A few months ago Inc. Magazine had an article titled, “The 1099 Bind.” The lead example was about a (now closed) on-demand housekeeping business in the Bay Area that ran into trouble, i.e. lawsuits, over “are we employees or are we contractors?”
You’d think a firm with $40 million of VC money would have a legal opinion on this (it’s a popular issue with headlines in local and national publications over the last five years). The IRS and the States are vicious when it comes to the contractor classification.
Yes, I understand management didn’t think they could be competitive if their labor costs were 20 to 30 percent higher. So maybe it wasn’t as good a business model as they thought.
On our “Partner” On-Call Network “Initial Disclosure Form,” which I ask business owners to complete as one of the first steps when I meet them and want to know more about the business, there are the following two questions (along with over 20 more):
- Are there any federal or state licenses, training, education requirements, etc. to operate this business (other than normal business licenses)?
- Do you have any people working as independent contractors who could possibly be considered employees? If yes, please explain if you have an opinion from your CPA or attorney stating if your independent contractor status complies with Federal and State law.
Venture Capital firm people tend to be smart and know what they’re doing. So I’m guessing the ROI looked pretty good and maybe they felt it worth the risk. Perhaps they should have asked some common sense questions, like the two above.
A lesson for all of us the old adage, “If it sounds too good to be true it probably is.”
“If we knew what it was we were doing, it would not be called research, would it?” Albert Einstein
