Delivery startup Postmates has been ordered to retroactively pay more than two years of workers’ compensation premiums for more than 3,000 of its couriers in Washington state, but the company is fighting the decision, GeekWire has learned.

The Washington state audit began after a couple of couriers were injured on the job and filed workers’ comp claims. When looking into those claims, Washington’s Department of Labor & Industries discovered Postmates was not paying workers’ comp for its couriers because it viewed them as independent contractors exempt from the program.

It’s the latest dustup between tech companies creating the so-called “gig economy” —relying heavily on contract workers — and the regulators and government organizations responsible for overseeing them. Technology is transforming how people work, with estimates that by 2020 as much as 43 percent of the U.S. workforce could consist of independent contractors. City, state and federal regulators are attempting to catch up to this fast-moving technology to ensure that these growing companies are following laws on wages, taxes, workers’ comp and other issues.

Postmates, based in San Francisco, operates in Seattle and cities around the country. The Department of Labor & Industries audit of Postmates from July 2013 to the end of 2015, obtained by GeekWire through a public records request, found that Postmates delivery personnel were not being accurately reported to L&I and were not exempt from the state’s workers’ comp program, and the company should have been paying in all along.

L&I identified a total of just under $320,000 in audited workers’ comp premiums during that period, according to documents obtained by GeekWire through the public records request. It is unclear if that is the exact amount Postmates has to pay because state law restricts L&I from releasing that information. Postmates was also charged a $75,000 fine for insufficient record keeping, or about $25 for each of the 3,011 couriers that worked for the company in Washington state during the audit period.

“Postmates was considering these couriers as independent contractors, and the company thought they wouldn’t have to pay, or whatever they thought, they weren’t paying L&I for workers’ comp for these couriers. Our auditors looked at these couriers and what they did and found they should have been recorded as employees,” L&I spokeswoman Debby Abe told GeekWire.

Postmates has not responded to several requests for comment. The company cooperated with the audit, but it also filed a request for reconsideration of L&I’s findings, essentially an appeal. The audit also recalculated the hours for some salaried employees, but Postmates is not challenging those findings.

Postmates ’employs no couriers’

In its response to the audit, Postmates doubled down on the assertion that it should not have to pay workers’ comp for its couriers because the delivery people perform a service for customers, not the company. Postmates argued it has little control over how couriers manage their own time. The company said it doesn’t require its couriers to accept a certain percentage of deliveries, has no influence on which routes they take and doesn’t do performance evaluations. It also has no restrictions on couriers working for competitors, even when they are logged into the Postmates app.

“Postmates is a technology company,” wrote Douglas E. Smith, of law firm Littler Mendelson, in a response to the audit dated Nov. 28. “It employs code writers, marketers and technical staff. It is not a delivery service. It does not provide courier services in Washington (or anywhere else). It employs no couriers. No couriers work out of Postmates’ offices in Washington, and all courier services are ‘performed outside all of Postmates’ place of business.’ ”

L&I’s policy is to resolve these types of disputes in 90 days, but sometimes that doesn’t happen with big companies. If L&I denies the request for reconsideration, Postmates can appeal the decision to the Board of Industrial Insurance, and the next step would be taking the conflict to court.

More than two years of workers’ comp claims would be a significant cost for Postmates, but the company recently landed a $141 million funding round, valuing it at close to $600 million. Postmates has reportedly been operating at a loss and expects to do so until at least 2018.

Postmates came to Seattle in 2013, starting small with a fleet of approximately 20 couriers delivering about 20 to 30 orders per day via bicycle and car. Its operations in Washington have increased since then, and Postmates couriers now deliver to Bellevue, Kirkland and Redmond, in addition to Seattle.

The audit documents bear out that growth. The audit found couriers worked more than double the hours in the fourth quarter of 2014 than the previous quarter, with incremental growth after that.

From L&I’s perspective, regulating tech companies that rely heavily on independent contractors like Postmates has proven difficult. L&I’s Abe didn’t have specific numbers, but she said L&I is auditing more companies like Postmates. Many of them are coming in from out-of-state, and Abe says they aren’t familiar with Washington’s unique workers’ comp laws, where most people, whether they are contractors or employees, should be covered.

Postmates is a technology company. It employs code writers, marketers and technical staff. It is not a delivery service. It does not provide courier services in Washington (or anywhere else). It employs no couriers.

“In Washington, independent contractors are considered covered workers unless they meet specific exclusion criteria. In contrast, most states consider independent contractors exempt from workers’ comp coverage,” Abe said.

Washington has a multi-part test to figure out if a business is exempt from workers’ comp, and the audit determined that Postmates did not fit that criteria. The test looks at whether workers are controlled by a central authority, if the service was outside of the company’s normal business scope, and whether the workers kept their own records or registered as independent businesses. L&I concluded that the couriers were working for Postmates, not for themselves.

Postmates argued in its response that it does not direct the couriers, and it considers itself a facilitator or a marketplace that matches customers and couriers. Citing previous cases, Postmates argued that because couriers use their own vehicles, the main tool needed to do the job, they are the ones in control of the business.

“Each and every courier is customarily engaged in an independently-operated business venture — i.e. they operate under their own direction and simply use Postmates’ app as a business tool to augment their income,” according to Postmates’ response.

Regulating the ‘gig economy’

Tech companies like Postmates, Uber and myriad others are seeking to modernize industries they see as out of date or inconvenient. But in doing so, they have stepped out of the hard-charging, fast-paced world of technology and into the service industry, where things move a little slower and a slew of regulations abound to protect the individuals responsible for delivering packages or driving people around.

The distinction between employees and independent contractors has come up time and again as these companies seek to expand their service around the globe. At the local level, the city of Seattle is attempting to put the finishing touches on a law that would allow drivers for companies like Uber and Lyft to decide if they want to unionize. It is also working on regulations for other tech companies providing real-world services like Airbnb.

Michael Duff, a law professor at the University of Wyoming who focuses on workers’ comp issues, told GeekWire these kinds of disputes between companies and regulators are nothing new. Workers’ comp laws are more than a century old, and companies and regulators have gone back and forth on what constitutes an employee or an independent contractor for even longer.

“Yes, there is a new economy, but this is the same kind of thing that periodically we have gone through in history,” Duff said.

A former attorney for the National Labor Relations Board, Duff was often tasked with questioning people in independent contractor/employee disputes to figure out the correct designation. Often, he said it was simple to tell if someone was an employee rather than a contractor. What it comes down to is how much say bosses have over what the worker does.

Duff said he sees some value in trying to further clarify the definitions of employee and contractor, but ultimately that could be a tough undertaking due to the virtually endless types of workplace arrangements that exist today. As technology continues to disrupt traditional working conditions, it will become even more complicated. But in the end, Duff thinks recent controversies from tech companies getting into the service industry are less about a revolution in how we work and more about businesses that don’t want to follow the rules.

“How to distinguish between an independent contractor and an employee, those questions still have to be dealt with,” Duff said. “This has been going on for decades. What it is driven by is the simple truth that employers don’t want to pay taxes, or support the regulatory structure if they don’t have to.”