsuits may cause business owners to rethink 'sharing economy'

When Maren Kate Donovan founded virtual assistant firm Zirtual in 2010, she envisioned taking her company down the same path blazed by other blockbuster firms in the so-called sharing economy, like Uber: provide a convenient service at a low cost by employing mostly part-time workers.

Four years later, she got there: Zirtual now employs nearly 300 assistants, from millennials to stay-at-home moms to anyone else who needs to work from home. For $399 a month, users can sign up for 16 hours’ worth of assistance.

But five months ago, Donovan changed her business model and made all of Zirtual’s assistants full-time employees. The reason: she noticed other firms like hers were beginning to face intense legal pressure for misusing independent worker contracts.

“My H.R. started to see the writing on the wall,” she said.

The past few years have seen an explosion of firms built on a 1099 workforce. The contracts allow employers to avoid having to payroll taxes or employee health benefits, while allowing workers a flexible schedule. Uber, Lyft, and online cleaning portal Handy —to name a few — all categorize their workers as 1099s.

But the arrangement is increasingly coming under legal scrutiny. In August, the Ninth Circuit Court of Appeals ruled FedEx had misclassified its drivers as 1099 contractors. Rich Reibstein, head of law firm Pepper Hamilton LLP’s independent contracting group, has described the case as an “earthquake” for independent contractor law. Despite FedEx’s legal firepower, the company could not prevent the court from picking apart the language of its contract agreement with drivers, he said.

“Those that are not structured and documented consistent with the law will have to pay a very substantial cost, or go bankrupt,” Reibstein told Fusion. He added: “It’s only a matter of time and good fortune, because there is a lot of low-hanging [liability] fruit among companies that haven’t gotten their independent contractor act together.”

FedEx has already restructured its labor agreements to an independent service provider model. But another recent ruling in Kansas could sink that arrangement too, Reibstein said.

“The rulings have only been harmful to FedEx, and people are not going to follow a program that is yet untested,” he said.

Uber is currently staring down a class-action lawsuit filed by drivers who allege the company requires them to perform a host of duties usually associated with actual employers. Uber has declined to comment on the suit.

Jill Ater, co-founder of part-time placement service 10til2, says it was only a matter of time before 1099 companies saw pushback. In cases like Uber’s and FedEx’s, workers win 78 percent of the time, she said.

“People think that if they hire their workers as 1099s, they’re not going to have to pay those taxes — but they’re going to have to pay more so their workers can pay their taxes,” she said.

Zirtual realized the cost of complying with 1099 laws at both the state and federal level would be prohibitive, and weren’t going to wait around for a lawsuit. John Donovan, Zirtual’s general counsel and human resources consultant (and Maren’s brother), said the company quickly realized the cost of complying with 1099 laws would sink the company.

“A lot of companies do this, and a lot of companies get in hot water for it,” he said.

Donovan came to decide it was the right thing to do anyway. Besides the obvious benefits to the employees, she could also provide clients with higher-skilled workers. Zirtual’s work from 9AM–6PM each weekday and can make up to $14 an hour. All qualify for benefits.

The move has allowed Lizzy Bannister to continue to work full-time while taking care of her grandmother at her home.

“Having a job that allowed me to work from home was really important, so I could sit on the couch and keep her company, but also work,” Bannister said. “That was the ideal situation.”

Rob covers business, economics and the environment for Fusion. He previously worked at Business Insider. He grew up in Chicago.