Just a few days after the California Labor Commission ruled that an Uber driver should be considered an employee, a different startup in the “1099 economy” is reclassifying part of its workforce. That change is voluntary, however, not at the behest of regulators. And it’s coming from Instacart, an on-demand grocery delivery service, which on Monday announced that it is transitioning roughly 200 workers in Boston and another 100 or so in Chicago from independent contractors to part-time employees.

Instacart uses so-called personal shoppers to fill grocery orders from its customers. In some of the 16 cities the company operates in, those shoppers do everything from filling the order in the store to dropping it off at the customer’s home. But in others, Instacart has begun to split up the job, so that some workers are exclusively in-store shoppers while others are assigned to delivery. It’s those designated in-store shoppers who in Chicago and Boston are becoming part-time employees. As part of that shift, they’ll receive more training and oversight from Instacart than they previously have. They’ll also gain certain benefits--unemployment, social security, and Medicare--and be paid a minimum hourly wage.

“As Instacart grows, and we continue to learn what makes the best experience for our customers, we are constantly looking for ways to improve our service,” Apoorva Mehta, Instacart’s founder and CEO, said in a statement. “When you look at the difficulty of shopping, picking and delivering items such as fruit or eggs that need to be carefully selected, you realize that grocery shopping can be complicated. For this reason, we want to provide supervision and training, which can only be done with employees.”

Overall, the 300 newly minted employees represent a small portion of the roughly 7,000 workers that Instacart has in the United States. But the change is nonetheless a big one. For starters, it means that at least one fairly well-known company in the on-demand space has decided there are certain business benefits to hiring employees over enlisting legions of independent contractors. It suggests that other similar operations--companies like TaskRabbit or Handy, if not Uber or Lyft--could reach a similar conclusion. Perhaps most importantly, it noticeably undermines Silicon Valley’s much-hyped thesis that the nascent on-demand economy is different, is here to stay, and ought to be exempt from the old employment rules. Quite the opposite, Instacart’s decision indicates that the contractor model may be shakier than the industry has touted up until now.

Lest that sound extreme, consider what Mehta told Fusion’s Kevin Roose in January, shortly after Instacart raised $220 million in funding at a $2 billion valuation. “We have the ability to try new things in a very quick way,” Mehta said. “We don’t hold inventory; we don’t own warehouses; we don’t own trucks. The changes we make are software changes.” Implicit in that list was one other point: We don’t have employees. As I noted at the time, Instacart, like many of its on-demand peers, was relying on its thousands of contractors to make the fundamentals of its service possible while keeping its margins ultra-thin. The moment even some of those workers became employees--people with benefits and the right to a minimum wage--was almost certainly the moment that $2 billion valuation would deflate.

Instacart decided to make in-store shoppers part-time employees after running a trial with that model in Boston since February and concluding that employment made workers better, happier, and more efficient. In-store shoppers in Boston and Chicago will be automatically shifted to part-time employees; should any Instacart workers wish to remain contractors, they’ll have to switch to delivery-only positions, or go back to doing both shopping and delivery. About 25 percent of shoppers in Boston opted to remain contractors, said Andrea Saul, a spokeswoman for Instacart. Most workers put in 20 to 30 hours a week.

Saul wouldn’t specify how the employment shift will affect the company’s valuation and financials, but she said the greatest costs will come from changes to compensation and payroll taxes. “Even though the model is costlier for us, we ultimately think that by improving our customer service and providing a better experience for the customer it will improve our business for the long term,” she said.

That’s precisely what seems like the biggest change in Instacart’s calculus--the notion that, in the long term, investing more in employees (and therefore quality) is a better bet than a transitory, freelance workforce. Just a few months ago, Mehta was trumpeting the assetlessness of his company; now he’s decided to add 300 shoppers to the payroll. It’s a wager to which the entire on-demand economy should pay attention: that in order to reshape the economy, “software changes” alone may no longer be enough.

--This story first appeared on Slate.

Published on: Jun 22, 2015