As governments increase the pressure on companies to insure that workers are properly classified as employees and not independent contractors there is bound to be some casualties in the process. The company Zirtual was just such a casualty.
With the US Department of Labor’s “Memorandum of Understanding” they are signing with willing states and local governments they are clamping down on the “improper use” of independent contractors (ICs). Many businesses are re-evaluating their business model. Many companies are started using independent contractors because it is a very economical way to start. Unfortunately the standard for using an IC is so stringent these companies begin their business by breaking the law. As a result they end up having to reclassify their workers as employees. Such appeared to be the case of Zirtual. They hired numbers of people as virtual assistants as independent contractors. Unfortunately they were not really contractors and they had to be reclassified.
Mistake or mismanagement?
The “mistake” Zirtual made, of improperly classifying workers as independent contractors, is the same as many other companies, such as Uber, are being accused of making. In Zirtual’s case they wanted to make the sharing economy experience more pleasant so they offered workers health insurance, paid vacation and a 401(k). Apparently their advisors did not tell them this makes those workers employees and not independent contractors. So they had to reclassify them as employees, and subsequently had to absorb a great deal of expense in doing so, to the point that in early August they closed the doors.
Many of the critics of Zirtual however blame the failure on mismanagement. Lack of financial oversight and starting up with an improper model are certainly indicative of at least inept management.
Regardless of the reasons for the failure of Zirtual there are several lessons to be learned for many parties. First, for the entrepreneur, if your business model includes the use of independent contractors make sure you are going to adhere to the standards of both the IRS and the US Department of Labor, as well as state and local governments. Otherwise you may find yourself in the same financial pinch that Zirtual did when you have to correct your mistake.
Secondly, to the worker, if you are offered a position that will occupy you full time, not providing the opportunity to engage with another “client” then you are NOT an independent contractor. Taking such a position affords you none of the benefits of being an IC and may burden you with a tax obligation you may not want to bear.
Thirdly, to investors, closely question any plan that has the business using independent contractors from the get go.
Finally, a piece of advice to governments, realize that not everyone has to be an employee. Some people genuinely desire the opportunity to be a “solopreneur” and don’t need the government to run their lives.
Perhaps if everyone had learned these lessons the 500 Zirtual workers would not be unemployed today.