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Instacart is playing games with its workers’ pay — and will eventually suffer for it

A shopper for Instacart studies her smart phone as she shops for a customer at Whole Foods in Denver.
Cyrus McCrimmon | Denver Post | Getty Images
A shopper for Instacart studies her smart phone as she shops for a customer at Whole Foods in Denver.

In September, the grocery delivery company Instacart announced a big change that pissed off many of its workers: The startup was replacing tips with a "service fee" that would be collected by the company instead of the people delivering orders.

The startup's explanation was that Instacart workers were too reliant on tips — around 80 percent of orders had one — and that the service fee would allow the startup to pay everyone a more reliable wage.

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Many workers looked at it another way: Instacart, in their eyes, saw all of the tips they were making and wanted to capture that revenue for itself. And when Instacart's best workers realized the the tip-to-service-fee transition would mean lower pay for them, they, in turn, freaked out.

Instacart quickly relented and added the tipping feature back. But with a catch: The company made tipping much harder to find in the app.

Instead of the tipping option appearing on the checkout page as it originally had, a default 10 percent "service fee" sat in its place.
To get to the tip option, customers would have to click on a small arrow to the right of the service fee that doesn't give any indication where it leads.

Even if someone knew to click on that arrow (but honestly, why would they?), they would be greeted with a new screen where the tip is set by default to $0. Until very recently, Instacart also described the tip on this page as an "additional tip" even though it's the only tip.

As a result, many Instacart delivery people have resorted to handing out flyers to customers to make it clear that the service fee is not a tip, and to explain that the "additional" tip is, in fact, the only tip. Many of these flyers also explain how to set the service fee to zero.

One would think Instacart would be alarmed by such actions, signaling that customers are confused and workers are outraged. Instead, Instacart originally defended the "additional tip" language to Recode. Then, more recently, it removed the word "additional" — at least on its iOS app.

A spokesperson explained the about-face by saying, "We're a software company" and that the company is often tweaking and testing different layouts and language. (It just so happens that the change came after I repeatedly harped on how misleading the "additional tip" phrase was in several conversations with the company over the past month or two.) She declined to make CEO Apoorva Mehta available for an interview, instead pointing me to comments he made to BuzzFeed News in November.

In that article, Mehta said the service fee would help "bring consistency to our model as we go from tens of thousands of shoppers to doubling that by the end of next year." He added that Instacart workers making more than the market rate for a given city would likely earn less than they had, and the lowest-paid workers would earn more. The CEO also disputed the idea that the tipping feature is hard to find.

What short-term benefit might Instacart gain by swapping out tips for service fees in the checkout flow? Well, tips are typically not recorded as revenue by a business. Service fees, on the other hand, typically are.

If that's the case at Instacart, the introduction of a service fee would have a big positive impact on revenue growth, since Instacart's revenue cut is only a fraction of each order. The spokesperson wouldn't say either way.

Workers I've talked to — plus many more who have grown accustomed to venting on private internet groups for Instacart workers — aren't buying the company's reasoning. It's hard to blame them for being skeptical.

Last year, Instacart cut wages to its frontline staff by 40 percent or more in some cases. Then, with the introduction of the service fee in September, Instacart also announced that it reserved the right to change the base pay of workers as often as every week.

In January, that freedom resulted in another pay cut for many workers. This pay structure — what Instacart refers to as "dynamic" pay — feels like essentially outsourcing the risk associated with the volatility of its business ... to its workers. Not cool. And likely not sustainable.

Whatever the truth, Instacart is fast developing a reputation for messing with its own workforce. You know, the humans that the "software company" relies on to pick, pack and deliver to its customers.

That should be a red flag, not only to management and employees, but to its investors: Whole Foods and a who's who of Silicon Valley VC firms, like Kleiner Perkins, Andreessen Horowitz and Sequoia Capital.

After all, it does take some skill — or, at a minimum, the willingness to be trained — to pick out good produce quickly, and get it to someone's door in a timely manner. And the supply of people willing to do it, while feeling like they are getting robbed, is not endless.

By Jason Del Rey, Re/code.net.

CNBC's parent NBCUniversal is an investor in Recode's parent Vox, and the companies have a content-sharing arrangement.