Startups have a crazy new idea for saving money: Be nice to workers

Racking up the stock options.
Racking up the stock options.
Image: Managed by Q
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Not so long ago, assetlessness was all the rage. Startups chasing the success of Uber aimed to hold no inventory and hire no employees. Instead, they enlisted workers as independent contractors—set your own schedule!—to avoid paying for benefits and other mainstays of traditional corporate employment, like a guaranteed minimum wage.

The “Uber” or “gig” model, as it’s become known, was an instant hit in the tech world. It helped companies flush with funding grow fast and nimbly, while saving an estimated 30% on labor costs in the process.

But these days the gig model is looking less idyllic. Uber and companies like it have been dogged by lawsuits from those less quick to buy into the gig economy euphoria—the people who wonder whether “being your own boss” should mean more than toggling on and off a smartphone app. They’ve also struggled with disgruntled workers, high turnover, and expensive recruiting costs. Hiring workers as contractors is certainly a shortcut, but this cost-cutting strategy is not without costs of its own.

That’s why a handful of startups have lately started swinging the other way. Companies like Managed by Q (office cleaning and services), Juno (a ride-hailing competitor of Uber’s), and a few others are attempting to make a name for themselves as the nice guys of the gig economy. They’re promising better wages and, in some cases, benefits and equity. In Silicon Valley, where efficiency is often prized beyond all else, it might seem unusual to choose to spend more on workers who can be had for less. But what if—contrary to all gig-economy wisdom—keeping workers happier is saving money, too?

“We believe we have plenty of evidence to suggest that treating employees as you’d want to treat white collar workers leads to better business value,” says Satya Patel, partner at venture-capital firm Homebrew in San Francisco.

Managed by Q (or Q, as it’s internally known) was among the first to set itself apart in the gig economy. It hires cleaners and handymen as employees—not contractors—and furnishes them with benefits that include health care, paid time off, and a 401(k). But Q made headlines in March when founder Dan Teran said he would, over the next five years, distribute a 5% stake in the company to its workers. The process began in July with Q awarding stock options to “operators” who had worked at least 780 hours over the last 12 months, a bit more than 15 hours a week on average. Twenty-six percent of operators were eligible for the grant, according to CFO Chris Davis. “We think that they should share in the eventual success,” he says.

Juno, the newest competitor to Uber in New York City, hires its drivers as contractors but is giving them a stake in the business. The company, which launched earlier this year, plans to distribute 1 billion restricted stock units to its drivers over the next 10 years, at a rate of 25 million shares a quarter. The goal is for Juno’s drivers to ultimately own the same amount of equity as the firm’s four co-founders. Juno says it began issuing the shares in the second quarter and that “100% of drivers that took any rides during the quarter were allocated shares.”

Promising equity to workers who wouldn’t usually receive it offers a novel solution to one of the thorniest problems in the gig economy: how to retain workers when their jobs are by nature temporary. People with traditional corporate jobs have lots of reasons to stay in them: steady pay, benefits, the same faces at the office every day. Gig work provides none of that. The wages are highly variable, the benefits typically nonexistent, the coworkers and clientele continuously in flux.

As a result, startups in all corners of the gig economy have struggled to engender loyalty and keep their workers sticking around. Uber and Lyft have spent hundreds—and at times thousands—of dollars apiece on recruiting drivers, but stumbled on retaining them. A 2015 paper (pdf) from Uber and labor economist Alan Krueger found that only about 55% of Uber drivers remained active one year after starting. (Uber declined to provide a more updated figure for its driver retention and Lyft said it doesn’t share those numbers.)

Other gig companies such as DoorDash (a food delivery startup) and Handy (an Uber-for-home-cleaning) have at times spent upward of $200 recruiting each worker, with similarly disappointing results. At Handy, for example, figures from 2015 showed that 20% to 40% of cleaners stopped work on the platform within their first two to three months.

The cost of replacing these workers can add up quickly and siphon off the savings from hiring contractors in the first place. Of course, that’s true for just about any company that relies on low-wage, low-skill labor and provides those workers with little opportunity to advance. Few know this better than Walmart, which shocked corporate America early last year when it announced plans to raise wages for more than 1 million US workers. Walmart has since become the ultimate test case for the theory that investing more in people upfront pays off by making them happier, more loyal, and more productive. 

For startups looking to increase worker retention, stock is one way to change the equation. Quite literally, equity programs make workers more invested in their company. They also require them to stick around to cash in. At Managed by Q, employee stock options only kick in after a one-year “cliff,” and then vest at a rate of 25% per year. To get the whole grant, you’d have to be there for five years. To qualify for Juno’s program, drivers must be ”online” or “busy” for at least 120 hours per month (about 30 hours a week) for 24 out of 30 months. Juno counts time spent driving for competitors such as Uber or Lyft toward a driver’s total hours.

Of course, another way to get people to stay is by hiring them as employees from the outset, the path Q and a few other small startups are taking. Homer, a food delivery and logistics startup in New York, hires all its couriers as employees and pays them on average $15 an hour. The choice has helped Homer create a “culture of retention” and provide customers with a “consistently high quality service,” says Homer CEO Adam Price. Another example is Eden, a small office-management company in the Bay Area that has a staff of about 100 “wizards” who clean and fix things for clients. It employs all of them as W-2 workers.

“At Eden we make sure people can get benefits and that means our costs per employee are about 30% more,” says Eden co-founder and CEO Joe Du Bey. ”To make the equation work, the question is, does this make your employees stay 30% longer? For us, having people stay definitely makes economic sense.”