Tag Archive for 'startup'

Startups Face Legal Action for Treating Contractors Like W2 Employees

Lawsuits against companies for a lack of distinction between contractors and employees are rampant. Startups especially are currently under fire for treating 1099 contractors like W2 employees, but without the benefits.

employee or independent contractorCompanies (especially startups) prefer to hire contractors in order to save money. This distinction also releases companies from any legal liability for workers. For example, an Uber driver hit a passenger in the face with a hammer last year, but Uber refuted liability because the driver is technically a contractor.

Hiring 1099 contractors may help a company save money, but the practice is highly unfavorable to workers.

1099 Contractor vs. W2 Employees

The biggest difference between 1099 and W2 workers is W2 workers are told what to wear, how to look, or where to go. 1099 workers have full control over their work and their contract. 1099 workers can’t hold a contract for longer than six months, and they can break the contract at any time.

Some companies consider their 1099 contractors entrepreneurs. Workers who drive the mega buses full of Silicon Valley employees work under a third-party company, and therefore receive no benefits or wages. Companies under this mantra will also refuse overtime pay and compensation for gas.

Companies like Uber will even go as far as to declare their contractors “customers.” They consider drivers “independent business owners,” who use Uber’s app to make money, while Uber takes a cut.

In contrast, W2 employees receive job stability, salaries, benefits, overtime, and compensation if the job requires driving long distances. Most importantly, companies with W2 employees are legally responsible for their actions.

Misclassification Lawsuits

Startup companies Uber, Lyft, Handy, Homejoy, and Instacart have all been sued by workers claiming they treat them as employees, but are compensated as 1099 contractors. The workers claim the companies control their working lives as if they are W2 employees and so the workers demand the same type of compensation.

Attorney Shannon Liss-Riordan takes on companies like these with class action lawsuits. In the past, she went after strip clubs for classifying their dancers as contractors. They receive no wages, benefits, and are forced to hand over a portion of tips to bouncers. Dancers in the strip club King Arthur even charged them $35 per shift and took 30 percent of the money made from private dances.

This type of lawsuit is a misclassification suit: a contractor does the job as an employee, but does not receive the same benefits a W2 employee would.

If given the option between a 1099 or a W2 contract when entering a job, 1099 may seem more favorable. Sure you’ll receive a bigger paycheck, but you will owe higher taxes. In addition, technically being an employee means benefits, salary, and often a pension. You are also protected under nondiscrimination laws, unlike 1099 contractors.

The Debate over Commercial Insurance Coverage and Ride-sharing Reaches a Boiling Point

Commercial liability insurance protects the owner of a company against claims of liability for bodily injury and property damage. As opposed to personal passenger vehicles which only require minimum state limits for liability insurance, vehicles used in the course of a business are usually required to carry insurance with higher coverage for bodily injuries and property damage in the event of an accident. Pretty simple and not much room for debate, right? Wrong.

Ride Sharing InsuranceMuch to the dismay of both insurance companies and taxicab companies, ride-sharing start-ups such as Uber, Sidecar, and Lyft have swept across the country in the last few years. All are venture capital funded, San Francisco-based companies that have grown into billion dollar industries, operating in almost every state in the U.S.

Transportation Service or Technology Company?

These companies have long argued that they are merely technology companies and should not be subjected to all the rules, regulations, and permits that state and local agencies mandate for other transportation companies like taxi services. More importantly, they argue that they should not have to maintain the type of commercial insurance that is required for vehicles used in the course of a business. Consequently, states, counties, departments of insurance and public utilities commissions are scrambling to deal with this debate across the country. California’s struggle is a perfect example of the conflicts presented in the majority of states.

When Uber, Sidecar, and Lyft first started operating in San Francisco, they required their drivers to carry personal minimum liability insurance, which in California is $15,000 for injuries, $30,000 for total liability and $5,000 in property damage.

Taxi companies’ primary concern is eventually going out of business because, they argue, licenses, permits and insurance premiums make it impossible to compete with ride-sharing prices. On the other hand, insurance companies maintain that they want ride-sharing companies to continuing to prosper, as long as they are adequately insured. They claim that do not want to get stuck with the bill if the drivers only have personal insurance policies, but they refuse to admit they are trying to upset these companies business models.

Consequences of the Insurance Gap

Adding more fuel to the fire, in January of 2014, a 6-year-old girl was run down by an Uber driver in San Francisco. Although, Uber had a $1 million umbrella insurance policy, they maintained the driver was not covered because he didn’t have a passenger in the car. Here lies the problem. In San Francisco, authorized taxis are required to provide $1 million of liability coverage per incident, 100% of the time.

Now there were real-world consequences to the perceived gap in insurance coverage, where the umbrella commercial policy was not yet in effect because the driver did not technically have any passengers.

The insurance industry’s stance is that any time drivers are logged into a ridesharing smartphone app and looking for a ride they are providing a commercial service. The argument is that, because drivers are going to go where potential riders are, based on the pings the apps send to them, they will inevitably be driving to crowded urban areas. This often occurs at night when there is a greater chance for accidents, triggering insurance pay-outs. Therefore, when they enter these areas based on their running apps, they are engaged in “changed behavior” and transition to commercial drivers. Essentially, insurers argue, the drivers are no longer entitled to personal liability coverage and must now have commercial coverage.

In California, the Public Utility Commission (PUC) stepped in and set regulations for ride-sharing companies, such as Uber, Lyft, and Sidecar. Not technically exclusive to these companies, the regulations targeted all “New Online Enabled Transportation Services” (TNC.) They defined this as an organization that provides pre-arranged transportation services for compensation using an online enabled app or platform to connect passengers with drivers using their personal vehicles. Included are requirements that the TNC get a permit from the PUC, a criminal background check be issued for each driver, there be a driver training program, a zero tolerance policy on drugs and alcohol and increased insurance coverage. As for insurance coverage PUC mandates that a TNC maintains commercial liability insurance policies of not less than $1,000,000 per incident coverage if the accident occurs while the driver is providing services.

The new PUC regulations did little to satisfy the insurance companies and they insisted the commercial coverage extended to whenever the driver had their app running. In response, several proposals backed by insurance company lobbyists, were presented to the California legislature calling to overwrite PUC’s regulations and include stricter rules for permits and licensing. However, their principal demand was for mandatory commercial liability insurance for drivers even when they have no passengers.

The Compromise

At this point the legislature has conceded that PUC, and PUC alone, has regulatory authority over ridesharing companies. Local taxi cab regulators have no authority, meaning special city permits and licensing requirements do not apply. The bill, which was passed by the California State Assembly and State Senate in late August of 2014, will require drivers to have $50,000 coverage per person for death and injuries; $100,000 damage coverage per accident; and $30,000 coverage for property damage. The ride-share companies also must have $200,000 in excess liability to cover costs of accidents that exceed policy limits. However, the question remains, which insurance policy provides the extra $200,000 in coverage for drivers who cause accidents on personal trips while running on apps on their smartphones. This has yet to be adequately addressed and resolved.

Are There Any Other Alternative Solutions?

Many states are claiming that the ride-share companies are coming into their communities in full force, blatantly ignoring any regulations or restrictions that are passed. However, ride-shares have agreed in several states to provide $1 million in commercial coverage for whenever a ridesharing driver has a passenger. They claim to have offered solutions to deal with the insurance gap but, at this point, they have not agreed to the level of commercial coverage during the times that insurers are demanding.

State governments and other regulators have varied on their methods when trying to deal with ride-sharing companies. The following are some examples of the different approaches:

  • In Washington, D.C. the state legislature is considering a bill that would set minimum commercial insurance. There is a proposal from the D.C. Taxi Cab Commission to regulate ride-sharing companies so that their commercial insurance coverage would be the primary coverage for personal vehicles.
  • Connecticut and Kansas send alerts to ride-sharing drivers that they may not be covered by their personal auto insurance policies while driving for the company.
  • In Washington State there was a proposed state bill mandating a study of ride-sharing companies that must provide a report to the legislature examining issues such as insurance coverage requirements and safety regulations. This bill was defeated. However, the Seattle City Council passed an ordinance that requires drivers to have commercial insurance coverage whenever that driver is available for a ride.
  • The Chicago City Council passed an ordinance requiring ride-sharing companies to provide $1 million of primary noncontributory coverage. Additionally, they must have $1 million in liability coverage for themselves, and $1 million for the drivers from acceptance to the conclusion of the ride.
  • Cease and desist letters have been issued to ridesharing companies by cities in Michigan, Missouri, Nebraska, New Mexico, Ohio, Pennsylvania and the Texas cities of Austin, Dallas, Houston and San Antonio.

Although the ride-sharing companies have agreed to comply with some state legislation, critics continue to argue that the legislature is not entitled to regulate the “sharing economy” and interfere with legitimate technological business models. With the rise of technology will come an increased number of unforeseen issues concerning insurance coverage, the state legislatures will continue to wrestle with new snags in the system and the law will change at a rate that the public has never before seen?

Can Crowdfunding Help My Startup Business?

If you’re starting a business, a primary roadblock is probably the issue of raising money. In the old days, fundraising was a tiresome process that involved soliciting potential pools of investors, making cold-calls, and doing whatever it took to attract attention – even if it meant selling mattresses.

crowdfuning for startupsWith crowdfunding, you can now start your own business simply by asking your Facebook friends and other Internet users to make small donations to your business. To encourage donations, you can offer awards or promise a share in the value that the business creates.

The 2012 JOBS Act, which stands for Jump Start of Business Startups, has made crowdfunding more advantageous than ever. The JOBS Act exempts crowdfunding from the strict registration requirements of the Securities and Exchange Act of 1933 of the Securities Exchange Commission.

Now, a potentially limitless number of individuals lacking accreditation can invest their money in your startup!

It is helpful to consider what the Act does:

  1. It imposes limits on how much a crowdfunder can invest and on the amount a startup owner may raise in a year to one-million dollars. This represents a compromise to having no regulation at all.
  2. It imposed disclosure requirements, but otherwise the details were left to the Commission’s administrative rule-making process.  The Commission reserves the right to shape policy in how the rules are applied to crowdfunders.

How Does the Act’s Loosening of Requirements for Crowdfunding Benefit Startups?

The Act now allows the Commission to permit relatively inexperienced investors with modest savings to help support highly risky startups. If you were once a startup that would normally receive large investments, you can now establish yourself with the help of many crowdfunders.

This benefits the market as crowdfunders have greater options to choose from when it comes to supporting small-scale business innovation by startup owners lacking traditional support of high-profile venture capital firms.

Critics of the changes in the law point out that there is a limitation of the amount that crowdfunders can contribute in a twelve-month calendar year. They also point out that the full-disclosure requirement of crowdfunders indicate a distrust of crowdfunding among regulators as a legitimate way for a start-up to raise funds.

Athough the Act may not be perfect, it does allow crowdfunders and startups to work together in a constantly growing and changing marketplace.

Zynga Demanding that Employees Return Stock Or Be Fired

If you’ve used Facebook at any point in the last few years, you’ve probably noticed your news feed getting clogged up with messages like “Bob just harvested 12 bushels of kumquats in FarmTown” or something similar. These simple, addictive games have proven to be a cash cow for a few companies. And the undisputed king of so-called “social gaming” is a company called Zynga. They make games like Mafia Wars and Farmville.

The people who founded the company, as well as its top executives, are now fabulously wealthy. However, like just about every successful tech company, Zynga was once a plucky startup with limited funding, and its future prospects were far from certain.

Cash-strapped startups, in a bid to attract the best possible talent, often offer new hires stock options, to supplement below-market salaries. Presumably, this is also meant to encourage these new hires to work hard to help the company succeed, and to attract employees who honestly believe in the company’s long-term success, by essentially forcing them to bet on it.

This has led to some relatively low-level employees (like secretaries and cooks) who got into a startup on the ground floor who end up with multimillion dollar windfalls when the company goes public. One famous example is a chef who was hired in Google’s early days ending up with $20 million when the company went public in 2004. Zynga, apparently, wants to avoid situations like this.

Basically, in anticipation of an initial public offering, Zynga appears to be looking at employees whose contributions to the company they don’t believe warrant a potentially-huge financial windfall. The company is telling them to give back their stock, or lose their jobs.

The company claims that they gave out too much stock to employees in the early days, and now they don’t have enough unvested shares to give out to attract top talent.

I honestly am not knowledgeable enough on the subject to say if this is legal or not. But, it seems like these employees are getting an incredibly raw deal. The whole reason that stock options are a good way to attract top talent in a company’s early days is that they offer the promise of a huge financial windfall a few years down the line, if the company is successful. It seems incredibly shortsighted for a company like Zynga to go back on this deal now that it’s inconvenient.

After all, stock options won’t be nearly as effective in attracting new employees if they have reason to suspect that they’ll be asked to give their shares back, or be fired, as soon as it’s convenient to the top executives in the company. Furthermore, actions like this will serve as a disincentive for employees at startups to put in the long hours and personal sacrifice that are usually required to turn a startup into a successful business. After all, how hard would you work to make a company successful if you know that your bosses might take away your major reward for doing so (your now-valuable stock options).

Of course, this maybe could have been avoided if the employees had pushed for a contract stating that the employer would not be able to pull this kind of move. Now that Zynga has set this precedent, prospective employees at other startups might start pushing for terms in employment contracts stating that they cannot be forced to give up their stock options as a condition of continued employment.

In this economy, it may seem that prospective employees aren’t in much of a position to be making demands of their employers, but with startups, the situation is a little different. Unless they’re flush with venture capital funding, tech startups often operate on a shoestring budget. Their need to attract talent, and the limited incentives they have to offer, give talented employees a good deal more leverage over their employers than the average worker has.

Employment is generally “at-will,” meaning that employees can be terminated for any reason, or no reason at all (presumably including failing to give back their stock options). However, this is the default arrangement, and it can be modified by contract. Of course, both parties have to agree to the terms of a contract for it to be valid, which is why employment contracts are relatively rare in non-unionized workplaces: the employer has little to gain by signing an employment contract which will almost certainly limit their rights to fire employees bound by the agreement.

But as I said, the situation with startups is different. Their employees have leverage. Hopefully, they’ll take this case as an object lesson in flexing their leverage, so situations like this don’t happen in the future.