1099 work and the startup ecosystem

From Business Insider, Mike Zivin argues that startups should stop using 1099 workers and should hire employees instead. Mike writes:

breaking an addiction to 1099 work is good for the entire startup ecosystem – filtering down from the employees’ satisfaction to customer demand and the startup’s growth to investors’ returns. And the fact that Zirtual didn’t have a strong enough business model to support it meant that it was able to “fail fast” – instead of dragging investors, customers and employees along for additional months.

This is because reclassifying employees fundamentally challenges the “grow fast” model of building a startup. More upfront capital will be required to get businesses off the ground, and startups will have to strategically, and potentially less quickly, scale the business. However, the advantages of a full-time workforce – lower employee turnover, improved customer experience and reduced regulatory uncertainty – may more than make up for an initial increase in costs.

Almost by its nature, the on-demand economy employs a transient workforce. In a May 2015 study by Requests for Startups, nearly 28 percent of independent contractors at Uber, Postmates and Airbnb said that they expected to be employed at those companies for less than 12 months. Why? Mostly because the pay isn’t what it’s cracked up to be. Nearly 43 percent of those that had previously left an on-demand job said that it was due to “insufficient pay.”

Though good for some workers who want to fit a part-time job in between other work or school, transience also impacts the customer experience. IRS rules mandate that: “You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done)” [emphasis added]. To employ 1099 workers, the startup must relinquish control. It cannot train workers or set schedules – and therefore, it cannot control the service.