Uber: How does it remain profitable?

Words like “worklife balance” or “working for yourself” appear to seem like a dream for people - old or young, rich or poor alike, which may explain the sudden, seemingly unprecedented rise of the gig economy, especially among rideshare services.

But unlike other companies, seemingly having a clear driven profit model, Uber only appears to collect of commission from drivers - or do they have something else in mind? The answer is unfortunately, yes. In fact, they exert an unprecedented amount of control over their drivers, conspicous through their business model.

Through analyzing the business models of Uber and Lyft, it was discovered that there are two main indirect strategies employed by companies to exhibit managerial authority over their drivers. These strategies can be summarized into two core themes: gatekeeping and guiding. Algorithmic, or digital gatekeeping is mainly characterized by the usage of various loopholes within corporate immunity strategies, which controls who is allowed to commence, or to continue, working for the firm and the various corporate responsibilities associated with Uber. Guiding, on the other hand, controls how and when workers conduct their work and is often associated with the implementation of financial incentives and commission structures.  

Gatekeeping   

Firstly, Uber and Lyft enforce legal strategies aimed at gatekeeping the legal protection of themselves which would help shield them from the typical responsibilities associated with a conventional employment relationship. One example seen is the instance of forced arbitration.  

Forced arbitration clauses are waivers that require workers to resolve disputes in private rather than in a public court. They ensure that even if ridesharing workers aren’t misclassified, companies would still have a legal shield. These clauses establish a legal framework that immunizes the companies from potential legal actions initiated by workers and allows them to maintain control over their large and dispersed workforce, and have two main effects: lack of consent and public scrutiny.

Primarily, a considerable number of rideshare employees often do not read the entirety of the terms of service or the intricate details, commonly referred to as the "fine print," when consenting to employment agreements. Consequently, these individuals may inadvertently agree to terms, such as arbitration clauses, without fully comprehending or intending to do so. For example, in Lyft’s TOS, section 17 stated that “drivers must agree to submit all disputes with Lyft to binding arbitration and waive the right to seek relief on a class, collective, or representative basis”.

Alternatively, it grants rideshare companies' corporate immunity by shielding employers from public accountability for their wrongdoing, which prevents the public from learning about unlawful activity. Arbitration does not result in precedential decisions or public oversight and arbitration lacks the deterrence a standard lawsuit would have on gig employers. In forced arbitration proceedings, workers often lose and win smaller awards. An Uber Driver in California who represented herself in arbitration was awarded $4,152.20 in expenses, which is far less than what a lawsuit would’ve given her. In a private arbitration proceeding, individuals must “pro se” - and many workers are unable or unwilling to defend themselves, or even unwilling to, because of their cultural or financial status.  

Guiding   

Aside from legal contortions, Uber and Lyft also manipulate – or “guide” various mechanisms that ensure maximized profit for the employer at the expense of their workers.  

The most conspicuous way this is achieved is through the increasing “cut” rideshare companies take from drivers for their services. Typically, other gig companies, whose employees are independent contractors, take an average of 15% of the sale/service revenue as commission such as Fiverr (20%), Upwork (10%), AirBnB (4-13%), TaskRabbit (15%) and Etsy (6.5%). Ridesharing companies, on the other hand, take around 20-28%, but this amount is heavily disputed. It is reported that Uber and Lyft pocketed a larger share of passenger fares (and gave a smaller percentage to the drivers) in 2022 than in 2019 when the city’s minimum pay standard went into effect. In February 2019 (when TLC first implemented the driver pay rules), companies took 9% of passenger fares compared to 20.7%. In April 2022, Uber and Lyft took the highest average commissions (21.4%) during the worst of the pandemic in April 2020 when drivers were most at risk. It is even anecdotally reported that companies will take much more than the reported 20%, even sometimes up to 50%. The large volatility of commission fees can be attributed to surge pricing.

Surge pricing, or prime time pricing, is a method of price rationing that determines a fare for a ride based on the equilibrium of supply and demand at a certain time. When demand goes up in rush hour, bad weather, or special events, prices will go up, and riders will be notified of this price change and can choose to either pay or wait. At first glance, this system may appear reasonable, but it leads to wage instability and detrimentally affects full-time workers, particularly in rural areas.  

Since demand is higher for rideshare services in large urban cities, rural drivers make less fare and take fewer ride requests per day, resulting in a lower salary. To circumvent this phenomenon, rideshare drivers are commuting hours away from their homes to more lucrative cities and sleeping in public spaces to maximize their earnings. In California, drivers from Sacramento are sleeping in their cars in San Francisco because they cannot afford housing in the San Francisco market. This holds for drivers nationwide: low-income workers face challenges in affording housing in urban areas, compelling them to resort to extreme measures to fulfill their work commitments.  

Surge pricing also hurts consumers. Despite Uber trying to equitize their prices, consumers reactions to prime time and surge pricing have been largely negative, leading to the advent of “how to avoid surge-pricing” online articles, which harms drivers whose wages are largely reliant on surge pricing and fares made during peak hours.

7.2.2. Deactivation  

In a rideshare app, rideshare drivers constantly run the risk of accepting “unprofitable fares.” When a ride request is put through the system, drivers are also not shown destination information or fare information about the route prior to accepting it. This results in scenarios in which a driver might have to drive a longer distance to pick up the customer than the actual distance of the order, occasionally making fares extremely unprofitable for drivers.

To uphold rideshare companies’ reputations, drivers risk deactivation - being suspended or removed permanently from the system - for canceling too many unprofitable fares. Uber and Lyft policies require drivers to maintain a very high ride acceptance rate of up to 90%. However, despite corporations’ claims of creating equitable and inclusive workplaces, two-thirds of all surveyed drivers experienced permanent or temporary deactivation, with drivers of color and immigrant drivers disproportionately impacted. Deactivation has a detrimental impact on drivers - especially full-time drivers - 81% of whom said driving on Uber and Lyft apps was their primary source of income struggled to make ends meet, including 18% who lost their car and 12% who lost their homes after deactivation. 

7.2.3. Financial Dependency   

Lastly, considering the financial vulnerability of many of their workers, Uber has set up a system of “financial dependency”, where the most vulnerable workers rely on their employer for financial stability.   

Rideshare has a high entry cost and maintenance fee. To account for this, Uber has developed a solution to alleviate this situation for drivers. This initiative is specifically tailored to assist drivers with low credit scores, aiming to provide them with financial support to lease a car and commence their driving activities. The catch is, this lease agreement is skewed to benefit Uber, the loan provider. For example, a driver leasing a 2013 Toyota Corolla would be paying about $385 a month through Uber, while they could lease a 2015 model car for $159 a month from a car dealership since drivers would have to pay 11.6% interest rates weekly over the three-year term according to Uber’s example of lease terms. One man from San Leandro, California, feels “trapped” after needing to make money for car payments because his 48-month loan costs him $1,000 a month and has a 22.75 percent interest rate. Not only would this maximize Ubers profit through leasing, but it also forces drivers to drive long hours to pay back Uber.   

On a deeper level, this "system" is crafted in a way that disproportionately affects immigrants and low-income individuals. Those who utilize Uber as an additional source of income have sufficiently high credit scores to secure a car loan from a dealership or already own a vehicle. In contrast, individuals with lower incomes and immigrants have lower credit scores, coercing them into taking the lease agreement.