San Francisco is investigating Scale AI's labor practices just months after Meta Platforms Inc. (NASDAQ:META) bought nearly half of the artificial intelligence startup in a $14 billion deal, casting new attention on how tech's fastest-growing firms treat the workers powering their models.

San Francisco Targets Scale AI's Use Of Contractors

The city's Office of Labor Standards Enforcement confirmed it has opened a probe into Scale AI, which relies heavily on contractors and freelancers to annotate data for training advanced AI systems, as reported by Business Insider.  

The agency enforces local rules on minimum wage, overtime, and paid sick leave.

Investigators Seek Testimony From Gig Workers On Multiple Platforms

A since-deleted public notice indicated investigators want to hear from workers who contributed through Scale AI platforms such as Outlier AI and Smart Ecosystem, as well as through staffing agency HireArt and gig site Upwork Inc. (NASDAQ:UPWK).

Scale AI spokesperson Natalia Montalvo said the company is cooperating fully. "Scale AI is compliant with all local laws and regulations," she told Business Insider. 

"Our dedicated teams work hard to ensure contributors are paid fairly, feel supported, and can access the flexible earning opportunities they value."

Upwork said it has not been contacted by the city. "Worker classification and compliance with labor regulations are ultimately the responsibility of the hiring business," an Upwork spokesperson said.

This is not the company's first regulatory challenge. A federal Department of Labor investigation earlier this year was dropped, though lawsuits in San Francisco allege underpayment and misclassification.

See Also: Wage Theft Allegations Target $13.8B Tech Giant Scale AI

Scale AI Restructured After Meta's $14.3 Billion Investment

Scale AI celebrated a $14.3 billion investment from Meta in July but soon after laid off 14% of its workforce, cutting 200 full-time staff and 500 contractors.

Interim CEO Jason Droege, who replaced founder Alexandr Wang after he moved to lead Meta's AI efforts, admitted the company had grown its generative AI business too quickly. He told employees the restructuring was meant to reduce bureaucracy, improve agility, and regain lost customers.

Despite the cuts, Droege said Scale AI remained financially stable and planned to expand hiring later in the year, particularly in enterprise and government divisions.

Spokesperson Joe Osborne confirmed severance packages for departing workers and outlined a plan to reorganize the company's data business for generative AI customers.

Last month, Meta's partnership with Scale AI showed strain after Ruben Mayer, a former Scale executive, left Meta just two months after joining.

Meanwhile, Meta's TBD Labs reportedly favored rival vendors Mercor and Surge over Scale AI due to quality concerns.

Separately, Lucy Guo, who co-founded Scale AI with Wang, shifted her focus to Passes Inc., a creator subscription startup launched in December 2022.

The company raised $50 million to help influencers and celebrities such as Olivia Dunne and Bella Thorne monetize their audiences, with Guo describing the service as offering "Hermès-level" support for creators.

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Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.

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