Instacart Changes Tune on Contract Labor as Uber Comes Under Legal Fire

Updated from 11:38 a.m. to include comments from industry experts throughout the story.

NEW YORK (TheStreet) -- As Silicon Valley debates the way on-demand startups classify their staff, on-demand delivery startup Instacart is expanding an offer for more of its personal shoppers to become part-time employees.

A California ruling last week shook the on-demand industry, finding that an Uber driver was in fact an employee, not an independent contractor. Though the ruling dealt with one specific driver, the case could have real implications for the dozens of startups that revolve around a business model of hiring independent contractors.

At a $50 billion valuation, Uber may be the most famous, with its business plan depending on the fact that its drivers are not classified as employees. If it had to provide benefits and salaries for its 22,000 drivers in San Francisco alone, the costs would certainly hit hard.

While the rest of the startup world continues unchanged and waits to see if any further legal action impacts them, Instacart -- which delivers groceries within two hours ($3.99 for two-hour delivery and $5.99 for one-hour delivery) -- has already been taking matters into its own hands.

Back in February, Instacart, which has raised $275 million in funding at a $2 billion valuation, decided to let its Boston personal shoppers--not drivers--opt to become part-time employees. Today, it expanded the test to Chicago, and according to Instacart's vice president of communications Andrea Saul, Instacart plans to expand to other cities as well though the company does not yet have a timeline.

The shoppers who opt in to become employees will work between 20 and 30 hours a week, according to Bloomberg, and make above minimum wage. If the shoppers don't want to become employees, they will have the option to become drivers.

"When you look at the difficulty of shopping, picking and delivering fruit, eggs, ice cream--items that have to be the right ripeness, are prone to breaking or have different refrigeration or freezing requirements--grocery shopping is more complicated than other contract jobs," Saul said. "For this reason, we want to provide supervision and training so we can be more accurate and more efficient."

It's important to point out that Instacart's drivers are not able to become part-time employees and remain in a similar role as Uber drivers.

But even with the drivers remaining independent contractors, having to treat personal shoppers as employees will come at a big cost to Instacart. Instacart currently has about 10,000 shoppers in 16 U.S. cities. Pay for Instacart's shoppers varies based on city, though Glassdoor, a jobs and career website, estimates that the average pay is between $10 and $18 an hour.

"In the short term, our expenses will definitely go up, due to factors such as payroll taxes and workers comp," Saul said. "But we think in the long-term, customer satisfaction will rise due to the improved quality of order fulfillment, so we anticipate a net gain over time. We also believe the change will help increase our retention rate for Shoppers."

Greg Portell, a partner in A.T. Kearney's Consumer Products & Retail and Media Practices, estimates that Instacart could see as much as a 50% increase in overhead costs because of the change. Other industry experts believe that number may look more like 20%-30%, but either way it's not an insignificant increase.

The one benefit Instcart has over Uber, though, is that it isn't competing with TLC, Portell notes. Meaning that Instacart, along with Postmates and other delivery companies, has defined a new industry and it has the flexibility to redefine pricing since its competitors would also be forced to undergo similar employment changes if litigation were to pass. Uber on the hand, would be competing with the TLC, which would likely be exempt from any legal reclassifications. Uber would then need to find a competitive advantage beyond price.

Startups like Instacart and Uber may be the first to be impacted by the shifting views on employment status, but some of the larger companies like Amazon (AMZN) and Google (GOOG) (GOOGL) may also have to rethink their approaches.

Amazon's Prime Now operates similarly to Instacart, and there have been reports that Amazon may move to a courier-based model for all of its deliveries, as opposed to using UPS (UPS). If Amazon had to classify each courier as an employee, this would certainly not be cost efficient. Google Shopping Express has a similar issue with its couriers.

The definition of independent contractors versus employees has long been contentious, according to Steven Gal, an entrepreneur and visiting associate professor at Cornell University's Johnson Graduate School of Management, who remembers discussing the case in law school in the '90s. Back then the question was around different industries, say a real estate agent; now there are simply more industries that straddle the line between contractor and employee.

"There is no clear answer to this," Gal said. "It'll definitely take years of litigation before you'll get to any solution."

The question is whether Uber, Instacart, and the like are merely technology platforms that enable independent workers to do their job. The California ruling seems to think otherwise.

But even if the California ruling spreads beyond the one employee to the entire on-demand industry, Gal thinks these startups are far from going out of business. They'll just rework their business model, spreading some of the costs to the consumer and the employee to make up for losses.

"If [Uber] becomes a little more expensive customers will still love it," Gal said. "I don't think it's astronomical. They introduced the safety fee when safety became an issue and consumers didn't flinch. It's the cost of doing business."

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