When Tech Startups Outgrow the 1099 Model: Moving Firms Out of the Kiddie Pool

Chelsea Fitzgerald · 18 Vand. J. Ent. & Tech. 3

Abstract

The 1099 independent contractor has become the new norm for Silicon Valley startups. In the wake of the Ninth Circuit Court of Appeals decision in Alexander v. FedEx, tech startups have been scrutinized for their financially savvy preference for 1099 contractors through both class action lawsuits and administrative proceedings. As these movers and shakers grow from humble beginnings to companies with multi-billion dollar valuations, the choice between classifying workers as traditional W-2 employees or 1099 contractors will have dramatic effects on the peer economy’s labor force and tax status. This Note examines the startup worker classification dilemma, concludes that neither a strict application of the W-2 formula nor the 1099 model alone is an adequate fit for the high risk nature of startups, and proposes a regulatory solution for worker classification based on the concept of critical mass—the point at which these firms should exit the 1099 kiddie pool and start classifying workers as W-2 employees.