Chariot is Decidedly Not the Uber of Employers

As more and more on-demand startups make daily headlines for their hiring practices, Ali Vahabzadeh is taking the long view on the issue.

The founder and CEO of Chariot, a ride-sharing company based in San Francisco that focuses on getting commuters to and from work, Vahabzadeh has always hired his drivers as full or part-time workers. This decision was largely driven by the law, but also by a belief that taking on drivers as employees is essential to company success.

“We made a very conscious decision before we launched that our drivers were the lynch pin of our business,” said Vahabzadeh. “They make the world go round for us.”

Vahabzadeh’s company principles are not shared by Uber, Lyft or SideCar — all of whom contract out their workers — but it appears more on-demand founders are starting to see things like the Chariot CEO. On Monday, online grocery service Instacart announced that it would be taking on a large portion of its contractor workforce as part-time employees.

Chariot is still significantly smaller than Uber and other on-demand transportation companies. Since launching in 2014 with one route and just a few full-time drivers, the ride-sharing service is now up to six routes with 40 vans out on the road at any given time. Uber, on the other hand, had more than 160,000 active drivers by the end of last year. Still, Vahabzadeh is convinced that as the company scales, the cost of employing his drivers will be offset by higher retention rates and a better experience for his customers.

In an interview with LinkedIn, he explained both the benefits and the costs of hiring his drivers and also what he thinks will change in the future for the on-demand worker.

Edited excerpts:

LinkedIn: Why do you hire your drivers as employees as opposed to contractors?

Vahabzadeh: First of all, it is the law. We tell our drivers what time to show up and which routes to take and we provide them uniforms so the law says that that person is an employee. That definitely contributed to our decision making. What we also learned was that recruiting for drivers, I don’t want to say that it is easy, but I wouldn’t say it is our focus. Uber and Lyft are spending the vast majority of their marketing dollars on recruiting drivers, not users. Our retention rate is very high. Month over month it is about 85%.

Why do you think that is?

Most people are proud of being an employee of a company. They can assign value to that. When they talk to their families and friends they can say, ‘I work for Chariot’ as opposed to, ‘I spend two hours Ubering around day to day.’ They also get a steady and consistent wage, whereas doing the 1099 thing [filing taxes as a self-employed person] is very unpredictable.

If the law allowed you to hire your drivers as contractors, would you?

We think that actually employing the drivers is good business. The 20 to 25% premium we are paying in payroll and workers’ compensation, we actually think it is worth it. We spend less time recruiting and re-recruiting drivers which takes a lot of time, energy and expense.

Are you worried about keeping up the cost of hiring your drivers as you scale?

As long as we are presenting positive unit economics in the early days, I am very confident we can continue to produce break even to marginally profitable economics. It is an expense, but I think we get a better quality person driving and we can really train them and produce a better service as a result.

Ginger (pictures above) has been a Chariot driver for 9 months. She started part time, then became full time and is now captaining an entire route. 

What was your reaction to the California Labor Commission’s ruling on Uber?

I wasn’t surprised. I think it is one of those things that can go either way. They have marshaled a lot of resources throughout the 1099 on-demand economy. I think that there may be a third rail that emerges out of all of this. Someone who is not a 1099 or a W-2, but a third class of worker that will be produced. Regulation doesn’t move as fast as the pace of innovation so in the interim, I think it is dangerous for Uber and others to have this legal liability hanging over their business models.

What is your advice to other founders who can’t figure out how to hire their contractors?

It’s tough. Producing benefit tiers and really providing the best of benefits to different employees is important. We give our captains [Chariot captains manage a route and are salaried employees with equity] some benefits and it is very expensive. We think we figured it out, but it remains to be seen if we can give the whole gamut of benefits to all of our drivers. That would be pretty expensive to do.

What do you see happening in the future with regulations concerning on-demand workers?

It will be interesting to see if any states like California take the lead to create different classes of workers. At the end of the day, the W2 and 1099 workers are IRS and federal concepts, but you have seen states produce regulations like minimum wage laws that they become the pioneers and the federal government comes after. It will be interesting to see if any city or state really sticks their neck out and tries to find a resolution for this.

Correction: This post has been updated to reflect that Chariot was founded in 2014, not 2013. 

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