Further, an increasing percentage of Americans rely on gig work to pay for necessities. In 2016, 4.5% of adults depended on gig work to meet basic needs. By 2021, this had more than doubled to 9.4%.(1) Tips play an important part in these workers’ pay. In a recent study conducted in Seattle by labor group Working Washington, tips made up about a third of the pay of delivery and car sharing gig workers; about 24.3 million U.S. adults are at least partly reliant on tips to meet their basic needs.(2)
In part, this dependency on tips over base pay is growing because of actions taken by gig companies to institute tipping. Until 2018, ride-hailing apps didn’t even feature tipping. Now, rideshare services have changed the pay structure, taking a larger part of a worker’s base pay than before and giving customers the option to tip. This cuts into some extra income that tips would provide for the workers. Recent reports show that ride hailing apps are taking more than 50% of the base pay of rides compared to their publicly stated 25%.(3)
Yet, while more workers are relying on tips, the average American tips less. A study by CreditCards.com found the average American is less likely to tip now than in 2019: 12% less likely to tip a driver and 10% less likely to tip a food delivery person.(4) And if consumers do tip, the average tip (across all services) in 2022 was 20%(5), compared to 26% in 2017.(6), (7) But relying on users — other Americans who may also be struggling — to pay gig workers with tips instead of the companies that employ them isn’t the answer.
We are reaching a boiling point. As jobs grow more and more flexible, they have also become more and more unstable. In a survey conducted by researchers at Sciences Po, gig workers in the U.S. and the UK were willing to give up 50% of their paycheck in return for a traditional contracted work arrangement.(8)
But companies also face a conundrum. In many gig industries, head-to-head competition forces these companies to cut costs wherever possible. For example, higher pay to Lyft drivers would likely steer investors to Uber. An executive whose performance is measured by profit margins could get fired if company profits took a hit because wages increased. Companies lack incentive to change the pay structure of gig workers because these companies themselves are trying to get ahead.
So we need to create an economic environment where companies can hire these workers as employees and pay them a living wage. There are steps policymakers can take to change the gig economy dynamic.
First, Congress could eliminate the payroll tax, so there would be no tax incentive for companies to sign on workers as “contractors.” If this proves politically unfeasible, companies could be required to pay the same payroll tax for both employees and contractors. Currently, companies are responsible for half of employees’ Social Security contribution, but none of it for contractors. Eliminating this advantage to hire workers as contractors would be a step toward allowing companies to give people more stability.
Proof exists that companies can make the shift. In 2018, California passed a law mandating that cannabis delivery drivers be employees rather than contractors. Drivers classified as contractors were granted employee status, and the benefits that come with it — overtime, minimum wage, Social Security contributions, etc. Companies adapted. Although it raised costs by 12-15%, companies started targeting a different customer base, one willing to pay more to interact with better-trained staff.(9) Forcing companies to evolve is not a business death knell — cannabis delivery is alive and well in California.
Another change that would benefit both traditional service and gig workers would be to mandate a pre-tip minimum wage equal to that of the regular minimum wage. Tipping shifts the burden of employee pay onto the customer and away from the corporation. Putting the burden back on companies helps prevent worker exploitation and could lead companies to develop new business strategies, as was the case with the cannabis companies in California. The group One Fair Wage has made significant headway in this arena already with its focus on tipped restaurant workers. Because of its extensive advocacy, eight states have passed laws requiring full minimum wage for all workers, with tips on top of the minimum.(10)
Moreover, a major problem that businesses face when trying to shift away from tipping to a service fee model is that their competitors didn’t do so at the same time. But a law mandating all the gig platforms make this change at once solves the timing issue for competitors. In the UK, a court ruling against a joint lawsuit filed by Uber and competitor rideshare app FreeNow forced all rideshare platforms to pay their workers a minimum wage as well as regular employee benefits. And Uber still needed more drivers to meet demand. To attract more workers, Uber raised wages another 5% in August 2022(11), (12) — proof a minimum wage didn’t kill the rideshare market.
Government can also partner with the private sector to aid social movements. In 2018, food delivery workers in Bologna, Italy, came together to sign a charter with the city council and the local food delivery platforms. The charter guaranteed minimum pay and set overtime and benefit standards for these working arrangements. Some companies refused to sign the charter, so the mayor of Bologna organized a boycott of the holdout firms. This proved to be effective, illustrating how politicians can help push for more fair treatment of workers.(13)
Ultimately, trends in the gig economy are combining to produce unsustainable outcomes for a growing part of the American workforce. The current system not only allows for this but incentivizes it. We can only improve gig workers’ economic situation by first shining a bright light on the problem and then pushing for change to the system in which these businesses operate.
