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Amazon Sued For Stealing Tips, Sees Sellers Flock to Competitors

A top legal watchdog has a hot tip for Amazon, which could be in for a turbulent holiday season.

Washington, D.C. attorney general Karl A. Racine filed a new lawsuit against the e-commerce giant for stealing tips from delivery drivers through a deceptive, illegal scheme that tricked consumers into thinking they were increasing drivers’ compensation when Amazon was actually diverting gratuities to reduce its own labor costs and increase profits.

“Workers in the District of Columbia and throughout our country are too often taken advantage of and not paid their hard-earned wages,” said Racine, who has also taken Amazon to task over its wholesale policies and other alleged antitrust activities. “What’s more, consumers need to know where their tips are going. This suit is about providing workers the tips they are owed and telling consumers the truth. Amazon, one of the world’s wealthiest companies, certainly does not need to take tips that belong to workers. Amazon can and should do better.”

In 2015, Amazon launched its Amazon Flex service, which offers quick deliveries of its products through its delivery drivers. The company currently serves tens of thousands of consumers in the District of Columbia and fills thousands of orders weekly. During the checkout process, Amazon encourages consumers to tip their delivery drivers, offering a default preselected tip amount and assuring consumers that 100 percent of the tip amount would go to the drivers.

In the beginning, that was true. But starting in late 2016, that went out the window.

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Amazon adjusted its driver payment model so that many of the tips solicited from customers didn’t actually serve to increase a driver’s take-home pay. Between 2016 and 2019, Amazon used more than $1 million in “tips” from D.C. consumers to subsidize its own labor costs, instead of increasing driver pay by the consumer-designated tip amounts. In reality, Amazon was using those “tips” to pay a portion of what it had already promised to pay drivers.

In late August 2019, when this practice was exposed by the media and the issuance of a Civil Investigative Demand by the Federal Trade Commission (FTC), Amazon said it would stop using consumer tips to subsidize driver payments. However, Amazon claimed that it voluntarily changed these practices. While Amazon paid restitution to drivers as part of a June 2021 FTC settlement, it hasn’t paid any civil penalties regarding the misrepresentations and omissions it made to consumers concerning those deceptive tipping practices.

“Nothing is more important to us than customer trust,” Maria Boschetti, a spokesperson for Amazon, said. “This lawsuit involves a practice we changed three years ago and is without merit—all of the customer tips at issue were already paid to drivers as part of a settlement last year with the FTC.”

The District of Columbia demands a trial by jury for the maximum number of jurors permitted by law for violating the Consumer Protection Procedures Act.

Washington, D.C. attorney general Karl Racine again takes aim at Amazon.

Interestingly, Amazon rolled out a delivery driver gratitude program the same day the lawsuit was filed.

For the holiday season, customers are encouraged to tell their Alexa voice assistant to “thank their driver,” and then the driver who delivered their most recent package will be notified of the customer’s appreciation. To fete the new feature, drivers will receive an additional $5 at no cost to the customer with each thank-you received from customers. Amazon will be doing this for the first one million thank-you’s received as a recent Insider report suggests the once-hot Alexa division will cost the company $10 billion this year on declining usage. Additionally, the five drivers who receive the most “thank-you’s” during the promotional period will also be awarded $10,000 and an additional $10,000 to their charity of choice.

But those deliveries may be fewer and farther between.

The e-marketplace giant’s continued fee hikes are alienating sellers and opening the door for competition from other e-commerce platforms. In Capterra’s Amazon Seller Survey, half of small businesses (50 percent) that use Fulfillment by Amazon (FBA) said their fees are unfair. Nearly all—99 percent—intend to sell on other marketplaces in the new year, including Google Shopping, Facebook Marketplace and Walmart Marketplace.

This could be a significant development; only 31 percent of current FBA users list products on other e-commerce platforms. Amazon will soon face retribution in the form of elevated competition from other established e-commerce platforms, fledgling startups and direct-to-consumer options. So, it shouldn’t come as a surprise that the consistent fee hikes have driven small businesses to explore the possibilities elsewhere.

Half of the 99 percent of respondents who plan to operate in marketplaces beyond Amazon in 2023 will start selling on Google Shopping, eBay or Facebook Marketplace. Fifty-three percent said they would sell on Walmart Marketplace, which offers member perks such as fuel discounts and in-store pickup and return. Other e-commerce platforms include Etsy (38 percent), overstock.com (22 percent) and Newegg (17 percent).

Rising supply-chain costs and increasing holiday demand have resulted in unprecedented fee hikes. This is the first time Amazon is charging more for FBA during the holiday season, and it’s a hefty 30 percent increase from 2020. In response, small businesses have had no choice but to raise product prices (54 percent), use the Fulfilled by Merchant option (52 percent), absorb the cost (50 percent), and reduce marketing spending (44 percent).

“Raising Amazon seller fees is risky, given customer expectations for low prices and fast shipping,” Molly Burke, senior retail analyst at Capterra, said. “By making it more expensive for sellers and consumers to participate in its marketplace, Amazon is opening the door to rivals like Walmart, which offers similarly convenient shopping and selling experiences at a lower cost.”

Fee hikes disproportionately affect smaller businesses, as well. In fact, FBA users that earn $25,000 in average monthly revenue from Amazon were significantly more likely to say their profitability will be impacted, compared to higher earners. Higher-earning FBA users are likelier to sell products across additional channels, including brick-and-mortar and directly on their own website. Despite fee hikes, businesses will continue to sell through FBA as two-thirds of respondents rank their business as successful on Amazon.

Looking forward to 2023, retailers say they’ll diversify their e-commerce business to reach new customers and reduce costs. While Amazon’s third-party marketplace isn’t going away anytime soon, retailers can balance the effects of FBA fee hikes by expanding their revenue streams on other e-commerce marketplaces and social media platforms.