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Startups that push the limits of labor law are getting socked by lawsuits, and risk paying out big to employees and the IRS. These episodes are not just a threat to the business model of many tech ventures.

The labor flare-ups are also a stubborn reminder of a growing, and possibly permanent, servant class who are powering the tech industry’s dreams of disruption.

The contractors who clean toilets

When two sisters sued maid-on-demand service Handy last month over alleged labor law violations, the lawsuit felt almost inevitable. Not only had Handy been filling Facebook feeds with ads to clean homes for the improbably low price of $29, the startup also adopted the bold legal stance that the workers who do the clearing are not employees but “independent contractors.”

This notion of a “contractor” wearing a uniform and scrubbing toilets for $29 may seem far-fetched (Handy, for its part, claims it pays $15-$22/hour and doesn’t require uniforms). But it’s just one of the more striking examples of a phenomenon in which more and more companies are re-classifying their workers as contractors in order to save costs associated with having employees.

“When the market tanked in 2008-09, we started seeing more independent contractor situations. We first started seeing it in landscaping and construction, then it spread to different industries,” said Nicholas Woodfield, a general counsel at the law firm Employment Law Group.

The upshot is that the traditional notion of a contractor, which invokes images of a skilled tradesman with tools, has expanded to include laborers, maids and, well, anyone — especially in Silicon Valley.

As New York magazine reported in September, the Valley is now awash in so-called “1099 companies,” a reference to the IRS tax form filed by independent contractors. These startups include well known firms like Uber and TaskRabbit as well as a slew of smaller outfits like Handy, Homejoy and Washio. All of them take a category of services normally performed by employees — washing, cleaning, driving and so on — and repackage it as a web-driven platform powered by contractors.

And for many people, this has been a boon. For consumers, the slew of contractor-driven companies means prompt and easy access to an unprecedented array of services. Meanwhile, for workers, the 1099 business model offers an easy way make a few extra bucks without the constraints of a formal job.

The trouble, however, is that many in this new worker army look more like conscripts than contractors. And their teeming ranks pose legal and ethical challenges to one of Silicon Valley’s favorite philosophies.

Disruption and its discontents

Transforming toilet cleaners into contractors is one example of how the tech industry is shaking up the labor market. But more broadly, Handy’s unusual arrangement also embodies a Silicon Valley ethos that tech boosters like to call “disruption,” and that detractors call “regulatory arbitrage.”

The basic idea is that a startup takes a run at a regulated industry and tries to break it with the help of cool tech and a big pot of venture capital dollars. If regulators object to its business model, the company often deploys a PR charm offensive to portray its would-be overseers as anti-progress — and to dissuade them from enforcing laws until the startup is too big or too popular to be stopped.

Examples abound: Airbnb flouted city zoning laws to compete with hotels in many cities; Uber and Lyft thumbed their nose at taxi regulations and are now a fixture of urban transport; messaging service Snapchat played fast and loose with privacy rules but became a hit messaging service.

Not every attempt succeeds, of course. Aereo, the startup that sought to challenge outdated TV rules, had to shut down after the Supreme Court found that its business violated copyright law. But many other companies are winning the arbitrage game, staving off lawsuits and persuading the public, and often politicians too, to take their side against fuddy-duddy regulators.

Skating over legal lines comes with a price, of course, but many of these companies are able to pay it. Uber and Airbnb, for example are up to their eyeballs in court cases but, since they are now super-charged by VC money and riding an enormous user base, it’s a safe bet they will survive whatever punishment comes their way.

And whatever you might think of such tactics, it’s hard to deny that consumers are often the long-term winners of the disruption that comes with regulatory arbitrage. After all, few would dispute that Uber’s app is way more efficient than a taxi dispatcher, and Google’s digital library (which you can call a copyright disruption) has been a godsend to readers and scholars everywhere. In short, whatever legal ripples these companies create, most of them deliver an overall net benefit to society — which is part of the reason they ultimately prevail.

In the case of many contractor companies, however, the net benefit to society is harder to see. Meanwhile, the penalties they are courting while skating on the edges of labor law could hurt far more than those that befalls other types of tech disruptors.

Disrupting wages… and the IRS

Abraham Lincoln reportedly asked, “If you call a dog’s tail a leg, how many legs does a dog have?” His answer was,

“Four. Calling a dog’s tail a leg does not make it a leg.”

The quote is from a California appeals court decision this summer, in which judges threw cold water on the idea that employees stop being employees if you call them contractors.

The case concerned the huge package company FedEx, which had insisted that its delivery drivers were independent contractors — never mind their uniforms, logo-clad vans and the company’s control over the drivers’ schedule and pay.

And FedEx isn’t the only delivery company to run afoul of the employee/contractor divide: Lasership, the company responsible for many of Amazon’s shipments, settled a similar case with drivers in Massachusetts late last year. Google, meanwhile, conceded under pressure last month that its security guards are employees, while Uber now has its own contractor case on its hands.

Disputes over employees versus contractors are hardly new, of course, and the court cases continue to revolve around a 1947 Supreme Court case that provides a series of factors to determine that classification. The question now is how those factors apply to the army of “contractors” powering the Silicon Valley startups.

Legal scholars suggest that these companies — the Task Rabbits, the Handys and so on — lie on a continuum. On one end will be those where the worker brings capital or a specialized skill, and exercises considerable control over how the work is done. On the other end is, well, the maids.

“Arguments that janitors are independent contractors have mostly been rejected,” said Cynthia Estlund, a labor law professor at New York University. “With cleaning people, it’s definitely pushing the line.”

So what happens if courts conclude Handy and other companies have crossed that line? For starters, the companies will not be able to rely on their own contracts as a defense against lawsuits. As Estlund pointed out, federal labor rights are like anti-discrimination laws in that courts will not allow companies to claim that employees have opted out of them.

And the situation is more serious still since alleged labor violation by the likes of Handy would translate into real money owed to real individuals. Unlike others forms of tech disruption that fall afoul the law, such as those involving zoning or transport or privacy rules, the damages at stake are not abstract.

In the latter type of cases, companies can often cop to a symbolic settlement with an agency, since the harms are hard to quantify. In the case of underpaid maids, however, the damages can be easily calculated from business records in the form of dollars per hour, and would very likely be valued at hundreds or thousands of dollar per person.

And that can be just the first financial ordeal that befalls a company caught on the wrong side of the employee/contractors divide:

“The misclassification of employees is a substantial tax dodge that hits the Treasury,” said Woodfield the labor lawyer, who noted that fewer bona fide employees in the workforce means fewer payroll taxes for the IRS.

Woodfield said that the IRS is on the lookout for companies that disguise employees and contractors, and that it can impose fines and even criminal penalties on violators. In the worst case scenario, then, reimbursing maids for unpaid overtime could be the least of Handy’s worries.

Silicon Valley’s labor law disruptors thus face a unique and severe form of financial penalty, even if their move-fast-and-break-things ethos is not particularly worse or different than other disruptive companies.

Is there a solution to superfluous people?

Silicon Valley is incredibly good at solving some of society’s hardest problems, and its ambitions span everything from driverless cars to personal medicine to reusable rockets. Yet, there is one problem that the tech industry is not only bad at, but is actively exacerbating.

That problem is what to do with the legions of superfluous people that digital disruption keeps producing — and who now serve as spare parts to power Handy, Uber, Task Rabbit and all the other piece-work mills. While there’s no doubt such gigs are ideal for some types of workers, reports by the New York Times and others make clear that many people take them because they have no other choice, and are regularly exposed to fear, uncertainty or exploitation.

In tech land, however, the response to the rise of mass under-employment often ranges from indifference to outright insensitivity: behold the VC in Forbes who extolls the Handy workers of the world to salute their “uncollared” status. Or the well-meaning but hairbrained attempts to address homelessness by encouraging the indigent to act as Wi-Fi beacons or mine bitcoin.

Let them eat digital cake, in other words.

It’s true that no one has the an obligation to solve the surplus worker problem. The CEO of Handy has no more duty to fix structural unemployment than I do to cure cancer.

Still, given that Silicon Valley disruption is upending full-time jobs in a raft of industries, from media to movies, it seems fair to ask why someone, somewhere can’t make solving unemployment the next “moonshot” to go with health-monitoring nano-particles or bringing airborne internet to billions of people.

For now, however, it appears that the fate of the Handy “contractors” will not be resolved by a tech miracle, but by a slow grind in the courts. As the labor law professor Eslund suggests, the starting point may be to remember the maids of Handy deserve a real place in the workplace to begin with.

“These people should be treated as the employees of somebody. The appeal of this claim is to bring them into a system that they should be in.”