Thanks to a new set of rules recently passed in New York City, drivers for ride-hailing applications like Uber and Lyft are about to be guaranteed a minimum hourly wage. The new rule, passed by the New York City Taxi and Limousine Commission, mandates a wage floor of $17.22 per hour after expenses—or $26.51 per hour before expenses—a move that is estimated to raise the average rate of pay by approximately $9,600 per year for the over 77,000 ride-sharing drivers working in the Big Apple.
While not the first city to consider minimum wage rules for ride share drivers, New York City is the first to take action. In passing the new wage rule, the Commission stated that its purpose is aimed at securing workers’ right to a living wage with “minimal disruption to passengers.” Jim Conigliaro, Jr., founder of the Independent Drivers Guild, one of the leading groups advocating for the pay raises, praised the move in a statement, saying “[t]oday we brought desperately needed relief to 80,000 working families. All workers deserve the protection of a fair, livable wage and we are proud to be setting the new bar for contractor workers’ rights in America.”
Though the Commission’s move has been praised by many, it is unclear how the industry will change once the new rule goes into effect. Traditionally, ride share drivers earn a percentage of the total cost charged to the passenger for each ride. The cost of each ride starts at a minimum price “floor” and increases based on the duration of the ride and the distance traveled, with distance being the primary factor determining the final cost of the ride. Because of the price floor and the increased payout for traveling longer distances, the most lucrative fares have historically been long-distance trips and quick, short-distance trips where drivers can turn over a larger number of passengers in a shorter amount of time. At times when the demand for ride share drivers is at its highest, companies use “surge pricing” to charge customers a premium and incentivize drivers to get on the road and meet market demand.
In theory, the ride share pricing system is structured so that, at any given time, the number of drivers on the road is proportional to the immediate level of demand. While drivers make more money during high-demand periods of time, so do the ride share companies; and since drivers’ pay was set as a percentage of revenue generated during a shift, ride share companies never had to worry about their wage costs exceeding their profits. Combined with the fact that drivers incurred their own expenses (gas, car payments, insurance, vehicle maintenance, etc.), the result was that ride share companies could take a hands-off approach to employee staffing and simply allow the laws of supply and demand to take over.
Despite the risk of uncertain earnings, the benefit of the traditional pay system for drivers was the flexibility to work whenever they want, for however long they wanted. Because companies’ payroll expenses were set as a fixed percentage of overall revenue, there was never any reason for them to set restrictions on the number of drivers allowed to work in any given area at any given time. Once the new minimum wage rule goes into effect, however, companies will be forced to implement restrictions on the number of drivers who are allowed on the road at any given time, in order to avoid situations where there are more drivers working (and earning minimum wage) than are necessary to meet the level demand for a particular area at a particular time.
The rule change has also been criticized by ride share companies as an attempt by the powerful taxicab lobby to push them out of business by hitting them in the pocketbook, either by increasing the cost of doing business to the point of being unprofitable, or by increasing the cost of their service to consumers to a point where they are unable to compete with the cost of traditional taxis.
Ride share companies are not the only critics of the new minimum wage rule. Despite the apparently well-intentioned nature of the new minimum wage rule, many have criticized the move for the uncertain negative consequences that are likely to result. Will companies begin implementing “work shifts” to limit the number of drivers on the road in proportion to anticipated demand? Will drivers be prevented from going “on the clock” if there are already enough drivers on the road to meet demand? If demand drops off but the number of drivers on the road stays steady, will companies start forcing drivers to “sign out,” and if so, how will they determine who “gets the boot” at any given time? Or will companies simply increase the cost of fares across the board to cover increased payroll expenses?
One way or another, the rule change is likely to be felt most by the drivers themselves. Many drivers fear that the benefits of a mandatory minimum wage will be outweighed by a decrease in the number of work hours allowed. For drivers who rely on ride sharing companies as their primary source of income, they may be forced to look for new jobs that will give them more income security. Drivers who rely on ride sharing as simply a means to supplement their income in their spare time may also find themselves tightening the purse strings if suddenly they can no longer rely on their secondary source of income. At the end of the day, however, one thing is certain: if more cities end up following the Commission’s example, we are likely to see a major disruption in the ride sharing “gig economy.”