Last May, we reported on the rise in lawsuits seeking to define the employment status of workers in the sharing economy. See article. In particular, drivers for ride-sharing companies classified as independent contractors filed suits across the country in state and federal courts seeking increased compensation and statutory protections that they would receive under California law only if re-classified as employees. At the end of January, plaintiffs in one putative class action, Cotter et al. v. Lyft Inc. et al, settled with Lyft for $12.25 million and additional job security. Under the terms of the settlement, though Lyft drivers remained independent contractors.  As a result of these employment classification lawsuits, companies in the sharing economy are now considering whether the best defense to such lawsuits is to re-classify their workers as employees instead of being independent contractors. The answer, however, is not so clear.

While Lyft could afford the $12.25 million settlement, other gig economy start-up companies do not have the money or investor loyalty to weather drawn-out litigation. The gig-economy, synonymous with sharing economy, derives its name from its norm of part- rather than full-time employment i.e., gigs. This summer, for example, Homejoy, a gig-economy cleaning service, closed because of a class-action worker misclassification lawsuit claiming that its cleaners were deprived of reimbursements and overtime wages because of their classification as independent contractors. The company could not survive because its business model, dependent on the principle of not employing people directly, crumbled in the face of the lawsuit and its investors fled.

In light of these employment classification lawsuits, and the collapse of start-ups like Homejoy, some of the smaller gig economy start-up companies are now rethinking the use of independent contractors.  Instacart (grocery delivery), Luxe (parking service), Shyp (on-demand courier service) and Munchery (meal delivery) have all moved away, at least in part, from the independent contractor model in favor of hiring employees. More recently, Honor, a web-based caregiver service for seniors, announced that it would move towards a traditional workforce, qualifying employees for benefits, workers compensation and stock options. See announcement. Honor was originally imagined as a network of app-driven senior care providers who could be matched with assignments through a smartphone app (think Uber or Lyft for senior care needs). Although the company’s CEO Seth Sternberg claims the decision has nothing to do with potential lawsuits, it is hard to believe that the increasing number of employment classification litigations was not at least a factor in the major labor structure transformation. See article.

What remains to be seen, though, is whether this labor model restructuring will result in more or less litigation.  Our earlier report about sharing economy litigation reminded readers that employees, unlike independent contractors, may pass liability on to their employers under a legal doctrine, respondeat superior, which holds an employer responsible for an employee’s action in the course of her work.

Companies choosing to move towards traditional employer-employee relationships should consider whether the risks of class action and other individual lawsuits brought by consumers could be even more crippling than the current wave of employment classification class actions. Indeed, consider the potential pool of litigants: in a successful business, the number of consumers (and thus potential litigants) will hopefully far exceed the number of workers. To date, no class actions have been filed against the start-ups mentioned above that have re-classified their workers as employees. It remains to be seen, though, what will happen in the future.