A recent lawsuit has thrown a spotlight on the issue of independent contractors, and the potential fallout for companies like Homejoy. The Massachusetts-based company raised $40 million in venture capital from sources including Google Ventures, PayPal founder Max Levchin, and Y Combinator. Google has even hired several of the company’s top tech employees. But what is Homejoy doing? Will it survive its lawsuit? Here are some details about what’s really at stake.
The first lawsuit involves Homejoy’s classification of its cleaning workers as independent contractors, rather than employees.
The company executives defended this decision, arguing that the contractor classification allows workers greater flexibility. The lawsuit was filed against the company in March, and it has since grown into a global service with operations in five countries. It’s unclear if Homejoy will continue operating after the lawsuits are resolved. If Homejoy does not settle the lawsuits, it will be forced to shut down.
Another lawsuit targets Homejoy’s worker-classification practices. The company was facing multiple lawsuits from workers over whether they were employees or independent contractors. The lawsuits also raised questions about Homejoy’s ability to obtain enough external investment to sustain its operations. While Homejoy was successful in its early years, it failed to attract enough investors to keep its business afloat. The company has since ceased operations in Canada, where the company only generated $25 million in revenue. A German company called Helpling had looked into purchasing Homejoy in April but decided against the deal after looking at its financials. Other companies such as Handy were also considering a buyout. However, the lawsuits are not the only reasons for Homejoy’s failure.
Homejoy is one of the dozens of companies that use apps to pair users with independent contractors.
Similar to Uber and Lyft, Homejoy pairs users with contract workers. Instacart recently converted many of its delivery people into part-time employees. Likewise, package delivery startup Shyp has recently converted some of its workers into employees. As more startups turn to this method of working, more questions are being raised about the legality of this arrangement.
The company’s legal problem stems from how the service was structured and operated. The pros did not have proper training, quality assurance, or compensation, and Homejoy made them a “middleman” who took a 25 percent cut of the transactions. Homejoy’s wage economics was also not good for the pros. The company’s promotion rates attracted the wrong type of customers, and Homejoy’s poor quality of work hurt the company’s bottom line.
The company’s service was hit-or-miss.
Independent contractors didn’t receive adequate training and supervision, and the service was inconsistent. In addition, the company was trying to increase profitability and growth at all costs and ignored its most important goal – customer retention. This is why the Homejoy lawsuit has become so widespread. In addition to the legal problems, Homejoy’s business model has some potential benefits. Homejoy’s focus on growth has also made the company prone to glitches.
While Homejoy may have had trouble raising money for its startup, the lawsuit reveals a larger problem with the sharing economy: regulations that put workers in a 20th-century box and restrict their freedom. Consequently, Homejoy may be facing millions of dollars in penalties. It may have been too early to convert the workers to employees – if it had, it could have avoided millions in penalties. The company may now need to change its strategy, including hiring employees.
The California Labor Commission’s decision earlier this year essentially changed the company’s classification system.
While the ruling affected just one driver, it sent a powerful message about how the system works. The decision comes just as Homejoy’s fundraising campaign was gaining steam. It seems likely that Google is planning to use Homejoy’s technology to help consumers find home services professionals. But it may not be the company’s endgame.
Regardless of Homejoy’s current business model, the company’s failure has also raised questions about the underlying model of an on-demand marketplace. VC funding in 2014 was estimated to reach $4 billion. Despite its lackluster performance, these startups often rely on scalable products with inherent viral effects. And while Homejoy’s mission was clear – to match quality professionals with homeowners, it failed to achieve its goals.
