Hybrid W2 / 1099 Models

There’s obviously been a ton of news about new legislation around worker classification.  I’m not going to discuss those issues here.  Let’s just say I think government tends to be wildly incompetent, demonstrates a complete disregard for second order effects and unintended consequences, and generally lags the markets by at least a decade.  The old saying of the “path to hell is paved with good intentions” fits very well.  

But I’m not going to go into any more detail on those issues for now.  

Instead, I want to discuss an emerging trend of hybrid worker models.  Marketplaces that incorporate human labor in an offering have historically focused mostly on 1099 models to keep things asset light and highly flexible. 

Nowadays, marketplaces can gain an advantage by being more forward-thinking and taking advantage of some of the best of both worlds. 

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Unfortunately, not many marketplaces have taken advantage of the pros of both options yet.  It does add some complexity, but ideally can get you all of the pros and none of the cons. 

You’ll notice that the cons of the W2 model are almost all addressed by 1099s and vice versa. 

Let’s look at a hypothetical example of a marketplace for QA testing as a service.  It’s easy to imagine how they might have a roster of W2 employees that function as the core testing unit and augment that team with 1099s as demand spikes or new devices and platforms need to be tested in different languages, times, regions, devices, etc. 

I’d also like to share the strategy of two marketplaces employing hybrid models today. 

1) Faber Connect – Faber is a construction staffing marketplace based in Vancouver.  (disclosure: I was on the board for several years).  They work primarily with 1099 contractors, but they have a smaller number of W2s on the roster in order to guarantee better reliability to their buyers.  If a general contractor is looking to Faber to provide 5 construction workers on a Tuesday and 1 of them doesn’t show up in the morning, the W2 worker is dispatched to the job site to fill in for the no-show.   It creates a much more reliable service and greatly increases customer satisfaction.  In addition, since there is more control over the actual work of the W2 worker and they are better trained on the platform, they can perform additional value-add functions like contractor onboarding and general customer support. 

“For Faber, supply quality is everything. That is why we ensure the 1099 workers who work their way up the ranks on the platform and showcase very positive metrics are eligible to transition to the W2 side if that is something they would like. This allows us to offset the sometimes inconsistent quality of 1099’s, while also rewarding our top performers at the same time.” – Sebastian Jacob, Founder and CEO at Faber Connect

2) soona – soona is a great marketplace serving the needs of the growing long tail of eCommerce companies.  All of these companies need high-quality product photography for their listings on Shopify, Amazon, and all of the other platforms online.  But, it’s expensive and time consuming to get all these digital assets.  Soona offers a virtual photo studio where customers can send their products in to the studio and Soona photographers will take care of producing the assets. 

soona has a network of professional photographers that often start as 1099 contractors.  The high performers are moved to W2 “studio and pro" creatives and receive a salary and benefits. The biggest driver for soona to do this is photographer retention.  It is devastating to a marketplace to churn some of the best suppliers, so soona takes action by giving them a path toward a successful full-time career as a creative.  Liz, the founder, is also adamant that platform businesses should offer jobs to workers that the founders would be happy performing as well.  She has harsh words for founders that aim to build large platforms on the backs of “minimal” wage workers.  The goal should be to increase efficiency enough that you can offer both lower costs to buyers andhigher earnings and W2 insurance benefits to sellers. 

My hats off to Sebastian Jacob at Faber Connect and Liz Giorgi at Soona for driving marketplace innovation forward. 

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