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Zirx and Luxe Are Also Considering Reclassifying Workers as Employees

The question is key to the business models of many service startups.

Luxe

Shyp and Instacart might not be the only startups that could end up reclassifying their workers as employees rather than contractors.

Luxe and Zirx, two on-demand valet parking apps, are considering doing the same. The companies are researching the benefits and drawbacks of hiring their drivers as employees, according to a person with direct knowledge of the matter. The startups are trying to determine if workers will stick around longer and perform better when they’re employees instead of contractors. Some of Luxe’s more skilled valet drivers are already employees.

The issue of whether startups should classify their workers as employees has come to the fore in recent months. Two investors and one founder have told Re/code that most companies in the on-demand space are thinking about whether to reclassify their workers, although some are further along in their research than others. Homejoy, the home-cleaning startup, weighed the pros and cons on two occasions before ultimately deciding to keep its cleaners as contractors.

The business model for many of these startups, such as delivery service Postmates and meal delivery app Sprig, relies on hiring contract workers, who cost far less since the companies don’t have to pay payroll taxes, health care premiums or expenses. It keeps their costs low, which allows them to offer greater amenities for more affordable prices. At the same time, some of these startups are getting better results hiring regular employees, who they find are more reliable and perform better.

The debate has become most pronounced as it relates to ride-hailing app Uber, one of the highest-valued private companies in the world at $50 billion. There are several lawsuits winding their way through the California courts to determine whether Uber drivers are employees or contractors. Many on-demand startups have received funding by modeling themselves as “Uber-for-x” companies, so they’re paying close attention.

Some argue these companies might be classifying their workers wrongly. Workers are occasionally given uniforms to wear and standards they must abide by — in that way, they look like official employees instead of independent operators.

For startups like Shyp, Luxe and Zirx, changing worker classification now is a way to get ahead of the issue. By baking the costs into their business model in the early days — instead of down the line when they have outsize valuations — they’re setting reasonable expectations for investors about what their profit margins will look like after paying for employee benefits.

Hiring workers as employees has other advantages as well — a company can schedule them on shifts, train them and put them on neighborhood rotations so they learn the area and get faster at their jobs. If they’re given benefits of some kind, like reimbursement of expenses or vacation accrual, they might also work for a company longer, which lowers a startup’s worker acquisition costs.

Also, competition for service workers in the startup space is fierce — see the bonus new-driver signing battles between Uber and Lyft — so companies need every edge they can get.

This article originally appeared on Recode.net.

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