A second generation of gig economy startups is abandoning a dependence on contractors in favor of full employees.

When Dan Teran set out to launch an on-demand office services startup in 2014, the model to follow appeared obvious. Companies like TaskRabbit, Handy, and Uber had fired up the gig economy by hiring thousands of workers as independent contractors. In doing so, the startups benefited from a cheaper workforce, and workers got to enjoy greater flexibility in when and how they worked. But Teran had just read management expert Zeynep Ton’s newly published book, The Good Jobs Strategy, in which she held up companies like Zappos and Trader Joe’s as proof that investing in a workforce can make a company more profitable in the long run. Teran couldn’t shake the feeling that Ton was right. On top of that, the 1099 contractor model was just starting to show signs of weakness, as Uber had recently been slapped with a class action lawsuit alleging it was exploiting drivers. So in launching Managed by Q, Teran decided to make what seemed like a gamble: He would make members of Q’s workforce full W2 employees, eligible for company-paid health insurance, a 401K with match, and paid family leave.

That was nearly three years ago. Today, Managed by Q is at the forefront of a growing trend of on-demand companies that support full-time workforces. Some of these startups began by embracing more traditional labor models, like Q, while others decided to switch mid-stream, overhauling their business practices to bring workers on board as employees.

By Uber standards, this second generation of on-demand platforms is minuscule, and its approach has yet to stand the test of time. Some companies that switched employee models have failed entirely. But the trend is clear: It’s become dangerous to build a business purely on the backs of contractors, and a growing number of enterprising companies are betting their futures on marrying the appeal of the on-demand world with the security of traditional employment.

Over the past several years, legal challenges to the contractor model have piled up, and just in the last month, Lyft and Instacart both settled misclassification lawsuits — Lyft for $27 million, and Instacart for $4.6 million. Meanwhile Uber, whose latest round of bad press has centered on its corporate culture, continues to face questions about its drivers’ status: Courts in New York and the UK have found that drivers cannot be classified as self-employed, while drivers in Seattle are fighting for their right to unionize and Californians are considering doing the same.

Against this backdrop, a number of on-demand startups that began with 1099 contractors have taken the risky step of converting their workforces to employees — taking on as much as 30 percent more in payroll costs in exchange for legal peace of mind and a trainable workforce. Instacart, for example, began offering a full-employee option to workers in 2015, after being served with its first misclassification lawsuit; W2 “shoppers” now comprise about 20 percent of Instacart’s workforce. (As Instacart’s recent lawsuit settlement makes clear, however, the partial switch has not saved the company from all of its legal woes.)

In a flurry of announcements over the summer of 2015, several other companies started revamping their workforces entirely. Shyp made the switch that July, citing the desire to be able to train its couriers and provide them with more supervision; it was followed by companies including Luxe (valet parking), Eden (tech support), and Sprig (food delivery), all of which appeared to come to the collective, sudden realization that they needed more control over their workforces. Most of these startups avoided directly calling out misclassification lawsuits as their motivation for making the switch—but given the timing, the rush to change seemed far from a coincidence.

“I think that you have companies stepping back and saying, ‘Well, wait a minute, let’s find out what what we really want and how we really want to build our business,’ and I think there are plenty of companies that find Uber’s arrogance, with respect to taking responsibility for complying with even baseline regulations, distasteful,” says Rebecca Smith, deputy director at the National Employment Law Project. “As we see more courts and agencies diving in and saying, ‘Just because you use a shiny app or platform doesn’t make you not an employer,’ the more we will see these sorts of changes happening.”

But those changes aren’t easy to make. When Honor, a platform connecting older adults with home care professionals, transitioned its workforce at the beginning of last year, it kicked off a particularly trying six months—and lost about 15 percent of its workforce in the process. “The amount of code our engineers had to write just to be able to continue to pay people on time, to take out the right taxes, it was mind-blowing,” says Honor CEO Seth Sternberg. But the rough patch was worth it, he says: Honor is now able to train its care professionals and offer what it believes is better, more consistent service, in total compliance with labor laws. Things didn’t go quite as smoothly for HomeHero, another venture-backed home health care startup that made the switch: When the company folded this February, it called the W2 model an “inferior” employment model that increased onboarding costs tenfold.

“This is the kind of fundamental decision you make early on—the earlier the better,” says Mitch Kapor of Kapor Capital, an investor in both Honor and Managed by Q. “The nature of your relationship with your labor force is a fundamental piece of the architecture of the business. It’s not the technical architecture; it’s the social architecture. And these architectural choices are difficult to change.”

Nearly three years in, Managed by Q now has close to 900 employees, working across 5 cities with some 1,200 office clients. That’s hardly the hyper-growth that companies favoring the Uber model have enjoyed, but the slow-but-steady approach is a natural consequence of investing in employees, and it encapsulates Q’s bet on longevity.

Investors haven’t shied away. A year ago, Q raised $25 million in it Series B round; it’s since raised another $30 million, and counts Google Ventures, Jessica Alba, and former NBA commissioner David Stern among its backers. That influx of cash has allowed the company to expand its office services menu: Alongside Q’s initial offerings of cleaning, maintenance, and office administration, it now includes flashier options such as yoga classes and catered lunches. As it’s grown, Q has also started offering its employees (known as “operators”) more perks—last March, Teran announced that the company would begin giving operators equity.

In practice, one big difference between Q and other on-demand companies is that platforms relying on 1099 contractors are legally barred from training workers. “The W2 route involves more rigorous training and supervision,” points out Q communications lead Ariella Steinhorn. Q’s hypothesis is that investing in its operators’ happiness and career development will pay off in the form of a better end product: says Steinhorn, “happy employees will ultimately lead to happy clients.”

The home management platform Hello Alfred is also testing that theory using full-time employees. “Alfreds,” as they’re called, are entrusted with customers’ keys and perform tasks ranging from laundry to grocery shopping and home cleaning. Because of the intimate nature of the work, hiring Alfreds as full employees made more sense, says CEO Marcela Sapone; she says she also felt strongly about offering her workers traditional benefits. Sapone, like Teran, believed that if she built up employees’ trust and loyalty, they’d ultimately offer customers a better experience. Like Q, her company is growing slowly—it currently employs only about 200 Alfreds—but the strategy has been deliberate, she says, and the company has been profitable since its launch.

Providing benefits such as health insurance and paid leave, though, means that these companies tend to have higher expectations of their workers than looser on-demand platforms. Unlike Uber drivers or Postmates, Q operators and Alfreds can’t just pop onto the app whenever they please and knock out a few hours of work. They’re given schedules, and then have some flexibility within those, in that they can adjust their shifts and the number of hours they work in consultation with their supervisors. Both Q and Alfred say that they work with employees to accommodate unexpected schedule changes, and Q keeps a number of operators on call to fill in when those do come up—but a schedule still exists.

Customers, meanwhile, are more likely to have their requests filled by someone who’s familiar with their office space or apartment—and they’re guaranteed to have it filled by someone who’s been thoroughly trained by their employer. Companies embracing the W2 model are hoping that those perks will in the long run make their services more valuable to customers.

It’s a worthy theory, though it’s still unproven. None of these newer companies has come close to achieving the scale or notability of its on-demand predecessors, and ultimately only a combination of customer demand, legal clarity, and some more time on the market will determine whether this version of the on-demand economy can thrive. This cohort of companies—the ones that have felt an acute pressure to play things safer than their contractor-driven brethren—is sacrificing explosive growth for building what it hopes are sustainable, ethical, and legally airtight businesses. If their bet turns out to be correct, the future of work may end up looking not all that different from the past.