The one thing the on-demand economy must fix

Ondemand model

Instant gratification consumers can rejoice thanks to the on-demand economy. Using your mobile device, with a couple of taps you can order a ride to take you home. You can order your dinner for the night. You can have someone pick up your laundry and deliver it – washed and folded – the next day.

The consumer benefits are obvious. On-demand applications turn your mobile device into a remote control for service delivery. And the innovation propelling the on-demand economy means that you don’t need to visit a brick and mortar restaurant, grocery store, laundromat, or post office ever again.

Bravo to the new middleman

On-demand companies own very little – if any – tangible assets. Uber doesn’t own a fleet of cars. DoorDash doesn’t own any restaurants. Shyp doesn’t own any post offices.

Rather, these businesses are taking advantage of other people’s assets to be in business. Designing and delivering an on-demand application is the new way to make money as a middleman. The success of the Uber – the poster child for the on-demand economy – meant that many entrepreneurs saw a business model they could emulate very easily.

This makes sense to me – until recently, on-demand companies seemed invincible. Investment from January 2010 to April 2015 totaled a whopping $9.4 billion. Tapping into consumers’ insatiable appetite for instant goods and services could reduce startup time by months or even years. Building an application in the “Uber-for-X” model seemed to be a get-rich-quick scheme for entrepreneurs, served on a golden platter.

…But there’s less fanfare for workers

Here’s the catch with the on-demand model – the people providing the actual service are not employees. Uber doesn’t employ its drivers. DoorDash’s delivery person is not an employee, even though he or she wears a DoorDash t-shirt. The list goes on.

Sure – that all sounds great. Who doesn’t want more flexible working hours? But the work is defined, structured and monitored so tightly that Uber drivers, for example, didn’t even have time to pee because they are forced to work around-the-clock for fares.

The IRS defines someone as an independent contractor if “the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.” Based on this definition, this is where the on-demand definition unravels. Homejoy, an on-demand cleaning service that shut its doors last year, was subject to employee misclassification class action lawsuits, but also failed because it couldn’t train its independent contractor cleaners, because doing so would violate labor regulations.

It’s all about the gross margin

The challenge that the on-demand economy faces goes beyond worker misclassification, and whether someone should be classified as an employee or independent contractor. It all boils down to gross margin. On-demand companies save a lot of money by avoiding a lost of costs in the form of employee benefits, taxes, and tangible assets. These costs are incurred by the so-called independent contractors, and passed on to the consumer.

Even though on-demand businesses are shaving a lot of costs, companies are now starting to find themselves stuck in a world of low margins, high promotional costs and workforce churn. Uber has thin margins, but its volumes are so high that the business is viable. Meanwhile, Instacart can’t rely on the same network effects in the grocery delivery space, and it has had to raise its prices and fundamentally change its business model.

The framework is already available – so stop mistreating workers

The on-demand concept is relatively new, but it’s no different from companies hiring seasonal workers during peak times. This is something that the agriculture and retail industries have done for years. The main difference is that thanks to mobile technologies, the timeframe to meet consumer’s demands is significantly compressed. Peak times that businesses used to plan weeks or months in advance for are now whittled down to minutes.

As VC funding for the on-demand economy dries up and as misclassification lawsuits take their toll on these companies, how they treat their employees is central to their success. A number of startups, such as Luxe, Shyp and Instacart, have already converted their independent contractors to employees. Uber just settled two major class action lawsuits in which drivers challenged their classification as independent contractors for up to $100 million. The company also agreed to policy changes that reduce its control over drivers, like deactivating drivers’ accounts at will from turning down rides frequently.

I believe this is the right approach. Rather than continue to look for loopholes, the on-demand economy must invest and engage its people. The right framework already exists – it’s one where employers, employees and customers all play key roles to a company’s success.

Raj Narayanaswamy
Raj Narayanaswamy
Raj is the Co-Founder and Co-CEO of Replicon. Replicon provides award-winning products that make it easy to manage your workforce. With complete solution sets for client billing, project costing, and time and attendance management, Replicon enables the capture, administration, and optimization of your most underutilized and important asset: time.
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