Amazon to Pay $61.7 Million in FTC Settlement Over Driver Tips

The U.S. Federal Trade Commission has announced that Amazon is obligated to remit $61.7 million to resolve allegations concerning the withholding of tips from its Amazon Flex delivery personnel over a period of two and a half years.

The FTC’s complaint against Amazon and its affiliate, Amazon Logistics, asserts that the company represented to customers that 100% of tips were distributed to drivers. However, Amazon reportedly utilized these customer tips to offset costs following a reduction in the hourly wage—a modification not communicated to the drivers, according to the complaint.

Allegations and Timeline

The FTC further alleges that Amazon continued this practice until it became aware of the FTC’s investigation in 2019.

The issue centers around the Amazon Flex program, initiated in 2015, which enabled individuals to register as delivery partners for Amazon packages. These drivers received an hourly rate, supplemented by customer tips.

Amazon’s FAQ section within the Flex app explicitly stated that drivers would receive 100% of their tips: “For Prime Now, AmazonFresh, and store deliveries, the customer can choose to tip. You will receive 100% of the tips you earn while delivering with Amazon Flex.” Previous documentation, dating back to May 2018, also affirmed that Amazon “will pass to you 100% of tips you earn.”

Recruitment and Tip Promotion

The company actively promoted the benefits of tips in recruitment advertisements, offering potential earnings of $18-$25 per hour, with the possibility to “make more” through tips. The Amazon Flex service terms also guaranteed 100% tip distribution, as detailed in the FTC complaint.

Despite this messaging, drivers accepting delivery assignments through the app were assigned “blocks,” with only some being eligible for tips. Initially limited to Prime Now, eligibility later expanded to Amazon Fresh and Amazon Restaurants. Deliveries not eligible for tips were compensated with a flat rate.

The Shift to Variable Base Pay

From 2015 to 2016, Amazon initially adhered to its stated policy of paying $18 per hour plus 100% of tips. However, in 2016, the company transitioned to a “variable base pay” system, which persisted for two and a half years.

During this period, Amazon reduced its direct contribution to driver pay, utilizing an algorithmically determined internal “base rate” based on average tip data in the area. This base rate frequently fell below the advertised $18-$25 range.

Instead of providing drivers with the full tip amount, Amazon treated the lower end of the advertised rate as a guaranteed minimum, using driver tips to fulfill this minimum, as the FTC contends.

Lack of Transparency and Internal Concerns

These changes were implemented without seeking driver consent or providing any notification. Internal discussions within Amazon revealed concerns about the level of earnings detail to display to drivers, acknowledging that the changes would likely reduce their income.

Drivers noticed the discrepancy and voiced their concerns, submitting hundreds of complaints to the company and publicly on social media platforms. Even when questioned by reporters, Amazon continued to assert that it paid 100% of tips, despite internal recognition of the situation as “a huge PR risk” and a “reputation tinderbox.”

FTC Investigation and Resolution

The FTC issued a civil investigative demand to Amazon on May 23, 2019. It was only after this demand, on August 22, 2019, that Amazon announced an “updated earnings experience” for drivers, reverting to a compensation structure similar to the original.

The FTC settlement mandates a $61.7 million payment, representing the total amount of tips withheld from drivers. Affected drivers can register for updates regarding the refund process here.

Statements and Future Compliance

“Rather than passing along 100 percent of customers’ tips to drivers, as it had promised to do, Amazon used the money itself,” stated Daniel Kaufman, acting director of the FTC’s Bureau of Consumer Protection. “Our action today returns to drivers the tens of millions of dollars in tips that Amazon misappropriated, and requires Amazon to get drivers’ permission before changing its treatment of tips in the future.”

The settlement also prohibits Amazon from altering how driver tips are used in compensation without first obtaining their “express informed consent.”

Financial Impact and Industry Context

For Amazon, the $61.7 million fine represents a relatively small fraction of its overall business. In the third quarter of 2020, the company reported $96.15 billion in revenue and earnings of $12.37 per share, projecting revenue of $112-121 billion in Q4, representing 28%-38% annual growth.

Consequently, such fines may be viewed as a mere cost of doing business rather than a deterrent to unfair practices.

Amazon is not alone in facing scrutiny over driver compensation. Instacart also encountered issues regarding its tipping practices in 2019, leading to a class action lawsuit. Other companies, including DoorDash and Shipt, have also been subject to complaints and legal challenges concerning tips.

Underlying Economic Challenges

These issues stem from the inherent economic challenges of same-day and online grocery delivery services, characterized by narrow margins and additional costs associated with picking, labor, and cold storage. Businesses in this sector often rely on premium subscriptions, delivery fees, and price markups to maintain profitability, and sometimes resort to utilizing driver tips.

It is important to remember that tips are intended as supplemental income for workers, not as a source of revenue for businesses.

Amazon’s Response

In response to the FTC’s action, Amazon stated that it disagreed with the complaint but is pleased to have resolved the matter.

“While we disagree that the historical way we reported pay to drivers was unclear, we added additional clarity in 2019 and are pleased to put this matter behind us,” an Amazon spokesperson said. “Amazon Flex delivery partners play an important role in serving customers every day, which is why they earn among the best in the industry at over $25 per hour on average.”

Amazon Flex Complaint by TechCrunch on Scribd