As we mentioned in a previous post, many of the startups we work with at Founder Shield are a new breed of B2C services. These companies leverage the latest technology to perform traditional services more efficiently and create a much better user experience than ever before.
One of the ways these companies stay agile is through the use of large networks of independent contractors. For example, none of the drivers for Uber are actual uber “employees.” They’re independent contractors that meet certain requirements and standards set by Uber in order to access Uber’s customer base. We’ve seen this model repeated across different service industries (GetMaid, for another example) and new service industries are being tapped every day.
By using industry-specific independent contractors, these companies can focus on the technical side of their service. The core team can hover around a dozen people even if an army of contractors is used. Pretty awesome [scalable] model, right?
Though the model is great for growth, it can leave companies exposed to massive amounts of liability. Courts generally use a multi-factor test to determine a company’s liability for independent contractors, meaning that contractors can sometimes be considered “employees” despite your best efforts. It’s not a far-fetched scenario to be facing legal claims from one of your contractor’s screw-ups.
So how do you mitigate these risks? There are a couple steps you can take:
1. Lawyer up
A good lawyer that really understands marketplace tech is crucial to mitigate these risks. Depending on your industry, you either want to distance yourself from your independent contractors (“ICs”) or make their standards even more rigorous. Sometimes more rigorous standards (ex. requiring proof of insurance from ICs) are just not doable from a competitive perspective. If your competitors don’t have these requirements, neither can you. Therefore, it’s crucial to make sure your employment practices, contracts, and marketing materials all harmonize. A good lawyer can help you figure all of this out.
2. Get the right insurance
Once you’ve figured out your positioning, you need to get the right insurance in place. Usually companies that use ICs will need some combination of General Liability and Errors and Omissions policies. These policies can range from very reasonable to very expensive in this space. Sometimes companies simply have to cover their ICs in addition to the company (more expensive), while others will be fine without covering their contractors.
Here’s a hint on how to end up on the inexpensive side: talk to your lawyer about positioning yourself as a platform. A mere “conduit” to connect two parties in commerce. And whatever you do, don’t ever perform the actual services for which you subcontract workers!
If your startup uses ICs, I’m sure you may have plenty more questions after reading this. This post probably raises more questions than supplies answers, so don’t hesitate to reach out to us for your insurance needs or even suggestions on a good lawyer. We’re always here to help!