Instacart, the online grocery delivery service and one of the rising stars of Silicon Valley’s on-demand economy, is converting a large part of its contractor workforce into part-time employees. Instacart says it will make the change starting June 22 for staff members in Boston and Chicago, with more cities coming later. The shift comes amid an increasing debate over how technology companies such as Uber, Lyft, and the delivery service Postmates designate American workers who make a living using their services.

Instacart has about 10,000 shoppers in 16 cities across the U.S., roaming the aisles of retail chains such as Whole Foods Market, Costco Wholesale, and Petco, and selecting the fruit, vegetables, and other items that customers order via smartphone apps and the San Francisco startup’s website. Like drivers for Uber or messengers for Postmates, those workers have, until now, been contractors, with none of the security or benefits of full employment.

After redesignating workers in Boston and Chicago on Monday, Instacart plans to convert additional shoppers in other cities where the company operates to part-time employees in the months ahead. The newly employed shoppers will work between 20 and 30 hours a week and make above minimum wage, though precise wages will vary by city, says Andrea Saul, an Instacart spokeswoman. Instacart workers who wish to remain independent contractors will have the option to become members of its driver fleet, which ferries goods from supermarkets to customers’ homes.

Apoorva Mehta, Instacart’s founder and chief executive officer, says the change is designed to improve customer service and the quality of items. “Grocery shopping is not easy. A Whole Foods location can have between 30,000 to 50,000 items, depending on the size of the store. It takes nuance and skill to pick the best items,” he says. “What we found is that our shoppers require training and supervision, which is how you improve the quality of the picking. You can’t do that when they are independent contractors.”

Instacart has raised $275 million from such venture capital firms as Sequoia Capital and Kleiner Perkins Caufield & Byers, with a recent fundraising round valuing the company at $2 billion. The change in its workers’ employment status will require Instacart to pay employment taxes, covering benefits such as unemployment, Social Security, Medicare, and workers’ compensation. “In the short term, this is going to impact us negatively,” Mehta says. “In the long term, as a result of trust and loyalty we will build with customers, it should be the right thing to do.”

Since it was founded in 2012 by Mehta, a former engineer in the supply chain of e-commerce giant, Instacart has evolved several times in search of a sustainable business model. Last year it shifted from making money primarily on delivery fees and subtle price markups to charging retailers a fee to operate their same-day delivery operations online. The company also recently split its shopper and driver roles to allow workers to operate more efficiently.

Contractors, also known as 1099 workers because of their tax designation, power a wave of Silicon Valley on-demand startups. Companies such as Uber Technologies and Lyft say the distinction allows workers more flexibility to schedule their own shifts and work for several competing companies, if they wish. But they have none of the protection of permanent employees, such as health insurance and minimum wage restrictions. The regulatory tide may be turning against classifying such workers as contractors. California’s labor commissioner recently ruled in favor of a driver against Uber, saying she should be classified as an employee, not a contractor. Uber said in court papers it would appeal the decision.

Mehta says the possibility of new regulatory obstacles was not behind the change at Instacart, though he is watching the battle closely. “This was primarily for the customer experience,” he says. “But we are in this awkward phase where we have millions of people working in this new economy, and the laws are not clearly defined. It would be helpful for everyone in this space for there to be clear regulation.”

Source: Bloomberg