Amazon to pay $61.7M to settle FTC complaint over stolen Amazon Flex driver tips

The U.S. Federal Trade Commission announced today that Amazon will be required to pay $61.7 million to settle charges that it withheld some customer tips from its Amazon Flex drivers over a two and a half year period. According to the complaint against Amazon and its subsidiary Amazon Logistics, the company had advertised that it paid 100% of tips to drivers. But in reality, Amazon used the customer tips to cover the difference after it lowered the hourly rate -- a change it didn't inform drivers about, the complaint says.

The FTC also alleged that Amazon didn't stop this behavior until it became aware of the FTC investigation in 2019.

The complaint (PDF) specifically has to do with the Amazon Flex service, launched in 2015, which allowed anyone to sign up to deliver Amazon packages to customers. These Flex drivers were paid an hourly rate for those deliveries and could also receive customer tips.

In the FAQ section of the Amazon Flex app, the company had promised drivers they would receive 100% of their tips, saying: "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." An earlier version of this document had also stated that Amazon "will pass to you 100% of tips you earn," back in May 2018.

Amazon also promoted the tips benefits in ads recruiting drivers, where the company offered a rate of up to $18-25 per hour and the ability to "make more" via tips. And when drivers signed up for the Amazon Flex service, its terms also promised 100% of tips, the FTC complaint explains.

Despite the language being used, when Flex drivers used the app to accept their delivery gigs, they would be assigns delivery "blocks," only some of which were tips-eligible. Initially, this included Prime Now but later expanded to include Amazon Fresh and Amazon Restaurants. Those that weren't eligible for tips were paid a flat rate. Meanwhile, customers using the Amazon app were encouraged to tip drivers through the app, which noted that "cash is not accepted upon delivery."

Initially, Amazon from 2015 to 2016 paid drivers $18 per hour plus 100% of tips, as it claimed. But in 2016, it made changes to the program to adopt "variable base pay," which ran over the course of two and a half years. During this time, Amazon would reduce its own contribution to drivers' pay to an algorithmically set, internal "base rate" using data it collected about average tips in the area. This base rate was often below the $18-$25 advertised rate. Then, instead of paying out 100% of tips to drivers, Amazon treated the bottom of the range as a guaranteed minimum and used drivers' tips to meet that minimum, the FTC says.

When Amazon made these changes, it didn't ask for drivers' consent or otherwise inform them. It also had internal discussions where the company tried to decide what level of detail about earnings to actually show to drivers, knowing that the changes would reduce their earnings.

Drivers began to realize they were no longer receiving 100% of tips and hundreds complained both to the company and publicly on social media. When reporters asked Amazon to respond to these complaints, the company continued to say that it paid 100% of tips -- even as it internally acknowledged the situation represented "a huge PR risk to Amazon" and described it as a "reputation tinderbox."

The FTC says it issued a civil investigative demand to Amazon on May 23, 2019, and only afterwards -- on August 22, 2019 -- did Amazon announce an "updated earnings experience" to drivers, which was similar to the original compensation. In other words, it appears the investigation forced Amazon to stop the deceptive practice.

The FTC settlement includes a $61.7 million fine, which is the full amount of money withheld from drivers, the FTC says. This will be used to compensate drivers who can sign up to receive updates on the refund status here.

“Rather than passing along 100 percent of customers’ tips to drivers, as it had promised to do, Amazon used the money itself,” said Daniel Kaufman, acting director of the FTC’s Bureau of Consumer Protection, in a statement. “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.”

In addition to the fine, the settlement also prohibits Amazon from making further changes to how drivers' tips are used as compensation without first obtaining their "express informed consent."

For Amazon, however, the FTC fine is barely a slap on the hand, given the scale of its business. The company in the third quarter of 2020 pulled in $96.15 billion in revenue and earnings of $12.37 per share. It said revenue would climb to $112-121 billion in Q4, or annual growth of 28%-38%.

Fines like this, then, become just a cost of doing business and not a disincentive on unfair practices, as intended.

Amazon is not the only delivery business that has received complaints over messing with driver pay. Instacart also found itself in hot water over its own tipping debacle in 2019, which included a class action lawsuit over also taking driver tips to pay wages. Other companies, like DoorDash, Shipt and more, have also faced complaints and even lawsuits over tips.

At the core of these issues is the fundamental problem of the shaky economics of same-day and online grocery delivery businesses, with small margin items and additional costs associated with picking, labor and cold food storage. These costs require businesses operating in this space to charge premium subscriptions and delivery fees, and/or to mark up the cost of the items over in-store prices in order to make money. But even still, they often feel the need to tap into another income stream by taking driver tips.

Tips, of course, are never given to sustain a business -- they're meant to benefit an individual worker.

Reached for comment, Amazon says it disagreed with the FTC complaint but is glad it's over.

"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