After its initial public offering (IPO) in May 2019, Uber’s shares closed their first day of trading at $41.57 — 7.6 percent below the company’s offering price of $45. On November 6 — the day of the highly anticipated six-month “lockup” period following its IPO ended — early investors and employees looking to sell their stock for a big profit were somewhat disappointed. While it is routine for a company’s stock price to decline after the lockup period expires, after Uber shares flooded the market, the stock went down to a low of $25.58 a share, a 43 percent decrease from its IPO price. Nevertheless, the Uber IPO made some people rich.
Something else of note also happened on November 6. Uber drivers showed up at the homes of some of the company’s big investors, but not to pick up passengers or offer congratulations. The drivers were there to protest the fact that Uber has made some people very rich while underpaying its drivers. “Uber, Uber, you’re no good. Pay your drivers like you should,” shouted some of the protestors. One driver, who had been driving for Uber for almost four years, had a homemade sign reading, “Value stolen does not equal value added.” Uber stole his and a million other Uber drivers’ value, he said, “by underpaying us, undercutting us.” He believes that there’s just too big of a gap between what a driver earns and what Uber’s early investors are making. It is “unfair” because Uber has cut the rates it pays drivers and drivers have seen their expenses go up.
This protest was not an isolated incident. Just last year, before this incident in November, Uber drivers went on strike in Los Angeles in March and in selected cities around the country in May, protested at Uber headquarters in July, and brought traffic to a virtual standstill in Manhattan in September. The perennial cry by Uber drivers and the Progressives who support their cause is that Uber drivers are underpaid.
Founded in March 2009 and headquartered in San Francisco, Uber is the premier ride-sharing company that operates in 63 countries and more than 700 cities around the world. Anyone can create an Uber account with an e-mail address and phone number. To request a ride one must first download the Uber app to a cell phone and set up a credit card to make payments. Then, according to the Uber website, here is how Uber works, step by step:
- A rider opens the app. The rider enters his destination into the Where to? box on the top of the screen; taps each ride option to see the wait time, car sizes, and price; then confirms his pickup location and taps Request.
- The rider is matched with a driver. A nearby driver sees and chooses to accept the rider’s trip request. The rider is automatically notified when the driver’s vehicle is about a minute away.
- The driver picks up the rider. The driver and the rider verify each other’s names and the destination. Then the driver starts the ride.
- The driver takes the rider to the destination. The app gives the driver the option to access turn-by-turn directions, so the driver can focus on getting there and the rider can focus on enjoying a comfortable ride.
- The driver and rider leave ratings and reviews. At the end of each trip, drivers and riders can rate each other from 1 to 5 stars. Riders can also give the driver compliments. In cities where tipping is available, they can also add a little extra to show their gratitude.
There are just a few basic requirements that must be met for someone to drive for Uber: have a valid driver’s license, have at least one year of driving experience, have an eligible 4-door vehicle, have proof of insurance, have proof of residency, and pass driver screening requirements. These basic requirements are in addition to any national, state, or local regulations.
Uber has been criticized for increasing traffic congestion, reducing the value of taxi medallions, causing a decline in the use of public transit, and inadequate vetting of drivers. Uber has been praised for its ease of use, creating jobs, decreasing instances of drunk driving, and lowering the cost of transportation. But whether Uber’s coming to one’s city is a good thing or a bad thing is not our concern here. Our concern is simply this: Are Uber drivers underpaid?
What Uber riders don’t see when they “sit back and relax” is how Uber and its drivers divide up their fare. When Uber calculates a ride fare, it is based on several factors: a base fare, time spent in the car, distance traveled, a booking fee, a surge variable, taxes, and tolls. Uber generally takes 25 percent of the fare and gives the rest to the driver. Uber drivers are independent contractors who set their own days and hours. They can drive as much or as little as they choose. The more they drive, the more they can make, and especially during what Uber calls “surge pricing.” According to Uber, “Prices may increase to help ensure that those who need a ride can get one. This system is called surge pricing. Surge pricing automatically goes into effect when there are more riders in a given area than available drivers. This encourages more drivers to head to the busy area over time and shifts rider demand, to maintain reliability and restore balance.” Surge pricing is simply a way of adjusting prices in real time on the basis of supply and demand.
The classification of drivers as independent contractors allows Uber to avoid paying the applicable federal or state minimum wage or providing employee benefits such as workers’ compensation, family and medical leave, and health insurance. As independent contractors, Uber drivers don’t have income tax or payroll taxes withheld from their pay. If they make more than $600 in a calendar year, Uber reports it to the Internal Revenue Service (IRS) and to the driver on form 1099-MISC. This income is potentially taxable, depending on the driver’s expenses and other income. Uber drivers are also subject to Social Security (12.4 percent) and Medicare (2.9 percent) taxes of 15.3 percent if their self-employment income after expenses and deductions is more than $400. However, only the first $137,700 of this income is subject to Social Security tax, only 92.35 percent of self-employment income is subject to these taxes, and one-half of the Social Security and Medicare taxes paid are allowed to be deducted from one’s gross income for income-tax purposes.
When there is a problem, real or perceived, people often look to government at some level to solve it. After agitation by Uber drivers and other independent contractors, organized labor (they want to see Uber drivers classified as employees and unionized), Progressive groups, and Democratic politicians, the state of California enacted a law (AB 5) last year on a party-line vote that limits the ability of businesses in the state to classify its workers as independent contractors rather than as employees. The law, which was opposed by Republicans, the California Chamber of Commerce, and, of course, Uber and similar companies, took effect at the beginning of 2020. It codifies, clarifies, and grants exemptions to a 2018 California Supreme Court decision that imposed stricter requirements on the classification of employees. It makes it harder for companies to label workers as independent contractors by creating a three-part “ABC test” that must be passed before a worker can be classified as an independent contractor instead of an employee:
- The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact.
- The worker performs work that is outside the usual course of the hiring entity’s business.
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
Many professions received exemptions to the law on the grounds that they negotiate their own rates and communicate directly with customers: doctors, psychologists, dentists, insurance agents, private investigators, stock brokers, lawyers, accountants, engineers, veterinarians, real estate agents, hair-
stylists and barbers, commercial fishermen, travel agents, graphic designers, and certain photographers, photojournalists, freelance writers, and editors. The law allows large cities, the California attorney general’s office, and local prosecutors to sue companies for violating the law. Uber and other ride-sharing companies such as Lyft have said that they have no plans to reclassify their workers as employees and that they can pass the “ABC test.”
As long as Uber drivers are classified as independent contractors, are they all underpaid? Are some of them underpaid? Is it possible for any of them to be underpaid? The answer to those questions is that as long as Uber drivers receive what they were promised by Uber and that they agreed to, not only are they not underpaid, it is impossible for them to be underpaid. It is only because of fraud or mistakes on the part of Uber that its drivers can be underpaid. For example, just a few years ago Uber actually did underpay its drivers in Philadelphia and New York City. In March 2017, the company issued refunds to Uber limousine drivers in Philadelphia after deducting an extra 5 percent in commission for about 18 months. In May 2017, Uber acknowledged that it chronically underpaid its New York City drivers for two and a half years by taking a larger cut of their fares than it was entitled to. Uber was supposed to take its cut after deducting sales tax and a local fee. Instead, the company calculated its commission on the gross fare. That resulted in the withholding of tens of millions of dollars from Uber drivers. The average payout from Uber to affected drivers was about $900, which included interest.
But it is not only Uber drivers. Anyone who, as an independent contractor, does any work for any business, company, or corporation and receives the payment for providing goods or services that he agreed to can’t possibly be underpaid no matter how little he receives in relation to the time, money, or effort expended. If someone is promised X amount of money for services rendered, and completes his agreed-upon task in the manner in which he was supposed to, but then receives any amount of money less than X, then he has been underpaid. But if someone misjudges the amount of time it will take to perform a service, the amount of money he will have to spend to perform the service, or the amount of effort he will have to put forth to perform the service, then receives the amount of money that he was promised, but ultimately, after expenses, winds up with nothing when he has completed the work he agreed to do, then he was not underpaid. He may have been foolish, careless, negligent, short-sighted, ignorant, or inexperienced, but underpaid he was not.
The remedy for any independent contractor who thinks that he is underpaid — assuming that he is being paid the amount of money for performing a task that he and his employer agreed upon — is to (1) ask to be paid more money for doing the same amount of work, (2) ask to be able to do less work for the same amount of money, or (3) find another job. It is that simple. To give you a real-world example: If someone agrees to mow my yard and trim my bushes to my specifications for $20 and it takes him two hours to do it, as long as I pay him the $20 that we agreed on, then neither he nor anyone else can legitimately say that he was underpaid, and especially if he continues to mow my yard and trim my bushes for $20 week after week. If, after the first time, he decides that his time and effort are worth more money, then he can (1) ask me to pay him $40, (2) ask me to continue to pay him $20 every time he mows my lawn but only trim the bushes every other time he mows the lawn, or (3) stop mowing my lawn and trimming my bushes. When faced with his request, I can (1) agree to pay him $40 for continuing to do the same work, (2) agree to let him trim the bushes every other time he mows the lawn and continue to pay him $20, or (3) not acquiesce to his requests and risk his refusing to mow my lawn ever again. I can also make him a counter-offer and we can negotiate. For example, we might ultimately agree that I will pay him $35 each time he mows my lawn and trims my bushes as long as he also washes my car each time. The possibilities are endless. And not only is the dollar amount we agree on or the work that must be completed to earn that amount no one’s business, there is no reason for the government to get involved in any way.
The minimum wage
The principles discussed above are relevant to many other areas. For example, the minimum wage. A federal minimum wage was instituted by the Fair Labor Standards Act of 1938. The rate, which was initially set at $0.25 an hour, was last raised to $7.25 an hour in July 2009. States can use the federal minimum wage, set their own minimum wage (either higher or lower), or have no minimum wage at all. Currently, sixteen states use the federal standard. Five states have no minimum wage, in which case the federal minimum wage applies. Twenty-nine states and the District of Columbia have minimum wages that are above the federal minimum wage. Higher state minimum wages range from $7.50 an hour in New Mexico to $12 an hour in Washington (the D.C. minimum is $14 an hour).
For several years now, there has been a movement in the United States to increase state minimum wages to at least $15 an hour. It is seen as an easier thing to do than to persuade Congress to raise the federal minimum wage. Fast-food workers, convenience-store clerks, and laborers who earn the minimum wage are said to be underpaid (usually by the same people who maintain that Uber drivers are underpaid) because they can’t live on the minimum wage. According to the Bureau of Labor Statistics, only about 5 percent of U.S. hourly paid workers earn the prevailing federal minimum wage. They tend to be people who are young, have never been married, are unskilled, have no more than a high-school education, work part-time, and work in the leisure and hospitality sectors of the economy.
But are all minimum-wage workers underpaid? Are some of them underpaid? Is it possible for any of them to be underpaid? The answer to these questions is that as long as they receive the amount per hour that they were promised by their employers and that they agreed to, they are not only not underpaid, it is impossible for them to be underpaid. The fact that Uber drivers are independent contractors who are paid by the job and minimum-wage workers are employees who are paid by the hour makes no difference. The underlying principle is still the same. It is disingenuous for anyone who agrees to work for X amount per hour to claim that he is underpaid when he receives X amount per hour. Minimum-wage laws violate freedom of contract by infringing upon the right of an employer and an employee to make whatever wage agreement they choose.
Wages are simply the price of labor. Sometimes it is the price of goods that governments seek to raise. Governments impose anti-dumping duties on foreign imports that it believes are priced lower than the price charged in the originating country. This has the effect of raising the price of the imported good in order to “protect” domestic jobs and industries. Set your prices too low and the government might charge you with “predatory pricing” if it believes that you are trying to drive smaller competitors out of business so you can become a monopoly and raise your prices. Sometimes governments have programs to guarantee minimum margins to certain industries; e.g., the U.S. dairy and sugar industries.
But it also works the other way. Sometimes governments seek to limit the price of goods or services so consumers don’t “overpay” for them. That is the mentality behind rent control laws, price-gouging laws, usury laws, and ticket-scalping laws. But a willing buyer can’t “overpay” for apartment rent, goods in short supply, car-loan interest, or concert tickets if he agrees with a willing seller on a price. No one has the right to purchase a good or service for a particular amount no matter how much he “needs” it and no matter how little money he has to pay for it.
Are Uber drivers underpaid? They may wish they were paid more. They may wish they didn’t have to put so many miles on their cars. They may wish that they didn’t have to drive in the middle of the night. They may wish that they were employees instead of independent contractors. They may wish that they had paid vacations. They may wish that they had health insurance. They may wish that they had paid sick leave. They may wish that they received overtime pay for working more than forty hours. But as long as they are paid by Uber exactly what they agreed to work for, they are not, and cannot possibly be, underpaid. Just as it is impossible for any worker — independent contractor or employee — to be underpaid if he receives the pay that he agreed to work for. And likewise, no one can “underpay” or “overpay” for a good if a willing buyer and willing seller agree on its price.
This article was originally published in the February edition of Future of Freedom.