No one can predict if "O'Connor v. Uber" will make it to class-action status. If it does and the plaintiffs - Uber contract drivers - win or get a settlement that gives them employee status, others will be emboldened to also file lawsuits. That is scaring investors in startups.
In The Wall Street Journal, Greg Bensinger reports:
"Lawsuits are threatening to reclassify their contractors as employees, which could drive up labor costs an estimated 20% to 40%. That has put an investment chill over these startups and prompted some founders to switch their business models."
Investors are skittish for several reasons.
At the top of the list is the uncertainty. Today they could be funding a lean startup not burdened with the cost of traditional employees and the regulatory maze that goes with that. Soon enough the contract workers in that startup could file a lawsuit and the whole situation changes. Expenses skyrocket. A compliance expert has to be hired to manage the human resources issues.
Another reason is the ugly publicity that goes with any employment-related lawsuit. The company can come off looking like a meanie, not the platform for enlightened leadership.
A third reason is the reduced flexibility which comes with having a traditional workforce. If the company is large and plans a layoff, it has to comply with the WARN Act.
Obviously, in their pitches for funding, startups will have to cover the possibility of adopting the employee model. They better have good answers for investors' questions.