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The On-Demand Economy

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The hidden dangers of "Uberizing" your business

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  • Here are the slides from the Drexel Entrepreneurial Law Clinic presentation on 11/29/16
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The On-Demand Economy

  1. 1. THE ON-DEMAND ECONOMY: HIDDEN DANGERS OF “UBERIZING” YOUR BUSINESS MODEL Presented by the Entrepreneurial Law Clinic of Thomas R. Kline School of Law, Drexel University Student Lawyers: Joshua Goren Dylan Caplan Mark Hildebrand Michelle Paznokas Clinic Director: Steven Rosard Featuring: Randal White, Fox Rothschild LLP
  2. 2. WHAT IS THE ON-DEMAND ECONOMY? Platform (form of communication) Supply (drivers, short-term rentals, etc.) Demand (customers MUTUAL NEED PRODUCTS CUSTOMER DATA CUSTOMER DATA PRODUCT AWARENESS
  3. 3. “HIDDEN DANGERS” 1. Regulators 2. Worker Misclassification 3. User Dissatisfaction, Property Damage, & Personal Injury
  4. 4. HIDDEN DANGER NO. 1: REGULATORS Michelle Paznokas
  5. 5. UNDERSTANDING THE TENSION • Sharing platforms defy traditional notions about the way civic resources should be used • Example: Using a house as a home, not a hotel room • Professionalized and regulated incumbents allege unfair competitive advantage • Example: Taxi coalitions versus Uber • “Local governmental powers are at their strongest when regulating property markets through zoning powers, regulating hotel and restaurant markets with tools like taxes and safety inspections, and regulating transportation through direct oversight and city-provided services”
  6. 6. THE HEAVY HITTERS’ GAME PLAN • Step 1: Develop a customer base before obtaining regulatory approval (create “facts on the ground”) • Step 2: Claim that the company is not a service provider, but merely connects third-parties to one another • Shifts the regulators’ focus to individual independent contractors • Step 3: Utilize a loyal consumer base to influence politicians and regulators • This is not a viable game plan for every company
  7. 7. LICENSES & PERMITS • Do companies in the sharing economy require the same permits and/or licenses as traditional operators? • Who is liable for not getting a license (i.e., the platform, or the worker)? • How can a platform mitigate that liability?
  8. 8. LICENSES & PERMITS: HIGHLY REGULATED MARKETS • The question of whether on-demand companies need the same licenses and/or permits as traditional operators is, unfortunately, largely unanswered • Based on recent examples, the expectation fluctuates based on the then-current government involvement in the specific industry • Highly regulated industries, like transportation and lodging, as opposed to industries traditionally reserved for independent contractors (e.g., TaskRabbit and “handymen”) • Example: High barriers to the NYC taxi market
  9. 9. LICENSES & PERMITS: BURDEN OF RESPONSIBILITY • Common sense and current regulatory trends dictate that the worker is responsible for obtaining license
  10. 10. LICENSES & PERMITS: BURDEN OF RESPONSIBILITY • Companies may be held liable for failing to encourage and/or require proper licensing and permits • “Connectors of people” argument • The company is not the service provider, thus does not need a license
  11. 11. TAXING SHARING ECONOMY TRANSACTIONS • How should (or could) sharing economy transactions be taxed? • Burden to adhere to applicable taxes often falls on the worker • If the worker fails to pay, the company may have to instead • Sharing economy companies often “strike deals” with local governments to remit taxes • Should these companies pay specialty taxes (e.g., hotel occupancy taxes) and/or federal income tax? • Like all legal questions… “it depends”
  12. 12. PREDICTING THE FUTURE REGULATORY LANDSCAPE • Retrofitting old regulations • Local/state governments have been revamping old regulations (e.g., “cottage food laws” and “bed and breakfast” classifications) to account for the emerging sharing economy • Creating new regulations • Some localities have been writing completely original laws targeted at the on-demand economy • Example: “Transportation Network Companies” in California and Colorado
  13. 13. A BRIGHT FUTURE (MOST LIKELY) • Will the response in the U.S. be the same as in Europe? • Probably (and hopefully) not • Successful interactions between local regulators and peer-to-peer platforms • Uber-type apps in D.C. • Getaround in Portland • Free street parking in Denver • Uber in Chicago • Governor Wolf’s recent decisions regarding Uber and Lyft in Philadelphia
  14. 14. REPORT FROM THE FEDERAL TRADE COMMISSION • Discusses many of the consumer protection and “unfair competition” questions raised by both critics and proponents of the gig economy • Not an authority, but will be extremely instructive to regulators and companies • Generally speaking, the Commission has taken the position that regulators should adopt a narrow focus so that they are only as restrictive as is absolutely necessary • Link to the report: https://www.ftc.gov/reports/sharing- economy-issues-facing-platforms-participants-regulators- federal-trade-commission
  15. 15. TAKEAWAY: We must continue to monitor regulators’ interactions with industry-specific markets. The more regulated the industry, the more careful a company in that industry must be.
  16. 16. HIDDEN DANGER NO. 2: WORKER MISCLASSIFICAT ION Joshua Goren Dylan Caplan
  17. 17. COMMON ON-DEMAND SERVICES • Car services • Housing accommodations • Grocery delivery • Food prep and delivery • Home cleaning and handyman services • Personal assistant and concierge services • Dog-walking • Laundry and dry-cleaning services • Giftwrap and delivery • Flower delivery
  18. 18. CONSEQUENCES OF MISCLASSIFICATION • Back wages and overtime pay • Employee benefits • Disability payments and workers’ compensation • Tax and insurance obligations • Liquidated damages • Civil monetary penalties
  19. 19. WHAT IS AN “INDEPENDENT CONTRACTOR?” • Provide services in exchange for compensation • Works for multiple entities • Independent contractors typically: • Charge fees for service • Engage only for the term required to perform an identified service or task • Retain control over the method and manner of the work itself • Retain economic independent • Are responsible for paying income, social security and Medicare taxes • NOT protected by most federal, state, or local laws designed to protect employees
  20. 20. ADVANTAGES OF HIRING INDEPENDENT CONTRACTORS Federal employment laws which cover employees, but do not usually apply to independent contractors: • Fair Labor Standards Act (FLSA) • Title VII of the Civil Rights Act (Title VII) • Equal Pay Act (EPA) • Age Discrimination in Employment (ADEA) • Americans with Disabilities (ADA) • Genetic Information Nondiscrimination Act (GINA) • Uniformed Services Employment Reemployment Rights Act (USERRA) • Occupational Safety and Health Act (OSHA) • Worker Adjustment Retraining Notification Act (WARN) • Family and Medical Leave Act (FMLA) • Employee Retirement Income Security Act (ERISA) • National Labor Relations Act (NLRA)
  21. 21. BENEFITS THAT DO NOT APPLY TO INDEPENDENT CONTRACTORS • Health, life, and disability insurance • Retirement or pension plans • Stock options • Paid vacation and sick days • Fringe benefits • Taxes that Companies Avoid with Independent Contractors: • Federal, state, and local income taxes (1099-MISC instead of W-2) • Social Security and Medicare taxes (owed under Federal Insurance Contributions Act (FICA)) • Insurance taxes under the Federal Unemployment Tax Act (FUTA) • State unemployment insurance taxes • Workers' compensation insurance
  22. 22. SPECIAL IRS CLASSIFICATIONS FOR STATUTORY NONEMPLOYEES •Direct sellers •Licensed real estate agents •Companion sitters
  23. 23. AMBIGUOUS CLASSIFICATION • On-Demand companies provide a means to maximize underutilized resources • The owners of those assets are the workers • Uber drivers; AirBnB hosts • Employment Concern: Take away the Assets and the company no longer exists
  24. 24. GUARDS AGAINST MISCLASSIFICATION • Motto: “Control the Result and Not the Means” • Main Areas of Concerns: • Control and Supervision • Integration of Business • Length of the Relationship • Method of Payment
  25. 25. RESTRICTING ON-DEMAND WORKERS • Restrictive Covenants are enforceable at least to the extent that restrictive covenants are enforceable against employees • Ensure restrictive covenants are narrow and limited in time and territory • Misclassification may eliminate restrictive covenants • Possible Solution: Enter into separate restrictive covenant agreements • Possible Solution: Limit to narrowly tailored confidentiality and non-solicitation agreements
  26. 26. PLAN FOR THE RISK • There is no clear consensus on whether on-demand workers are independent contractors or employees • Refrain from controlling the means and focus on the result • Adapt business models to anticipate different tiers of misclassification concerns • At-will termination may reign supreme to threat of misclassification • Customer ratings systems may reign supreme to threat of misclassifications
  27. 27. TARGETS OF ENFORCEMENT AND LITIGATION • Construction • Transportation and trucking • Cable and internet companies • Janitorial services • Landscaping and nurseries • Security Services • Nursing • Child care • Home health care • Restaurants and catering services • Staffing services • Hotels and motels • Oil and gas
  28. 28. MITIGATING THE RISKS OF MISCLASSIFICATION • Conduct an audit; Train personnel on classification issues; obtain a ruling from the IRS; and Draft agreements that document the independent contractor distinctions • Avoid using the word “control” • Specifically place responsibility for taxes, insurance, business licenses and the like on the Independent Contractor • Require only compliance with industry standards when possible • Specify that the IC determines the manner and means of the work and that the Company is only interested in the final result • Do not require progress reports • Avoid payment by the hour, day or week, try to pay per project • Avoid specifying hours of work, or where to work
  29. 29. MITIGATING THE RISKS (CONT.) • FLSA Independent Contractor Test, Department of Labor’s Interpretive Guidance, IRS Independent Contractor Test • Include waivers of any right to participate in company benefits • Specify the length of the contractual relationship instead of leaving it open-ended • Specify the IC’s can perform services for others; Avoid contract provisions allowing for termination at will • Specifically state that the independent contractor provides all necessary tools, equipment and related items • Do not require IC’s services to the company
  30. 30. MITIGATING THE RISKS: RECORDKEEPING REQUIREMENTS • Parties’ written agreement, including expired and revised agreements • Independent contractor’s federal Employer Identification Number (EIN or FEIN) • Payments made • Copies of 1099-MISC • Contact information • Documents that may evidence worker’s independent contractor status
  31. 31. TAKEAWAY: Always consider your level of control and set narrow restrictions.
  32. 32. HIDDEN DANGER NO. 3: USER DISSATISFACTION, PROPERTY DAMAGE, & PERSONAL INJURYMark Hildebrand
  33. 33. VICARIOUS LIABILITY • Worker classification matters! • If the service provider is an employee, then the platform would most likely be found liable for any contract breach, property damage, or personal injury the service provider commits • If the service provider is an independent contractor, then the platform is much less likely to be found liable for the contract breach, property damage, or personal injury which the service provider commits
  34. 34. WAYS TO MITIGATE THESE RISKS • Set Standards • Example: Community Guidelines • If violated, Service Provider may lose access to the platform • Vet the Service Provider • Example: Customer Rating System • Reward quality Service Providers with prominence on the Platform • However, do not outright terminate low-rated Service Providers
  35. 35. WAYS TO MITIGATE THESE RISKS: TERMS OF SERVICE AGREEMENTS • Define the Platform as a Request Tool or a Connector of Service Providers and Customers and not a party to any contracts between the Service Provider and the Customer • Define that the Service Providers are Independent Contractors • Disclaim any liability for any misrepresentation of services, property damage, or personal injury • Require Service Providers and Users to indemnify and hold the Platform harmless • Require Service Providers and Customers to waive the right to sue the Platform
  36. 36. WAYS TO MITIGATE THESE RISKS: INSURANCE • Rely on your service providers to insure themselves • Configure a hybrid insurance coverage split between the service provider and the Platform • Seek new On-Demand Economy specific insurance policies
  37. 37. RELYING ON YOUR SERVICE PROVIDERS TO INSURE THEMSELVES • EXAMPLE: • In 2008, Airbnb launched and did not provide insurance coverage for their hosts • Hosts relied on their personal homeowner insurance policy • PROBLEMS: • Insurance Gap • Personal homeowner insurance policies do not cover damages when the dwelling was used commercially • Commercial version of the personal insurance policy was often far too expensive for the Service Providers
  38. 38. SPLIT INSURANCE COVERAGE BETWEEN THE SERVICE PROVIDER AND THE PLATFORM • EXAMPLE: • Initially, Uber relied on their Driver’s personal automobile insurance policies to cover injury or damage occurring while the Driver was waiting for a request and while the Driver drove to pick up a passenger • Uber’s insurance would cover while the Driver transported the Customer to their destination • SAME PROBLEMS: • Insurance Gap • Personal automobile insurance policies did not cover damages when the vehicle was used commercially
  39. 39. RELYING ON YOUR SERVICE PROVIDERS TO INSURE THEMSELVES OR SPLIT INSURANCE COVERAGE BETWEEN THE SERVICE PROVIDER AND THE PLATFORM • Litigation Expenses • If the Service Provider cannot compensate a victim, then the victim will likely bring the Platform into court • Triggering State Regulators’ Attention • Uncompensated Injuries or damage eventually trigger the attention of State regulators
  40. 40. THE SOFIA LIU CASE • December 31, 2013 (New Year’s Eve), San Francisco, California: • Uber Driver killed Sofia Liu, a 6-year-old girl • The driver’s personal insurance could not cover the damage and injuries • Uber denied that its insurance policy applied to this case and would not compensate the victims • The family sued the Driver and Uber…. • ...and almost immediately California began writing a new law regulating the ride-sharing industry • 26 other states followed California’s lead in regulating this sector of the on-demand economy
  41. 41. SEEK THE ON-DEMAND ECONOMY- SPECIFIC INSURANCE POLICIES • THE FIRST: MetroMile • ESTABLISHED INSURANCE COMPANIES: • United States Auto Association • Farmers Insurance Group • GEICO • AllState (HostAdvantage) • Mercury • State Farm • USAA • START-UPS: Slice Labs Inc.
  42. 42. TAKEAWAY: Find an insurance broker and get insured!
  43. 43. 1. REGULATORS • More Regulation in the Industry = More Precautionary Measures (And make sure to read the FTC Report!) 2. WORKER MISCLASSIFICATION • Always consider your level of control and set narrow restrictions 3. USER DISSATISFACTION, PROPERTY DAMAGE, & PERSONAL INJURY • Find an Industry-Specific Broker and Get Insured! THE HIDDEN DANGERS IN REVIEW
  44. 44. QUESTION & ANSWER SESSION: RANDAL S. WHITE • Partner at Fox Rothschild LLP • Practice areas include: • Labor & employment • Employment counseling, policy developments, & audits • Employment litigation • Employment training • Wage & hour law • Unfair competition & trade secrets
  45. 45. Please join us for a reception in the Third Floor Gallery! The slides from today’s presentation will also be made available on SlideShare: www.slideshare.net/DrexelELC

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