Like many “gig economy” companies, delivery services DoorDash and Postmates pay their drivers per delivery. If a driver logs into the app during a slow time, he won’t be paid until there’s a job available for him to complete. If it’s a slow day, and he waits 20 minutes between deliveries, he won’t be paid to wait for the next job.
Favor, an Austin-based instant-delivery company that operates in 22 markets, follows the same model, but with one exceptional difference: Favor has taken an unusual step of guaranteeing all of its 10,000 drivers a minimum hourly wage.
If Favor drivers, who the company calls “runners,” don’t meet their pay guarantee, between $9 and $12 an hour depending on the city, then Favor makes up the difference.
As some gig economy startups like Uber grab attention for their eye-popping valuations, the way they pay workers has become a topic of debate (and litigation). Some argue workers should be classified and paid as employees. Others argue that they warrant a new category of employment. But as independent contractors, these workers currently don’t fall under most of the government’s safety net programs, including minimum wage.
So why is Favor paying them a minimum wage?
“It allows us to set expectations,” says Favor CEO Jag Bath. “What ends up happening [without the guarantee] is that you’re hiring people, and they are going to leave because you’ve set an expectation that is far from reality.” This is especially important when Favor starts in a new city, Bath says, because runners typically sign up for Favor faster than new customers, who create work for them by placing orders. A month or two after launching in a new city, Favor’s drivers usually take enough trips to make more than guaranteed. “It’s a safety net, and it works when it’s needed,” Bath says. “Most of the time it’s not needed.”
Favor is not the only company that has essentially created a minimum wage program for the gig economy. Uber and Lyft have also set “minimum guarantees,” often in new markets or when they expect unusually high demand, like in Austin during the South By Southwest conference, for instance.
In arguments against making Uber and Lyft drivers employees, it has been pointed out that it would be difficult to apply something like an hourly wage when workers can choose when to work, and can work for more than one employer simultaneously, for instance logging into both the Uber and Lyft apps. A policy proposal from the Brookings Institute last December argued that the gig economy warranted a third category of worker, somewhere between independent contractor and employee, saying that it is “impossible in many circumstances to attribute independent workers’ work hours to any employer.”
Favor can’t technically monitor whether its workers also work for Lyft or Uber while on the clock, but Bath says that he’s not worried about it: Data about how many trips they’re taking per hour suggest they’re not cheating the app. Lyft and Uber solve the problem by requiring drivers to be online for a minimum amount of time and accept a minimum number of rides during that time in order to collect their promised hourly pay.
Gig economy companies created a minimum wage on their own terms, for their own competitive reasons. But that’s different than the government mandating a minimum wage.
The Economic Policy Institute (EPI), a union-backed think tank, recently used the example of Uber’s minimum guarantee to argue that the minimum wage and other labor laws could easily apply to the company’s workers, if they were classified as employees, but some doubt that it would be so easy. “There is no rule of law establishing that,” says Seth Harris, the coauthor of the Brookings Institute paper. He believes that gig economy workers’ ability to work for two employers simultaneously would conflict with current minimum wage law, a complication the EPI paper acknowledges. Even in a new third category of employment like that proposed in his paper, Harris says, “[I] could imagine a minimum income. I don’t think I can imagine an hourly minimum wage.”
That hasn’t stopped some on-demand companies from setting their own minimum wage—at least for as long as it aligns with their business objectives.