Shared Services Solace: How Startups Win with New Law

On April 30, a California Supreme Court ruling introduced a new ‘ABC Test’ to determine whether a worker is properly classified as an independent contractor for purposes of California’s Wage Orders. This new ruling will have significant implications on anyone involved with the ‘Gig Economy’, particularly the thousands of tech start-ups throughout the state that heavily rely on the work of independent contractors in their day-to-day operations.

Under the ABC Test, which will now apply with respect to enforcement of California’s Wage Orders, a worker is presumed to be an employee by default and will only be considered an independent contractor, also known as 1099, if the employer can establish each of the following:

1. That the worker is free from the control and direction of the employer in connection with the performance of the work, both under the contract for the performance of such work and in fact;
2. That the worker performs work that is outside the usual course of the employer’s business; and
3. That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the employer.

A tough test to pass

The first condition of the test should be simple enough to fulfil for these startups. Independent contractors are easily characterized as “free from control and direction” since they are usually experts in their fields, with contracts based on outcomes rather than number of hours spent or how the work is performed. Having said this, the culture of flexi-hours and work from home can confuse matters a little in this area, with the greater independence of employees overlapping with the way contractors work.

But the following two parts of the test will be much harder for businesses to satisfy, as they will need to prove that the jobs performed are outside the usual course of their business and that their independent contractors deliver similar services to other clients. So for example, if you are a manager of a business that provides audit services for accounting books, and you hire two additional auditors under an independent contractor arrangement, you will be risking non-compliance since auditing is your business’s main line of work.

This may prove even more challenging to new tech companies since their core business is to build and operate a technology product that requires a variety of skills and specializations. It may be difficult to differentiate between what is outside the usual course of their business and what is not. It’s also hard for these young businesses that normally work to a rapid pace to find professionals able to work in multiple organizations at the same time, making it tricky to comply with the third condition of the test.

The result is that many tech startups operating in California that often prioritize cost control and depend on running flat organizations and agile teams, may find the new ruling disruptive to their day-to-day operations.

A solution in ‘shared services’

One possible solution lies in the option of rerouting outsourced work to firms rather than individuals. Growing businesses that need external support and want to avoid the complications brought about by the new ruling, can choose to work with professional services firms and get interim teams and experts on demand to cover various functions of the organization where needed.

Known as the ‘shared services’ model, this approach is used by holding organizations that provide centralized services to all companies in the group, and by startup incubators and co-working spaces. When applied to tech startups, shared services can provide small businesses with the professionals they need to fill in gaps and fulfill assignments, without the risks and delays associated with long-term investment and building a substantial workforce. By doing this, they are able to control costs and focus on growing in core business areas, while receiving the immediate support they need to keep the business running.

Imagine a situation where a blockchain startup has come up with a business idea with massive potential, but does not have the team to execute it nor the processes in place. Consider the amount of effort and time it will require for their core team to build the necessary support structures – effort that would be better spent in developing their innovative idea and bringing it to fruition. By working to a shared services model, the company can rely on additional resources and expertise from a professional services firm to fast track the building of their organization, while they focus their energy on the core offering.

Agreements between the professional services firms and startups can cover long-term work requirements, but also be flexible enough to accommodate short-term needs that arise. A team of people employed by the professional services firm is deployed to provide specialized expertise and fulfill assignments, while economies of scale and technology tools help keep prices low.

With the new ruling in mind, the ‘shared services’ model can be a useful solution, providing growing companies with the resources they need while avoiding the risk of non-compliant hiring of independent contractors.

Mentor Global Consultants has adopted this model to great success, serving as the ‘provider’ in partnerships with tech startups operating in the blockchain sector. These businesses are often faced with the challenge of reaching milestones and showing results against a hectic timeline and under a tight budget, all the while adapting to rapid changes taking place in a maturing sector. Through interim teams of experts and support staff, we have helped these startups to hit the ground running and achieve rapid progress by easily and efficiently adding to their resources.

Find out how we use the shared services approach in our work with blockchain startups.