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.

Companies (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.