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Cleaning Startup Homejoy Shuts Down, Blames Worker Classification Lawsuits The multiple worker classification lawsuits filed against the company were the 'deciding factor.'

By Laura Entis

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Opinions expressed by Entrepreneur contributors are their own.

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In what should send ominous ripples through the sharing economy, on-demand cleaning service Homejoy announced today that it will be shutting down as of July 31.

The San Francisco-based startup was unable to raise enough money to continue on, CEO and co-founder Adora Cheung told Re/code, adding that while there were serious growth challenges (most notably, fierce competition from Handy), the "deciding factor" was a legal issue: Worker classification.

Like many companies operating in the sharing economy, Homejoy faced multiple lawsuits over whether it can legally classify its workers as contractors, not employees. Peer-to-peer operations like Uber, Lyft and Postmates have been able to thrive in large part because they keep their employee count small. Instead, these companies classify the majority of their workers as contractors, meaning they aren't responsible for covering payroll taxes, health insurance, overtime and other benefits.

The distinction between the two categories is murky, however, and workers have filed lawsuits arguing that they should be compensated as employees.

Last month, the California Labor Commission ruled that a San Francisco-based Uber driver should be classified as an employee not a contract worker. While the decision only affected a single driver, it sent a strong message: The current classification system is very much open for debate.

Related: Employee, Not Contractor: What the Uber Ruling Means for the Sharing Economy

It was bad timing for Homejoy; when the ruling was handed down, the company was in the process of raising money. "The Uber decision … was only a single claim, but it was blown out of proportion," Cheung told Re/code, implying that investors got skittish.

Established players in the sharing economy like Uber have the resources to battle it out in court, but for newer entrants, Homejoy's fate spells trouble. If Cheung is correct, and its classification lawsuits were the "deciding factor" that barred the company from securing the money it needed, other peer-to-peer startups face a challenging fundraising environment.

Earlier this week, the Labor Department weighed in on the issue, releasing a 15-page guide that could make it harder for employers to classify workers as contractors.

Some companies are already switching tactics. Grocery delivery service Instacart recently announced that it will begin to reclassify its in-store shoppers as part-time employees, while the on-demand shipping app Shyp is reclassifying all of its workers.

Founded in 2012 by Cheung and her brother Aaron, Homejoy raised $40 million from investors including First Round Capital, Redpoint Ventures and Google Ventures.

The shuttered company's tech team is reportedly being hired by Google.

Related: Another Peer-to-Peer Startup Just Turned Its Contract Workers Into Employees

Laura Entis is a reporter for Fortune.com's Venture section.

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