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The rise of the on-demand economy

The rise of the on-demand economy

10 June 2015

Using independent contractors could expose you to legal risk

These days you only need to tap your phone to get your apartment cleaned by Handy, your groceries picked up by Instacart and your flowers delivered by BloomThat. 

The most recent inspiration for the rise of the on-demand economy (ODE) is Uber, which provides private drivers at lower prices than regular taxi companies. Uber now operates in more than 50 countries and may hit an annual revenue of $10bn by the end of this year.

On-demand services: good for the company and worker?

The rise of the ODE is being pushed by improved technology and changing social habits. On-demand companies put people who have money but no time in contact with people who have time but no money. 

And it’s easy to do: just take a smartphone or computer and add freelance ‘crowdworkers’ to provide high-quality services directly to the recipient; you can now provide luxuries once reserved for the few to everyone at low cost. 

Consumers have more choice, while workers often welcome shorter-term flexible assignments to complement their lifestyles. Most independent contractors value flexibility over security, and are often young people, retirees, students, the otherwise unemployed or young mothers. This business model also means on-demand companies can rapidly upsize and downsize their workforce depending on demand. 

New legal challenges for on-demand companies

When on-demand companies start, they sometimes overlook compliance issues, such as labour and employment laws, and classify their ODE workers as freelancers and independent contractors (for obvious cost reasons). 

But incorrectly classifying workers may prove detrimental. These ODE companies are increasingly facing challenge and penalties for misclassifying workers and denying benefits. This is a grey area: no single factor decisively means a contractor is really an employee.

If courts force on-demand companies to reclassify their workers as regular employees, rather than contract workers, this may raise a company’s costs and jeopardise its business model. The company may not have included paid holiday and sick leave in their budgets and price calculations, for example. And even worse, the courts could apply the reclassification retrospectively; a serious issue for start-ups. Not complying with employment law could be a criminal or administrative offence in some jurisdictions. 

This doesn’t mean that the ODE business model is always non-compliant: it’s possible to run an ODE business with ‘real’ independent contractors, but companies need to invest proper time at the outset to getting this right. 

What legally compliant alternatives are available? 

  • In the UK companies may use ‘zero-hour contracts’ – contracts for casual work with no guarantee of a minimum number of hours (though these come with their own legal difficulties). 
  • In Germany, there is the ‘Arbeit auf Abruf’ model, but its disadvantage is that there must be a minimum number of guaranteed hours per week. For an ODE start-up this may not be an attractive alternative. 
  • In Hong Kong, ‘on-demand’ employment contracts exist, but in contrast with Germany, no minimum number of guaranteed hours per week is needed. But if employees work more than 18 hours per week for more than four weeks, they become entitled to regular employee benefits.

Some governments are starting to think of possible ways in which they can change their legal frameworks to cater for the ODE business model. There have been interesting developments in a number of countries, including Belgium where a member of the government has called for new legislation to support the on-demand economy.