In December, Instacart filed suit against New York City over its new minimum-wage law for grocery delivery drivers. New York and numerous other progressive cities have pushed to extend minimum-wage rules to the gig economy. Now, one of the companies most affected is fighting back.
The company has a point. Minimum-wage laws for delivery workers have proved a disaster economically, and they may also violate federal law.
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The push across the country to extend minimum-wage rules to gig workers started in New York. In 2023, the city established a minimum wage for app-based restaurant delivery drivers (currently $21.44 per hour). A year later, the number of app-based restaurant delivery drivers had fallen by 8 percent, while food-delivery costs jumped 10 percent.
Still, New York pressed further, including grocery delivery drivers in the law earlier this year. In response, Instacart brought a federal lawsuit in the Southern District of New York against numerous gig economy-focused laws that the city had recently passed, including its minimum-wage rule. The company sought a preliminary injunction to halt the law’s implementation, but its motion was denied, and the new minimum wage took effect on January 26.
Instacart plans to appeal the initial denial of its injunction request, and if the case fully proceeds to the merits, the company is advancing several legal claims under the U.S. Constitution and state law. The strongest may be its federal-preemption argument.
Under the Federal Aviation Administration Authorization Act (FAAA Act) of 1994, Congress expressly preempted state laws “related to a price, route, or service of any motor carrier.” Courts have held the term “motor carrier” to include independent contractors who engage in first- and last-mile pick-up and delivery services. This would seem to apply to food delivery drivers.
Nevertheless, many federal courts have narrowly interpreted FAAA Act preemption. For instance, in the 2014 case Dilts v. Penske Logistics, the Ninth Circuit Court of Appeals held that “background rules” of doing business, such as rules around mandated meal and rest breaks, did not sufficiently “bind” motor carriers to rates, routes, or services qualifying for preemption.
The Supreme Court, however, has arguably interpreted FAAA Act preemption more broadly. In the 2008 case Rowe v. New Hampshire Motor Transp. Assn., which involved Maine laws governing tobacco shipments, the Court held that FAAA Act preemption can still occur even if a state or local law has only an “indirect effect” on rates, routes, or services. In the current term, the Court has another opportunity to weigh in on FAAA Act preemption and clarify its scope.
The legal debate over New York City’s minimum-wage rule could come down to how—and how much—the law affects the rates, routes, or services of app-based delivery companies. On this front, the economic evidence is clear: New York City’s minimum wage for restaurant delivery drivers has created significant harm.
After the $21.44 per hour minimum pay for app-based restaurant delivery drivers took effect, pay rates technically did rise. But the city also experienced an exodus of drivers and higher costs for everyone. In the six months after the new rule went into effect, delivery apps saw nearly a million fewer orders and $17 million in reduced revenue for local restaurants.
On average in New York City, the delivery price elasticity of demand is about 0.68, meaning that a 10 percent price hike reduces trips by 6 percent to 7 percent. New Yorkers also were hit with a 12 percent spike in menu prices and a staggering 58 percent surge in app service fees.
These higher costs didn’t necessarily even translate into better take-home pay for many drivers. Tips decreased by almost half, and platforms had to cap the number of couriers on the road.
Under the Supreme Court’s Rowe standard, falling numbers of drivers, rising prices, and fewer orders seem to qualify as “indirect effects”—if not direct ones—on the rates, routes, or services that delivery platforms provide.
A successful legal challenge to Gotham’s rules could threaten rideshare and delivery minimum-wage rules in other progressive locales, such as Seattle and Minneapolis. That outcome would benefit not only firms like Instacart but also workers, through more orders and higher tax-free tips, and consumers, through lower prices.
Photo by CHARLY TRIBALLEAU / AFP via Getty Images)