Месечни архиви: October 2015

Injury Claims Become Commodities with Litigation Funding Claim Aggregation

Injury Claims Become Commodities with Litigation Funding Claim Aggregation

For all the black robes and ceremony, the American legal system often operates more like a factory assembly line than a citadel of individualized justice. Ninety- five percent of criminal prosecutions end in plea deals. Many defective-product claims settle in mass pacts that benefit attorneys more than putative victims. Now a legal dispute within a plaintiffs’ law firm that organizes massive torts is threatening to pull back the curtain on the mechanics of high- volume litigation.

It’s not a pretty picture.

Amir Shenaq, a 30-year-old financier, sued his former employer, the Houston law firm AkinMears, over $4.2 million in allegedly unpaid commissions. To earn those fees, Shenaq says he raised nearly $100 million used to purchase thousands of injury claims from other lawyers. The suit portrays a claim-brokering marketplace that normally operates in secret, with clients recruited en masse through TV and Internet advertising who are then bundled and traded among attorneys like so many securitized mortgages.

AkinMears “is not run like a traditional plaintiffs’ law office, and the firm’s lawyers do not do the types of things that regular trial lawyers do,” according to the Shenaq suit, which was filed in Texas state court in late September by another Houston firm, Oaks, Hartline & Daly. AkinMears doesn’t do “things like meet their clients, get to know their clients, file pleadings/motions, attend depositions/hearings, or, heaven forbid, try a lawsuit,” Shenaq alleges. Rather, AkinMears “is nothing more than a glorified claims-processing center, where the numbers are huge, the clients commodities, and the paydays, when they come, stratospheric.”

AkinMears’s outside attorney, Allan Neighbors IV of Houston, declined to comment or make the firm’s name partners, Truett Akin IV and Michelle Mears, available for interviews. In court filings, AkinMears denied wrongdoing and said Shenaq had been fired last July 31 for unspecified reasons. Shenaq,  a former Wells Fargo Securities leveraged-finance banker, alleges Akin fired him to avoid paying the multimillion-dollar commissions.

AkinMears asked the trial judge to seal Shenaq’s suit, saying his disclosures “will cause immediate and irreparable harm to the continued nature of financial and other information belonging to AkinMears and those with whom it does business under terms of confidentiality.” Judge Randy Wilson granted the gag order earlier this month, but only after the original filing had been disseminated online. Shenaq and the Oaks firm did not respond to requests for comment.

While it primarily concerns Shenaq’s attempt to get paid commissions he says he’s owed, the employment suit illuminates the now-common practices of litigation finance and claim aggregation. Shenaq alleges that in 2014, five-attorney AkinMears switched strategies away from “buying non-stop advertisements and acquiring clients in a random, unpredictable manner.” Instead, the firm’s principals decided “to start making direct investments in ongoing mass tort litigation” over such products as hip implants, Viagra, and Lipitor.

To finance those investments, AkinMears asked Shenaq to raise tens of millions of dollars from outside investors. The former banker says he did that primarily by obtaining nearly $100 million from the Chicago-based hedge fund Gerchen Keller Capital. The fund specializes in betting on other people’s lawsuits—a form of alternative investing known as litigation finance.

With the Gerchen capital, according to the Shenaq suit, AkinMears purchased some 14,000 defective-product claims, most of them concerning so-called transvaginal mesh, a type of implant designed to bolster sagging organs. Some women have complained that once implanted, the devices also cause injury and severe pain. By Shenaq’s calculations, the mesh cases cost AkinMears between $2,500 and $3,125 apiece and yielded attorneys’ fees of $15,000 each.

It isn’t clear from the court filings how much the plaintiffs stood to gain from settlement of their claims or where the AkinMears-owned cases stand. It also isn’t clear which companies AkinMears sued with the client information it acquired. Among the defendants that have been sued in connection with transvaginal mesh implants are C.R. Bard, Boston Scientific, and Johnson & Johnson.

Gerchen Keller managing director Travis Lenkner declined to comment, citing client confidentiality, but the hedge fund has been highly visible in the burgeoning litigation finance field. The firm announced a new $475 million fund in February for investments such as the AkinMears financings. Taken all together, Gerchen Keller says it manages some $800 million in assets for pension funds, endowments, foundations, and financial institutions—enough to make it one of the largest players in litigation finance.

In some instances, Gerchen Keller invests in litigation in exchange for a cut of any recovery. The investments with AkinMears, however, were essentially loans extended at an interest rate of “slightly below 16 percent,” according to the Shenaq suit.

The U.S. Chamber of Commerce has condemned both claim aggregation and litigation finance as likely to encourage frivolous and abusive lawsuits. “The allegation that a law firm used hedge fund money to buy and sell thousands of personal injury lawsuits shows plaintiffs have become little more than commodities,” says Lisa Rickard, president of the Chamber’s Institute for Legal Reform. “This case appears to be a new example of how litigation financing perverts the justice system and puts the interests of lawyers and financiers ahead of actual plaintiffs.”

More about the plumbing of mass lawsuits could become public if the Shenaq case defies the odds and proceeds to a public trial. And even the information available so far has helped to underscore that the life of a plaintiffs’ attorney isn’t necessarily what’s taught in law school. “Despite the fact that AkinMears’s lawyers do not have to dirty their hands with the mundane chores that come with actually practicing law,” the suit alleges, “the firm nonetheless charges a robust 40 percent contingency fee for its efforts (which is then divided in some fashion among the various participants in its ever-shifting syndicate).” Lucrative work, if you can swing it.


Copyright 2015 Bloomberg.

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R E Chaix Associates Taps Crombie in California

R E Chaix Associates Taps Crombie in California

Irvine, Calif.-based R. E. Chaix & Associates has named Kevin Crombie to its property/casualty team.

Crombie will be an independent advisor to Chaix’s P/C teams, and he will assist in securing new business opportunities.

He began his career in the insurance industry at Hartford more than 40 years ago and has since worked within the industry on both the carrier and brokerage sides. Crombie was most recently vice president of sales and new business development at American Safety Insurance. Prior to ASI, he operated his own excess and surplus brokerage in Southern California for more 10 years and previously managed a national program for construction business.

R.E. Chaix & Associates also has offices in Napa, San Diego and Rancho Cucamonga.

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Strong Quake Hits Afghanistan Pakistan India Ongoing Search for Survivors

Strong Quake Hits Afghanistan Pakistan India Ongoing Search for Survivors

Afghanistan’s strongest earthquake in more than six decades shook buildings across South Asia, prompting officials from Kabul to Islamabad to New Delhi to send out rescue teams to search for survivors. More than 130 people have died.

A 7.5 magnitude quake struck 254 kilometers (158 miles) north of the Afghan capital at a depth of 213 kilometers [132.35 miles] at 2:39 p.m. Indian time, the U.S. Geological Survey said. It was the first major temblor in the region since April, when a 7.8 earthquake in Nepal killed more than 8,000 people and triggered deadly avalanches on Mount Everest.

“The strongest earthquake in recent years has caused heavy damages and casualties in the nation,” Abdullah Abdullah, Afghanistan’s chief executive officer, told the country in a televised address. He said that 11 children died in a stampede as they tried to run out of a school building during the earthquake.

The quake caused landslides, disrupted mobile phone networks and caused houses to collapse in Pakistan, according to news reports. Omar Abdullah, the former chief minister of India’s northern Jammu & Kashmir state, wrote on Twitter that electricity was cut off in the main city of Srinagar. Office workers in New Delhi evacuated buildings.

The death toll in Pakistan has reached 123, with 956 people injured, the country’s military spokesman said on Twitter.

Afghan President Ashraf Ghani convened an emergency meeting to assess the damage. India’s Prime Minister Narendra Modi called for an urgent assessment of the earthquake and said his nation is ready to provide assistance. Pakistan said its army had begun rescue efforts in the country.

The South Asia region has a history of catastrophic earthquakes because the tectonic plate that carries the Indian subcontinent is pushing northward into the main Asian plate. The 7.5 earthquake is the biggest to hit Afghanistan since 1949, according to USGS data.

“This was by far the most severe earthquake I’ve felt in my lifetime,” Abdullah Ahmadzai, the Asia Foundation’s Afghanistan representative, said by phone from Kabul. “The region near the epicenter is not a highly populated district, but the structures there are very basic and vulnerable to these sorts of natural disasters. There is a lot of concern about mass destruction there.”

(An earlier version of this story corrected the distance of the earthquake from Kabul.)

–With assistance from Natalie Obiko Pearson, Bibhudatta Pradhan, Tom Lasseter, Kartikay Mehrotra, Sunil Jagtiani, Indranil Ghosh and Anurag Kotoky in New Delhi, Khalid Qayum in Islamabad and Ravil Shirodkar in Mumbai.


Copyright 2015 Bloomberg.

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NJ Lawmakers FEMA Maps May Have Exaggerated Flood Risk Across State

NJ Lawmakers FEMA Maps May Have Exaggerated Flood Risk Across State

New Jersey’s Congressional delegation members sent a letter to the Federal Emergency Management Agency (FEMA) on Oct. 23, expressing “significant concerns with the methodology” of the Flood Insurance Rate Maps (FIRMs) for New Jersey.

In a letter to FEMA Administrator Craig Fugate, the lawmakers said the evidence suggests that several core flaws may have exaggerated the flood risk across New Jersey, resulting in higher insurance premiums. They urged FEMA to take measures to ensure that the maps are scientifically accurate in order to represent the true risk to communities and individual property owners.

The letter was signed by U.S. Sens. Robert Menendez and Cory Booker (D-N.J.) and Reps. Chris Smith (R-4th Dist.), Frank Pallone (D-6th Dist.), Rodney Frelinghuysen (R-11th Dist.), Frank LoBiondo (R-2nd Dist.) Bill Pascrell (D-9th Dist.), Albio Sires (D-8th Dist.), Leonard Lance (R-7th Dist.), Donald Payne, Jr. (D-10th Dist.), Donald Norcross (D-1st Dist.), Bonnie Watson Coleman (D-12th Dist.) and Tom MacArthur (R-3rd Dist.).

“Being placed in a greater risk zone results in higher and sometimes unaffordable insurance premiums, reduction in property values, and costly retrofitting. With the consequences of FIRMs being so broad and far-reaching, it is critically important that these maps be objective and accurate,” the lawmakers said in a letter to Fugate.

The legislators said dozens of New Jersey municipalities, organizations and individuals are appealing the latest FEMA maps.

“We have received letters from multiple boroughs, organizations and individual homeowners who cannot afford the dramatic increases in insurance premiums associated with the FIRMs—increases that appear to go well beyond the risk,” they wrote. “In some cases, individuals will simply no longer be able to afford their homes or businesses—while at the same time, they may be unable to sell them with such high premiums.”

“As several appellants have already demonstrated, fundamental methodological errors—including, but not limited to, inadequacies in validation and deficient tidal effects—have resulted in erroneous estimates of the 1 percent Flood Risk elevation by several feet. This difference has enormous implications for tens of thousands of New Jersey homeowners and small businesses,” New Jersey’s Congressional delegation members said.

In response, FEMA spokesman Rafael Lemaitre said the federal agency used the best available science and technical data to create the Flood Insurance Rate Maps. “These maps aren’t created in a vacuum. We work closely with community officials, residents and other stakeholders to make sure everyone has input and is included in this process,” he said in a statement.

The following is the full text of the letter:

October 23, 2015

The Honorable Craig Fugate
Federal Emergency Management Agency
500 C Street S.W.
Washington, D.C. 20472

Dear Administrator Fugate:

We are writing to express our significant concerns with the methodology FEMA is using to modify Flood Insurance Rate Maps (FIRMs) for New Jersey. As several appellants have already demonstrated, fundamental methodological errors—including, but not limited to, inadequacies in validation and deficient tidal effects—have resulted in erroneous estimates of the 1% Flood Risk elevation by several feet. This difference has enormous implications for tens of thousands of New Jersey homeowners and small businesses.

As you know, FIRMs are an important tool developed to quantify flood risk all around the country. They are used, not only to determine flood insurance premiums, but also to guide building codes and mitigation activities. Subsequently, these determinations have significant real world consequences for families and business owners. Being placed in a greater risk zone results in higher and sometimes unaffordable insurance premiums, reduction in property values, and costly retrofitting. With the consequences of FIRMs being so broad and far-reaching, it is critically important that these maps be objective and accurate.

To date, dozens of New Jersey municipalities have appealed their preliminary FIRMs as currently drafted. Analysis from Jersey City, for example, shows that FEMA has overestimated properties in the Special Flood Hazard Area (SFHA) by as much as 34 percent, unnecessarily putting approximately 28,000 Jersey City residents in the SFHA at a potential cost of millions of dollars. Similarly, the City of Elizabeth predicts that the inaccurate expansions of SFHAs will begin “driving residents from their homes,” especially in older communities, while the City of Newark expects a devastating effect centered on its vital Ironbound community, potentially depleting this important tax base. Additionally, we understand that the City of New York has appealed their preliminary FIRM based on what they believe to be fundamental flaws in FEMA’s methodology. As FEMA evaluates the appeal, we ask that you consider the impact that potentially flawed methodology would have on the preliminary FIRMs for communities throughout all of New Jersey.

We have received letters from multiple boroughs, organizations and individual homeowners who cannot afford the dramatic increases in insurance premiums associated with the FIRMs—increases that appear to go well beyond the risk. In some cases, individuals will simply no longer be able to afford their homes or businesses—while at the same time, they may be unable to sell them with such high premiums.

With the memory of the devastation caused by Superstorm Sandy fresh in our minds, we along with our fellow New Jerseyans are more than cognizant of the need for accurate flood maps to identify risk and steer rebuilding in a more resilient manner. We understand and take flooding very seriously. However, including more homes and neighborhoods into SFHAs than necessary adversely affects families and, more broadly, calls into question the credibility of the FIRMs. In order to justify full compliance with the NFIP, FIRMs and flood insurance rates must reflect the most accurate predictions that technology affords.

The evidence laid out in a number of appeals suggests that several core flaws may have exaggerated the flood risk across New Jersey, resulting in insurance premiums that are neither sustainable nor reflective of the most accurate science. We strongly urge you to ensure all communities have the technical assistance and resources to exercise their right to appeal, and act with all expedience to resolve these discrepancies so New Jerseyans have access to reliable, objective, and accurate flood risk information.


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CoreLogic Report ‘Windy City’ Not the Windiest City

CoreLogic Report ‘Windy City’ Not the Windiest City

Jackson, Miss., is the windiest city in America, according to catastrophe modeling firm CoreLogic’s just released rankings of the windiest cities in the country.

The CoreLogic Windy City Ranking report, which provides a national ranking of the nation’s windiest cities, was generated by calculating the total force caused by all severe wind gusts of 60 mph or more for wind events dating back to 2006.

CoreLogic assigned a numerical score from 1 to 100 on the 293 cities it analyzed with data captured at the city center plus a 10-mile radius between January 2006 and June 2015. It also took into account the total number of wind events during this time period.

Based on these factors, Jackson topped the list with 153 wind events since January 2006 and a max wind speed of 99 mph giving it a CoreLogic ranking of 95. Springfield, Mo., was second on the list with 128 wind events and a max wind speed, followed by Boston with 121 wind events. Cambridge, Mass., was No. 4 with 116 wind events, and Shreveport, La., was No. 5 with 108 wind events.

According to the catastrophe modeling firm, Chicago, which is well known by its nickname “The Windy City,” actually came in at No. 50 for the nine-year time frame.

Below is a complete list of the top 10 windiest cities between January 2006 and June 2015, according to CoreLogic.

Windy City Ranking (Jan 2006-June 2015)

CoreLogic Rankings
Number of Wind Events
Max Wind Speed
Date of Max Wind Speed 1
4/4/2008 2
1/7/2008 3
10/29/2012 4
10/29/2012 5
7/26/2013 6
High Point
3/28/2010 7
6/26/2010 8
4/15/2007 9
7/17/2007 10


According to Lindene Patton, global head of hazard product development for CoreLogic, the company took information from various data sources in order to compile the report, including home weather stations managed by the National Weather Service, news reports, Twitter alerts and photos, to analyze the information at a more property-specific level.

Patton said most risk decisions are currently based on radar data that measures incidents of wind off the ground and not what happens on the ground or at specific geological points.

“Many other reports measure data from airports, but no one lives in an airport,” said Patton. “If people are interested in protecting assets and measuring risks they want to understand what is happening not an airport but on their block.”

CoreLogic looked just at cities with populations of 100,000 or more because urban areas have the most reliable sources of data, said Patton. It did not measure tornado events because they have specific meteorological conditions that are short and sporadic.

“The insurance industry separates wind events and there are different rules that apply to coverage and claims for different wind events. We wanted to really look at wind at that granular level,” Patton said.

She said CoreLogic choose 2006 as a data gathering start date because that is when certain data became available in sufficient enough volume and reliability to move forward.

“It is also almost a 10-year period to look at what happens over a period of time,” she said.

CoreLogic plans to conduct this report annually going forward. It also analyzed and reported what cities have had the most wind events and highest wind speeds this year through June 30.

Jackson ranked No. 1 again for the total number of wind events through June 30 with 14. Five of the top 10 cities for this year were in the Southeast with Jacksonville, Fla., at No. 2 with 10 wind events; Columbia, S.C., at No. 4 with eight wind events; Tallahassee, Fla., at No. 8 with eight wind events and Charlotte, N.C., at No. 9 with seven wind events. It is important to note that all of these wind events were recorded prior to the storm that happened on the Southeast coast in early October.

U.S. Cities Ranked by Total Number of Wind Events in 2015 (through June 30)

Wind Speed
Date Jackson
4/13/2015 Jacksonville
6/13/2015 Cincinnati
4/9/2015 Columbia
6/30/2015 Norman
5/16/2015 Pittsburgh
5/29/2015 Shreveport
5/25/2015 Tallahassee
4/19/2015 Charlotte
6/2/2015 Dayton


The city with the highest wind speed through June 30, 2015, was Reno, which recorded a speed of 119 mph on Feb. 6; followed by Boulder, Colo., with a wind speed of 87 mph on Jan. 1; and Wichita, Kan., with a wind speed of 86 mph on April 2.

U.S. Cities Ranked by Highest Wind Speed in 2015 (through June 30)

Wind Speed
Date Reno
2/6/2015 Boulder
1/5/2015 Wichita
4/2/2015 Amarillo
6/14/2015 Salt Lake City
4/14/2015 Reno
3/15/2015 Sioux Falls
6/21/2015 Oklahoma City
5/16/2015 Huntsville
4/3/2015 Norman


Patton said a greater emphasis is being placed on wind events in the insurance industry as more people move into larger cities where there is more wind and specific wind characteristics – such as natural wind paths between buildings.

“Also there are circumstances now where there are multiple wind events and more information is needed on how to adjust for claims,” Patton said. “There is a tremendous amount of interest in wind events in insurance and the more events that occur the more interest you get.”

About Amy O’ Connor O’Connor is associate editor of MyNewMarkets.com. More from Amy O’ Connor

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Insurance Industry IICF Raise 70K-Plus for Central Texas Flood Victims

Insurance Industry IICF Raise 70K-Plus for Central Texas Flood Victims

Central Texas may currently be under drought conditions and suffering from elevated wildfire risk but merely months ago the situation was just the opposite. In May, the Austin and Central Texas areas were deluged with flooding from a widespread storm system that destroyed homes, flooded cars and caused numerous deaths. At least 17 people died as a result of the late May storms in Texas alone.

There were many individual fundraising efforts around this tragedy, but understanding the strength in numbers, the insurance industry partnered with the Insurance Industry Charitable Foundation (IICF) to create an industry-wide fundraiser to support relief efforts in the area.

As a result of this partnership, the insurance industry with the help and leadership of IICF, raised more than $70,000 to help with the continuing recovery of individuals devastated by flooding.

During the week of Oct. 10 – 17, designated as the IICF Week of Giving, insurance industry representatives presented checks totaling $73,665 to the Salvation Army, the American Red Cross and the Austin Disaster Relief Network in support of Central Texas flood recovery.

The annual IICF Week of Giving represents an opportunity for insurance industry employees to give back to the community through volunteerism. The 2015 Week of Giving featured more than 200 volunteer events hosted across the country, including more than 35 in Texas.

Source: State Auto Insurance Companies

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People’s United Insurance Agency Acquires Kesten-Brown in Connecticut

People’s United Insurance Agency Acquires Kesten-Brown in Connecticut

People’s United Bank N.A., a Bridgeport, Connecticut-based regional bank with nearly 400 retail locations in six states, announced that its subsidiary, People’s United Insurance Agency, has acquired Kesten-Brown Insurance, a Bridgeport, Connecticut-based insurance brokerage.

People’s United Bank said the acquisition would further diversify revenues through additional non-interest income as well as bolster its insurance business.

Kesten-Brown Insurance, formed in 2000, focuses on commercial lines and employee benefits. The firm has expertise in serving larger commercial clients with a concentration in contractors, manufacturers, non-profit organizations, and real estate development risks, the announcement said.

People’s United Insurance Agency provides insurance services for individuals and businesses including personal insurance, employee benefits and commercial insurance through a team of approximately 155 professionals. It has offices in Bridgeport and Hartford, Connecticut; Boston and Springfield, Massachusetts; Portsmouth, New Hampshire; Smithtown, New York; and Burlington and Rutland, Vermont.

People’s United Bank N.A. is a subsidiary of People’s United Financial Inc., a diversified financial services company with over $37 billion in assets. People’s United Bank, founded in 1842, is a community-based, regional bank in the Northeast offering commercial and retail banking, as well as wealth management services through a network of nearly 400 retail locations in Connecticut, New York, Massachusetts, Vermont, New Hampshire and Maine.


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Drug Deaths Outnumbered Highway Fatalities in Virginia for 1st Time Last Year

Drug Deaths Outnumbered Highway Fatalities in Virginia for 1st Time Last Year

Deaths from heroin and opioid use outnumbered highway fatalities in Virginia for the first time last year, officials said.

Records show that 728 Virginians died from drug overdoses in 2014, while 700 people died on the state’s roads.

The increase in drug-related deaths comes despite heightened efforts to attack heroin use in the state, a focus that was announced a year ago by Virginia Attorney General Mark R. Herring.

“The heroin and prescription drug epidemic is a public health issue, a public safety and law enforcement issue and, most importantly, it’s a family issue,” Herring said in a news release.

Media outlets report that highway fatalities have been dropping as drug deaths increase. The highway death toll in 2013 was 741 while there were 661 drug-related deaths. And it 2009, there were 750 traffic fatalities and 504 deaths from heroin and opioids.

Herring’s office outlined the efforts made to help recovering addicts and decriminalize behaviors that can save lives. For instance, new laws were passed that provide immunity to law enforcement officers who administer Naloxone to counteract drug overdoses.

Herring also said during the past year, there have been 28 prosecutions against dealers and traffickers. Those cases recovered 95.4 kilograms of heroin valued at over $19 million. In addition, during the past year, authorities have also dismantled what is thought to have been the largest heroin-trafficking operation in Hampton Roads.

The state also launched initiatives to familiarize students with the consequences of drug use. Officials are also cracking down on prescription scams.

Herring said last week that he hopes the new statistics help officials realize how urgently solutions are needed to solve the heroin epidemic.


Copyright 2015 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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Unlike Uber On-Demand Office Service Cleans Up with Employees

Unlike Uber On-Demand Office Service Cleans Up with Employees

It’s scorching on the streets of Midtown Manhattan as Afonso Oliveira strides around the lunch-break crowds, unbent beneath his 45-pound, $350 industrial backpack. He is carrying everything that might be needed to tighten a leaking faucet at a digital marketing agency or repair a social network office’s electrical outlets. His feet move with a runner’s rhythm in Salomon Speedcross trail-running shoes rather than the typical work boots of a handyman. The 27-year-old does marathons in his spare time, and he doesn’t break a sweat moving between appointments.

It’s difficult to keep up. “This job, walking is one of the things that comes with it,” Oliveira tells me. “Usually I walk pretty fast. This is slow for me.”

Oliveira’s job is to show up whenever an office signed up with his employer, Managed by Q, needs something done: a pipe secured, a monitor mounted, a standing desk built. A client simply touches a special iPad installed in their office space, and Oliveira or one of his dozens of colleagues shows up like a food-delivery order or a ride to the airport.

I follow Oliveira to a market-data startup in a generic monochrome loft. The handyman breezes silently past the office manager, checks the iPad to see what’s wrong, and turns his attention to a glass door that has swung in the wrong direction and become stuck. “The bolt is catching,” he pronounces before cutting down a square of carpet and extending a stopper at the top of the doorframe. “It’s magic!” one employee exclaims. Oliveira is already on his way to the elevator and his next stop, having spent all of 10 minutes inside.

‘Uber for Offices’

Managed by Q, an on-demand maintenance and cleaning startup launched in April 2014, invariably includes the phrase “Uber for offices” in its pitch to venture-capital backers. A loftier description, the one preferred by co-founder Dan Teran, is “an operating system for space.” Q is supposed to exist quietly in the background and provide assistance only when asked, much like the company’s weapon-inventing namesake from the James Bond films. Managed by Q can do pretty much anything an office administrator might otherwise handle, from scheduling a plumber visit to ordering extra napkins for the pantry.

Unlike other stalwarts of the on-demand economy, however, janitors and cleaners summoned through the Managed by Q app receive stable incomes, benefits, and the potential to earn promotions. This is only possible because Q hires its entire workforce of over 400 people as W-2 employees rather than relying on temporary labor from independent contractors. None of Uber’s over 160,000 U.S. drivers fall under this classification—yet.

Paid-by-the-hour workers will make up as much as 40 percent of the U.S. workforce by 2020, according to a report from Intuit, up from around 25 percent in 2010. Thirty-four percent of the workforce did at least some freelance work in 2015, according to Edelman. Yet this burgeoning labor sector finds itself in an existential crisis.

Worker Classification

Uber lost a key ruling in a lawsuit earlier this year that alleges it misclassified many drivers as independent contractors instead of full employees, and the company is now appealing the decision. Other on-demand businesses like the car service Lyft and the grocery-delivery startup Instacart have faced similar lawsuits, as have more established companies like FedEx and Yelp. In July, the on-demand cleaning company Homejoy shut down under the weight of its own labor-related legal battles. The debate over worker classification has also become a talking point in the 2016 presidential contest.

This legal tumult is the result of a small but significant distinction. Anyone who signs a 1099 contract to start, say, picking up passengers for an app-based car service, is entitled to little in the way of benefits or stability from their employer. The obligations mostly run the other way: 1099 workers are responsible for paying their own taxes, setting their own schedules, learning on the job, and even supplying their own equipment. This makes 1099 workers cheaper than their W-2 counterparts—and far less closely managed.

“The most important factor is the right of control over the workers,” says Shannon Liss-Riordan, a Boston lawyer involved in litigation against Uber in California who has become a public champion of W-2 employees in the on-demand economy. Indeed, the IRS rules out anyone being deemed an independent contractor “if you perform services that can be controlled by an employer.” The problem for startups reliant on contractors, as Riordan sees it, is figuring out how to “provide the quality of service they are promising their customers” without violating the law.

Converting to W-2s

Some on-demand startups, including shipping service Shyp and domestic help provider Alfred, recognized the shifting legal winds and spent the early part of this year feverishly converting their contract workers to W-2 status. Managed by Q chose that path from the beginning. “We really wanted to reward performance, to train and nurture people,” Teran says. The strategy seems to be working. In 2015, Q raised $15 million in Series A funding led by RRE Ventures, expanded to Chicago and San Francisco, and gained over 300 clients in Manhattan totaling 2.5 million square feet of office space. Each client pays for a minimum of four hours of cleaning a week. The company recently poached executives from employee-heavy businesses like Buffalo Wild Wings and LivingSocial, and Q’s new general manager in San Francisco came over from Uber.

Q’s biggest accomplishment, however, might be its labor force of hundreds of cleaners and handymen. Uber often boasts about creating jobs for its drivers, promising to mint 50,000 new drivers through its 2015 pan-European partnership. Of course, those positions can sometimes entail only short bursts of activity. A job at Managed by Q, by contrast, offers some similarities in terms of flexibility with an entirely different degree of stability for workers.

The shift to on-demand work came easy for Afonso Oliveira because he was making a living that way long before smartphone apps became economic engines. Oliveira came to New York from the Brazilian town of Minas Gerais more than a decade ago to do construction jobs alongside his father, eventually moving on to stints as a roadside mechanic, floorer, and brick pointer. About three years ago he discovered Taskrabbit, the most contingent of contingent labor platforms, where workers bid on short-term tasks like cleaning and repair.

“In the beginning it was good,” Oliveira says during a break at a tea shop. “But then it became a window for contractors finding work.” Contractors would bid down gigs just to lock in new clients. “From there I gave up and started out on my own.”

Oliveira built his own team of handymen to do jobs around New York and New Jersey, working for clients including Uber. He heard about Managed by Q from another contract worker at Uber, and in late 2014 he gradually began integrating his workforce into Q’s system. “My guys were working for me, and I was working for Q,” he says. After less than a year with Managed by Q, Oliveira found himself near the top of the company’s management structure in the role of executive handyman. He oversees his department, offers training in new skill areas, and juggles work schedules for 22 on-demand handymen.

Insurance and Benefits

Unlike wholly self-employed handymen, Oliveira’s workers are covered by Q’s $2 million insurance policy. They receive benefits after they start working more than 30 hours a week, and the benefits don’t stop if their hours dip. Healthcare premiums are entirely covered by the company. With the right expertise, handymen can make as much as $45 an hour.

For its part, Uber emphasizes workers’ ability to not be stable employees. Sixty-five percent of drivers vary their working hours by more than 25 percent month to month, according to an Uber representative. W-2 employees wouldn’t have the ability to work whenever they want, the company argues, though W-2s aren’t legally forced to work a certain number of hours to qualify. The lawsuit Uber faces in California recently became a class-action suit, promising to set a larger legal precedent for when W-2s are necessary.

Working under 1099 status makes it illegal to earn promotions or take on larger responsibilities beyond the scope of a contract. Most on-demand platforms are cul-de-sacs: For a temporary worker, investing in the job does not necessarily lead to a measurable return, complicating the notion that drivers are actually self-employed. “Uber drivers are not entrepreneurs,” Liss-Riordan says. “They can only make more money by driving more hours.”

Since W-2 employment allows for promotions, it can also lead to a longer, more fruitful relationships. Anthony Knox, a 38-year-old operator, as Q calls its cleaners, started shortly after the company launched and was recently promoted to supervisor-in-training. “Everybody wants to get more responsibility,” he says.

That responsibility comes with higher wages, another impossibility for on-demand 1099s. In New York, for example, Q cleaners start off at $10 an hour and move up to $12.50 after a training period. (Rates vary slightly in each market, with San Francisco cleaners starting at $15 an hour). Cleaners can become mentors, earning $14, and then advance to quality-control supervisors at an annual salary of $35,000. Managed by Q charges its clients $25 per hour of service by a field worker. 32BJ SEIU, New York City’s largest property services workers union, uses an independent contractor agreement with a minimum handyperson wage rate of $26.198 an hour for Class-A office buildings. The union counts over 145,000 members, not far off from the U.S. population of Uber drivers.

Labor Unions

Digital-first companies have largely avoided grappling with traditional labor unions like 32BJ SEIU. “Thus far we have not dealt with the cleaners union,” says Michael Scharf, CEO of MyClean, a New York-based home and office cleaning company that also uses W-2 workers. “We’re hoping to stay below the radar.” In June, the co-working startup WeWork, currently valued at upwards of $10 billion, fired the cleaning company it had retained after workers threatened to unionize. It later hired some of the cleaners as full WeWork employees. Q’s workers occupy a middle ground with some protection and support, though entirely at the behest of the company.

A stocky African-American from the Bronx dressed in Q’s white-on-black T-shirt, Knox works with cleaners like a gentle camp counselor, asking if they’re having equipment issues or feeling overworked. I follow him to a startup incubator in Chinatown where Smyrna Cassidy, an operator for six months, is cleaning tables and arranging desktop detritus into eye-pleasing grids. The practice, called knolling, is named after geometric Knoll furniture and has become a Q trademark.

When he started working for Q, Knox was attending nursing school while taking shifts for other contract cleaning services. Now, like Oliveira, he’s more invested in climbing the company ladder. “A lot of technology is replacing nurses. I go to school for two more years and then they replace me with a machine,” Knox says. I ask if he’s worried about cleaning jobs going the way of the Roomba. “If you were to send a Rosie, if we may, to go clean an office at night, it might seem more efficient at the moment. It’s a robot, it wouldn’t get tired,” he says. “But how much programming can you program to really not miss details?”

Cassidy and Knox head upstairs to the office of a startup that ships curated boxes of pet treats, and proceed to take out the trash. The space is wide and mostly empty early in the evening, although a few dogs scurry about near the kitchen. Managed by Q is a startup serving other startups with their obligatory office perks. There’s a keg of rosé on tap and a haven of couches and bunk beds occupying one corner in what looks like a human-scale cat playground. “I should have gone to school for that. You can go to work, drink wine in bed all day, and still be at work!” Knox says. “They give them everything here.”

Depersonalizing Labor

The iPad that Q installs in its clients’ offices disguises human labor as an app. “They created a proprietary tech platform that allows them to have an extra layer of communication” with their clients, says Scharf, the MyClean CEO. This depersonalizing effect has also at times disadvantaged workers while benefitting the tech companies who contract them. When it comes to workers, “A lot of these startups are applying the rules of technology,” when it comes to workers, says Alfred co- founder Marcela Sapone. “That’s not how you deal with people you have a relationship with.”

Offering the support that full-time jobs have traditionally provided is expensive, particularly for app-based platforms pushing for massive growth. The startups that favor W-2 workers tend to be smaller and focus on high-end products. Going W-2 drives up the cost of managing and hiring new workers. Maren Donovan, founder of Zirtual, an on-demand virtual office assistance company, converted to a W-2 workforce in May. She puts the cost increase to her startup at 20 percent over contract labor.

In fact, the cost of using W-2 employees likely sped Zirtual’s collapse. In August, the company suddenly shut down and sold to Startup.co. “All of these on-demand shared economy companies that have been built up that all have independent contractors,” she says. “Their model will be destroyed if they have to move contractors to employees.”

In successful cases, however, a W-2 workforce may be more invested in their employer than 1099 contractors who come and go. Cosseted developers given stable employment might design the platform, but they’re not the ones interacting with paying clients. “I think it will be hard for companies to build strong teams if they treat their headquarters-based team with respect and their field operations with anything less,” says Hunter Walk, a partner at the VC firm Homebrew and an investor in Managed by Q.

Programmers vs. Laborers

There remains a gulf between on-demand startups’ most publicly prized employees—developers, UX designers, and product managers—and those doing the labor that makes the apps worth billions. This is as true for an Uber driver as it is an office cleaner or a domestic assistant. Q’s Oliveira might be an executive handyman in title, but that doesn’t make him destined for the C-Suite. “It’s hard for people who do not know what it takes to be a handyman to tell you what you should do or not,” he says of his relationship with the rest of Q’s staff.

Beyond the legal regulations, this gap is what stands in the way of a resolution between digital platforms’ owners and their contracted workers, who are far from integrated into the profitable dynamism of the Silicon Valley economy.

On a Saturday afternoon I visit Q’s new office, a sprawling loft with curved windows and exposed brick archways that was previously occupied by AOL. Vacuums and cleaning supplies are piled up near the kitchen. The occasion is an Operator Assembly, a chance for established cleaners and handymen as well as fresh recruits to hear updates on company policies and news. After an enthusiastic round-up of growth projections—very fast, very national—the workers break into smaller groups for team-building activities, lectures on client technique, and knolling sessions, in which iPhone cords, notebooks, and Q-branded giveaways are arranged in elaborate geometric compositions.

At the end of each assembly, there’s an award ceremony recognizing a few workers for exemplary service and high ratings from clients. That day, the supervisor, Anthony Knox, gets an award for not missing a day of work. “When I came here I told you guys I’d give you my all, and that’s what I do every day,” he says to raucous applause from colleagues. He takes home a $25 Visa gift card and a paper certificate. It’s a small liquidity event—although it might not be the last for Knox. Managed by Q plans to have a stock-option program in place for cleaners and other field staff by the end of the year.


New Worker Classification Needed for Sharing Economy, Uber Drivers
How On-Demand Economy Is Changing Workers’ Compensation
Labor Department’s 6-Part Test for Classifying Employees, Independent Contractors
How Ruling That Drivers Are Employees Upends Uber Business Model
California Uber Drivers Get Class Action Status in Employment Suit
Uber Expected to Ride Out Employee Ruling, Maintain High Valuation Copyright 2015 Bloomberg.

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NY Gov Cuomo Announces New Measures to Combat Worker Exploitation

NY Gov Cuomo Announces New Measures to Combat Worker Exploitation

New York Gov. Andrew Cuomo announced on Oct. 14 new measures to support a statewide task force to combat worker exploitation. The measures include a new $700,000 funding to coordinate outreach and education with workers and employers, as well as investigations, prosecutions and data collection and compliance efforts.

Cuomo also announced the creation of an Anti-Retaliation Unit and a Mediation Unit within the State Department of Labor to eliminate potential retaliation against workers who assert their rights, and to expedite the speedy disposition of cases generated by the task force’s investigations.

Officials said these two new units will serve to give workers the confidence to step forward with complaints of wage theft and other violations and expedite resolution of investigations while also helping employers save thousands in potential fines.

Cuomo also launched a new website, www.ny.gov/EndWorkerExploitation, to provide workers, employers and the general public with information about the task force.

The announcement came amid the first public meeting of the task force to combat worker exploitation. The task force said that so far, it has opened 30 joint-agency enforcement cases across New York. Allegations against the 30 employers at the center of these investigations include failing to carry appropriate workers’ compensation insurance, violating child labor laws, and stealing wages, tips and overtime pay. The industries include restaurants and delis, supermarkets and housecleaning companies, landscaping and car washes.

New York officials said the task force to combat worker exploitation is the first-of-its-kind statewide enforcement effort targeting multiple industries where workers are often victims of wage theft and subject to unsafe work conditions, but do not come forward for fear of retaliation. These industries include: restaurants, supermarkets, car wash, retail, landscaping, nail salons, construction, farming, maintenance, home health care, laundry, janitorial and cleaning services, and truck and waste disposal drivers.


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