The so-called gig economy sounds good on the surface: People can get connected to clients through marketplaces that let entrepreneurs unload some of the burden, like marketing, though review and rating systems and the bulk acquisition of potential customers.
Beyond Uber and Lyft, which have become poster children of the movement, there are systems where you can sell your services as a CPA, handyperson, pet sitter, or heaven knows what else. And for some, the marketplaces can make sense, when used judiciously.
But as much as enthusiasm, innovation, and taking chances may be part of what drives entrepreneurs, there also must be prudence and risk management. That’s exactly what many of the gig or sharing or task economy boosters miss — that and, perhaps, some clear recognition of what the markets can and will bear.
Less money than you might think
Start with the opportunities. Someone with refined professional (and business, marketing, and sales) skills might be able to command good rates, but that is not the norm, according to the 2015 1099 Economy Workforce Report from the consultancy Requests For Startups.
Three-quarters see their work as a part-time exercise. No problem with that, of course. However, after a year, people are split about 50-50 whether to continue or not. The way people lean correlates strongly with how much money they make. Of those who walked away, 42.9 percent stated insufficient pay as one of the choices and a possibly overlapping 36.9 percent found they didn’t enjoy the work.
Median pay wasn’t impressive. It took six to 12 months of work for the median to reach $15 an hour. After three years, that climbed to only $35. I say only because, if you’ve been self-employed, at least full-time, you realize that with expenses, the need to provide benefits, and additional taxes, $35 an hour isn’t much. In some cases — Uber is a notable example — the marketplace company can set rates or insist on other restrictions or demands that can hamper how you control your business.
Now flip the picture for a moment. From the marketplace point of view, there is growing concern over the issue of contractor versus employee. A partner at Wilmer Cutler Pickering Hale and Dorr, a major law firm, called the legal implications a “land mine.” Silicon Valley may be enamored with the idea of treating everyone as contractors, because it means the marketplaces have low costs of doing business. But the law can be sticky given how often employers have tried to avoid payroll taxes, workers compensation insurance, and other expenses of a business by saying that employees were actually contractors. There are guidelines to when someone falls into one camp or the other, not hard rules.
Who will be the target of investigation?
In addition, what happens if, as a business owner, you increasingly rely on contractors through a service? If the IRS or a state revenue service, or the Department of Labor or who knows what other agency, decides to start an enforcement action, there’s a chance that you could end up the target if you’re the one effectively employing someone and controlling their time and how they perform the work.
And then there are the ethical considerations. The dynamics of what people are actually making suggest that the marketplaces might be effectively collecting rents, like a financial service. They typically take a significant fee or percentage of the compensation for work, even though they’re contributing nothing to the actual process. The question is whether they are digging too deeply into the pockets of the so-called contractors, many of whom are inexperienced and don’t realize the true costs of running a business, and effectively getting a subsidy more than a reasonable fee for making the match. For example, you might think that 10 percent or 15 percent would be reasonable, but fees running from 20 percent to 30 percent or more aren’t unusual.
None of this means that being on either end of the gig economy is bad, or good. But if you want to run a smart business, you think long and hard about how you handle employee relations and what legal and ethical risks you might face.