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​One startup reconsiders the merits of the "gig economy"

In today's "1099 economy," companies around the U.S. increasingly turn to independent contractors, given that freelancers can be cheaper than hiring employees. But one startup is reconsidering the trade-off.

Online grocery delivery service Instacart is reclassifying a portion of its contractors as part-time workers, just as a debate over whether the so-called sharing economy means freelance workers are missing out on crucial benefits such as paid sick days health insurance while also being saddled with higher taxes.

The 1099 economy is named after the tax form that freelancers or contractors receive from their clients, rather than the W2 that employees receive. Several trends are encouraging -- or pushing -- people to take such work arrangements, including the ubiquity of mobile technologies and corporations' desire to cut costs. About one-third of Americans are now freelancing, according to a survey from Upwork, a firm that helps connect companies and freelancers.

Postmates, Instacart deliver what stores and restaurants will not

The growing army of freelance workers hasn't come without growing pains, however. Ride-sharing service Uber was recently handled a setback when a California court ruled that it had misclassified at least one of its drivers as a contractor, instead of an employee entitled to benefits.

Instacart spokeswoman Andrea Saul said in an email that its decision was in the works long before the Uber ruling, with the grocery service piloting the program in Boston in February.

Instacart is an online grocery delivery service that takes a high-tech approach to an age-old problem: grocery shopping. It hires "shoppers" who receive orders on their smartphones from customers. The shoppers then pick up items at customers' favorite stores or delivery them, all in a same-day transaction. Its site says independent contractors can make up to $25 an hour while shopping or delivering groceries.

But the company is shifting away from the independent contractor model after realizing that shopping can be a complicated business, Saul noted.

"When you look at the difficulty of shopping, picking and delivering fruit, eggs, ice cream -- items that have to be the right ripeness, are prone to breaking or have different refrigeration or freezing requirements -- grocery shopping is more complicated than other contract jobs," Saul wrote. "For this reason, we want to provide supervision and training so we can be more accurate and more efficient."

Instacart's pilot in Boston used a new operations model, with one group focusing on shopping and the other working on deliveries. The shoppers were also given managers to oversee training and provide oversight, so Instacart decided to make them employees, Saul said.

"Shoppers got better and more accurate at picking items, so we had fewer order issues. Shoppers also got faster at picking items, so we had more on time deliveries," she added. "Ultimately, even though the model was costlier for us, the change improved our customer's experience."

Instacart, which Bloomberg News notes has raised $275 million in venture capital funding, declined to disclose the financial impact of the switch. The company will be responsible for employment taxes such as workers' compensation and Medicare, which will add to its costs. Freelancers bear the brunt of those taxes themselves.

The online shopping service says the move will be worth it. Saul said, "We believe the hit we will take on cost by employing these shoppers will be worth it to deliver a better service for our customers, and, in turn, grow our business for the long-term."

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