Uber will pay back “tens of millions” of dollars to drivers in New York City, the company said today.
The payments are the result of an error Uber said it recently discovered in how it calculated driver earnings. Until this week, Uber applied its “service fee”—typically 25% for UberX rides in New York City—to the gross fare, or the total amount paid by the passenger. But in a terms-of-service agreement dated to November 2014, Uber told drivers it calculated that commission based on the net fare, or the amount paid by the passenger minus sales tax and other applicable fees.
Uber’s gross fares in New York include sales tax (8.875% of the net fare) and workers’ compensation for professional drivers (2.5%). By calculating its commission on the gross fare, Uber ended up taking about 2.6% more from drivers than it would have on the net fare. The company plans to repay those earnings, plus 9% annual interest, to “tens of thousands” of New York drivers, it told Quartz, with an average payment of around $900 each.
“We made a mistake and we are committed to making it right by paying every driver every penny they are owed—plus interest—as quickly as possible,” Rachel Holt, Uber’s general manager for the US and Canada, said in a statement. “We are working hard to regain driver trust, and that means being transparent, sticking to our word, and making the Uber experience better from end to end.”
Uber has long had a fraught relationship with its drivers, whom it hires as independent contractors to avoid providing them with benefits or paying a guaranteed minimum wage. The company has rankled drivers by cutting its rates and repeatedly refusing to build tipping into its app. In February, a leaked dash-cam video showed Uber CEO Travis Kalanick berating a driver who complained about falling fares.
The strained relations aren’t just bad press; they’re a fundamental problem for Uber’s business, which relies on having a large network of drivers to dispatch at any given time. The company has said it retains about 50% of drivers after one year, though other reports have set that figure much lower. Ride-hailing competitor Juno, which sold to Gett in April for $200 million, gained a foothold in New York simply by promising to be nicer to drivers (whether it made good on that promise is another matter). Uber is working toward driverless cars, but it can’t yet afford to alienate its entire human workforce.
Uber said it uncovered the error in its commission calculations earlier this month while updating its terms of service to reflect a new system of “route-based” pricing. That system, reported last week by Bloomberg, charges riders based on what Uber thinks they’re willing to pay. Economists call this model of pricing, versus using a uniform rate, “price discrimination.” Unlike other forms of discrimination, it’s not always considered bad, because it’s more likely to charge people of different income levels based on their ability to pay.
A lawsuit filed against Uber in federal court in New York last summer alleged that the company made “unlawful deductions” from driver wages by calculating its service fee on the gross fare, rather than the net fare. Uber said it only recently became aware that the issue was raised in that lawsuit, noting that it made the decision to refund drivers independent of the complaint.
Uber said it is emailing all affected drivers with the amount that they are owed. Drivers who have completed a trip in the past 90 days will have the money deposited directly into their accounts within seven days. Everyone else will be asked to fill out a form online to confirm that their bank account information with Uber is correct, and will then receive the money via direct deposit within one to two weeks. There’s no deadline by which drivers need to do that. The company is also alerting drivers to the mistake through messaging in its app, as well as handing out flyers and holding informational sessions at its driver help centers, called “Greenlight Hubs.” Uber considered having drivers sign a claims waiver to receive their payments but ultimately decided not to.
The repayments in New York come after Uber emailed drivers across the US last week about changes to its pricing model, which it said were designed to make earnings “easier to understand and access.” The company told drivers it would provide a “clear breakdown” of their earnings for each trip, including “minimum or base fare, plus time and distance, and any promotions.” Those changes, which took effect yesterday, also let drivers see how much their passenger paid by tapping “Fare Details” on the trip receipt. Uber said it aimed to make that information available in the app within 15 seconds of a trip ending.
What Uber didn’t state explicitly is that its commission is no longer calculated as a percentage at all. In an update to its driver agreement dated May 22, Uber defined the “fare” as a base fare amount plus time and distance. It defined its “service fee” as the price paid by the rider minus the “fare,” tolls, any other Uber fees, and taxes and surcharges. In other words, Uber’s commission is now simply what’s left over after subtracting driver earnings, taxes, and other fees from what a rider paid.
Uber’s pricing has gone through several evolutions since the company began providing on-demand rides in 2009. In its earliest days, Uber charged passengers based on time and distance. In 2011 it introduced surge pricing, its infamous practice of allowing rates to rise along with demand. Last summer, Uber replaced this system, which was still ultimately based on time and distance like a taxi meter, with “upfront pricing.” Under that model, the company asks riders to agree to a price when they book a ride, but pays drivers based on minutes and miles.
Upfront pricing at times created major disparities between what a rider paid and a driver earned. Because Uber didn’t show drivers the amount paid by their passenger, it also fed into driver suspicions that the company was somehow ripping them off. The changes to driver earnings announced by Uber last week are in theory designed to address these concerns, without changing the fundamentals of upfront pricing.
Uber said it has initiated an audit to see whether drivers were underpaid in other markets because of how it calculated its commission. The mistake is unlikely to have occurred widely because many cities and states don’t charge a sales tax on Uber rides, meaning the gross and net fares tend to be the same. As of today, the company said it has yet to find any other occurrences of this happening.