Cab Company Scams 2: Subleasing

Unless you're directly involved in a shady activity, you aren't likely to know much about it. I mean, the people running scams usually don't put up websites or hold conventions. Nonetheless, knowledge of illegal brokering and illegal subleasing in San Francisco is so widespread that I've been given names and details about these activities by people who aren't even directly involved with the taxi business.

Subleasing is a name that covers a lot of sins. One variation concerns Long Term Leases (LTL).

The way a LTL is supposed to work is that a driver leases a medallion and hires 2 or 3 other drivers to work the shifts that he or she doesn't work. She keeps what she makes himself plus the "gates" the other drivers pay her - which should not be more than an average of $104 per shift but, according to inside sources, are often far in excess of that legal limit.

Sometimes, however, the medallion holder "subleases" the medallion to a "broker" who hires the drivers and often takes huge deposits and charges higher than legal gates.

• Sometimes the medallion holder doesn't want the trouble of running a small business and only works his or her shifts and lets the broker do the hiring and handle the money for the other shifts. 
• Sometimes the medallion holders turns the entire operation over to the broker.
• Sometimes the LDL driver subleases the cab himself and charges exorbitant gates.

Some Post-K medallion holders either don't want to or can't work and sell the use of the medallion to a broker. This, in fact, is probably how the illicit practice started. It might even have had the semi-benign motivation of helping infirm drivers keep an income stream.

Prior to the "Pilot Plan," Post-K medallion holders could not sell their medallions and were required to work 800 hours per year. Many of them couldn't work as they grew older and let cab companies create phony waybills and fill the medallion holder's shifts with non-medallion drivers - not incidentally allowing the companies to make more money off the additional gates and tips that these drivers paid.

However, this practice has evolved into something far larger. Many medallion holders, who can but don't want to work, turn the medallions over to illegal brokers who buy the cars, create the fake waybills, do the hiring, and, last but not least, collect the gates.

Using brokers benefits taxi companies because it removes them from the illegal activites. The brokers or medallion holders often copy the waybills of legitimate drivers and put the medallion holders names on the documents.

But, I've also been told of cases where the managers of certain cab companies sublease medallions themselves without the medallion holder's knowledge. The medallion holders in question work their shifts but the drivers of the other shits pay illegally high gates to the managers.

Obviously, this system wouldn't work if non-medallion drivers were only paying legal gates. The brokers need to pay off the cab companies or the medallion holders and make a profit for themselves. In order to do this, they have to charge way over the legal gate cap.

In addition, there are some taxi companies that are simply over-charging their drivers to go to work. We're in a recession and they are many desperate people willing to work for very little.

My sources tell me that illegal gates prices are going from $140 to $160 to as high as $170 per shift. There are at least a couple of hundred medallions and several hundred shifts involved. This, in effect, is a multimillion dollar pyramid scheme with all the money being extracted from low-income drivers at the bottom - who are doing all the work.

TAC 9-27: Gate and Gas vs Long Term Lease

The main topics of the latest TAC were Gate and Gas (GG) vs Long Term Lease (LTL) and the Driver's Fund. Both subjects were discussed at length and in depth so I'll deal with them in separate posts.

First, I want to apologize in advance for any omissions or errors. I recorded the proceedings and slacked on my note keeping. When I listened to the tape, however, the only people I could understand were myself and Carl Macmurdo, who sat next to me. This article, in other words, will be even more a stream of consciousness than usual.

                                   Random Stuff

San Francisco, the third most expensive city in the country, has the 10th highest taxi fares.

Some Pilot Program Stats:

• 18 medallions are being issued to people on the list.
• 1 SFMTA held medallion has been transferred (i.e. sold) to a buyer.
• 19 medallion holder medallions are in the process of being transferred.
• 9 Pre-K medallion holders have died during that last year.
• 3 Pre-K medallions have been sold.

Quote of the week,

"Cab drivers are all schemers and frauds ... and need to be watched." Bill Mounsey  (photo, above) on the drivers ahead of him on the Waiting List.

Leasing vs Leasing 

The above title is my way of noting that no other system  (like a split of the meter) is in play. 90% of the county may work on some form of employer-employee relationship but we in the cab business prefer to stay in the same league as strippers, office temps and call girls.

The Name Game.

The initial discussion centered around tying to decide what to call the new owners who chose to work their cabs as an LTL. Some people wanted to call the relationship an "affiliate" because the new owners would usually be affiliated with a color scheme but I think Rebecca Lytle of the San Francisco Federal Credit Union carried the day by calling them "Owner Operated" leases (OOLs.)

The Owner Operated Lease.

It's basically the same as an LTL, except the owners don't lease it from a company. They buy their own cars and chose their own drivers. If they associate with a company, they pay for the radio and the color scheme.

There are significant differences in the way the contracts are written because the credit unions demand certain information from the owners (I'll cover this later in an interview with Rebecca Lytle) but the taxis themselves are worked much like an LTL.

The Leasing Debate.

There are strong feelings on both sides of the GG vs LTL issue.

Cons
Green Cab manager and councilor Anthan Rebelos said that he had "about five pages" of things he didn't like about the LTL. Councilor and driver John Han, Mark Gruberg of the UTW and myself also spoke strongly against the practice. Putting our ideas together, you could come up with the following partial list:

• Hundreds of experienced drivers have lost their shifts or their jobs.
• They've been replaced by drivers with less knowledge
• LTL drivers are less likely to take radio calls.
• LTL taxis hurt service in the neighborhoods.
• LTL cabs are frequently subleased to brokers.
• These brokers are charging desperate people illegal amounts of money to drive shifts.
• This brings a criminal element into the industry and, as such, creates situations of potential violence.
• This is almost impossible for the MTA to police.
• The companies themselves often don't know who's driving their cabs.
• This increases the potential for catastrophic insurance losses; and 
• Endangers the public.

Pros

• Jim Gillespie of Yellow Cab says that LTL drivers are as likely to take radio calls as anyone else.
• In the past, he's also claimed that LTL drivers get into fewer accidents.
• A man whose name I didn't get (photo, right) said that he'd been driving for 34 years and had been given junk taxis under the GG system.  He now works under an LTL  and loves it because he's got a brand new cab and makes a lot more money.
• Driver Ton Lee, who represents Asian drivers at the airport, said that LTL drivers work hard just like everybody else and deserve consideration.

The Devil Made Him Do It.

John Lazar of Luxor Cab said that he resisted LTLs until 2004 when he "lost 24 GG medallions."

This echoed Jane Bolig of Desoto Cab who said, "medallion holders are diving the system" by setting up bidding wars between companies (Hmm - guilty). She also said that "insane" liability insurance rates were forcing companies to change the way they do business.

"Force" is a big word with Lazar who claimed that new buyers were "forced" to go OOL because of the high cost of their loans. At an earlier meeting, he had said that a buyer making $2,300 a month couldn't cover $2,700 a month loan. This time he asked Rebecca Lytle to confirm his theory.

Ms Lytle, however, did nothing of the kind, saying that their cheapest monthly rate was $1,446 per month for a 25 year balloon loan. She later told me that the rates for the other loans that she had underwritten were:

• $1,798 for 15 year balloon loan.
• $2,304 for a 12 year fixed rate loan.

Not Forced - Wanted.

Nonetheless, all but a few of the new buyers have chosen to become Owner Operators. This is something that few people at the Town Hall meetings anticipated and it changes the dynamic of the sales. All the calculations that were done to come up with the $250,000 fixed rate were based on a GG system.

Once upon a time, Director Chris Hayashi told me that she wanted to end LTLs. Even if she still wanted to do this, it would take three years to phase them out because of the money the drivers have spent on cars. And, what about the new OOLS?

There could be a lot more said about this subject ... and there will be.

Yellow Needs More Cabs? For Whom?

There are several questions and interesting aspects about Yellow Cab manager Jim Gillespie's claim to the MTA Board that Yellow needs 139 more taxis in order to service all the radio calls that the company gets.

1. Why 139? Why not 140 or 135? Must be scientific, huh? Let's do the math:

• Gillespie says that Yellow failed to pick up 280,000 or 25% of its radio calls during the last 6 months.
• 280,000 / 139 = 2,014 radio calls that Gillespie expects each new taxi to pick up in 6 months
• 2,014 / 182.5 days = 11 radio calls per cab picked up per day.
• /2 shift a day = 5.5 radio calls per day per driver.

Sounds a bit lame, doesn't it? But, maybe Yellow doesn't expect much from new drivers. Let's look at the veterans for comparison:

• If 280,000 = 25% then 840,000 (280,000*3) calls must have been picked up during the last 6 months by Yellow's 500 cabs.
• 840,000 / 500 = 1,680 radio calls picked up per driver for 6 months.
• 1,680 / 182.5 = 9.2 radio calls taken per cab per day.
• /2 = 4.6 radio calls per driver per day.

Hmmm. Seems like the vets are even lamer. Let's do a little more math. What if each vet picked up 5.5 radio calls per day?

• 5.5*2 = 11*182.5 = 2,007.5 picked up calls per cab for 6 months * 500 = 1,003,770 radio calls picked up.
• If 280,000 = 25% then Yellow handles 1,120,000 (280,000*4) radio calls per 6 months.
• 1,003,770 / 1,120,000 = the percentage of calls that would be picked up by Yellow drivers if the vets were as good as Gillespie expects the rookies to be = 89.6% of the calls picked up.

 What if the vets worked just a little harder and picked up 6 rides per shift per day?

• 6*2 = 12 pickups per cab per day*182.5 days = 2,190 pickups for 6 months*500 taxis = 1,095,000 pickups.
• 1,095,000 / 1,120,000 = 97.8% of the calls picked up.

Well, it looks like we've found a solution to Yellow Cab's problem - train or whip the slackers.

In short, this is the only time that I can recall a company using the incompetence of its personnel as a reason to expand its business.

In short, the only science involved in Gillespie's speech was the science of bs.

2. Yellow Cab will not guarantee that all, or any, of the new drivers will take radio calls.

Perhaps you, gentle and misinformed reader, imagine that Yellow has a dispatching system that will use GPS to automatically assign the closest of those 139 cabs to one of those 280,000 radio calls?

Alas - that's not the case. Yellow's computer will inform their closest empty cab that there is a nearby radio call but whether or not the driver will accept the order is anybody's guess. He or she can take it or leave it. This also assumes that the closest driver actually has his computer on, which is problematical.

What's going on here?

3. Yellow Cab (along with all other San Francisco taxi companies) is in the leasing business, not the taxi business.

• They make their money from leasing taxis to drivers, not from the actual fares.
• The drivers pay the companies first and then make their money from picking people up.
• As long as a cab company can fill it's shifts with lease drivers, it doesn't matter how much actual business the company does.
• Mild recessions (with declining demand for taxis) are usually good for cab companies because desperate, unemployed people will take bad shifts. A little money is better for them than nothing.
• Yellow Cab, for instance, wasn't hiring in 2008 and 2009 because all their shifts were filled. 

4. Yellow Cab (along with all other San Francisco taxi companies) will never tell a driver to take a radio call. Why?

• Cab drivers in San Francisco are Independent Contractors, not employees.
• What these drivers are is independent of are all laws that protect employees.
• Cab companies do not have to pay unemployment taxes, social security taxes or (for Long Term Lease drivers) Worker's Compensation, etc on Independent Contractors.
• Telling a driver to take a radio call would make said driver an employee. 
• Telling a driver to take a radio call would mean that Yellow Cab would have to pay the taxes etc listed above.

5.  Yellow Cab (along with most other San Francisco taxi companies) is more and more operating its medallions under long term lease arrangements.

• The medallions are leased by the month and the taxi companies have no control over who drives the cab.
• Hundreds of experienced drivers have lost their shifts due to this trend.
• They have been replaced by new drivers who aren't trained (for Yellow to train them would make these drivers employees).
• Most of these Long Term Lease drivers hang out at the airport or head downtown.
• These new drivers are much less likely to take radio calls than the people they replace.

And, those are the real reasons why people in the Bayview, the Sunset, the Richmond and Noe Valley, not to mention the attractive blond at Greenwich and Scott, aren't getting taxis as quickly or as often as they should.

As long as the current taxi system remains in effect, 139 more Yellow Cabs will do little or nothing to improve San Francisco's radio business. 

Gillespie was quoted in the Examiner as saying, "If we had more taxis and they were more spread out, people could get their cabs quicker and more people would call ..."

If the cabs were "more spread out" ... but they won't be any more spread out than the current cabs are. Under the current system there is no leadership or direction, there is no one to tell the taxi drivers where to spread. The new taxis, like the currents ones, will gravitate to areas where the service is already good like SFO and Union Square but service to the outlying areas would not be improved one whit.

If Yellow Cab (along with the other companies) ran their businesses in a more rational manner, if the companies were more interested in serving the public than in avoiding various forms of taxation, the taxicabs we already have on the street would more than adequately handle the radio calls.


The only people who would really benefit from those 139 more medallions would be the owners of Yellow Cab along with the new medallion holders.

The Independent Contract - In Sum

Over the last 30 years, the law has pretty much caught up with the Independent Contract. A series of court cases have given drivers Workers Compensation and, maybe, Unemployment. It's no longer legal for companies to demand insurance deposits from their drivers.

It's also true that I have probably romanced the virtues of being an employee. It's doubtful that, under the political climate of the last three decades, we would have been able to form a union even if we been given employee rights. Unions have hardly proven themselves to be bastions of morality either. A friend of mine, in a Longshoreman's Local, had to tip union agents to get shifts. And, the foundations of building have been poured on many an ex-Teamster.

The level of corruption seems to be about the same. On the other hand, union workers are usually much better paid.

But there are advantages to driving a cab as an Independent Contractor. It's a cash business and nobody tells you what to do. You can take radio calls or not, work the airport or not, use any system you can think of to make money and take breaks (or not) any time or any place you like. Furthermore, an economic recession is unlikely to cost you your job. All that happens is that you make less money. In fact, people laid off from other industries invariably swarm taxi companies looking for work during recessions. Most of them make less money driving cab than they had been making before but at least they make something.

Comparing lease drivers to workers in 19th Century sweat shops is also way off the mark. You can do what you want when you drive a cab and, benefits aside, taxi driving pays better than most clerical or retail jobs. The combination of the freedom and cash is what got me into the business - and what keeps me there.

However, the biggest advantage of the Independent Contract clearly goes to the companies. The ability to fire people (excuse me "cancel their leases") without cause has given cab companies way too much power and led to abuses that I've written about earlier (see Alleged Tipping and the series on the Independent Contract). Beyond that it has saved the companies huge amounts of money that they have not had to pay in the way of taxes and benefits.

The gates and gas system has also made the taxi industry recession proof. Although the taxi business is currently down (by most accounts) 30% to 50%, the companies are flourishing. Former stock brokers, computer geeks, money managers and (god knows) maybe lawyers are lining up to drive cabs. But they can't even get an application. The companies are backlogged with drivers. They aren't hiring.

I guess the question is whether or not this is a good thing. As a medallion holder, I appear to be benefitting from this system. But I wonder? Is is right for companies to be flourishing when the amount of actual business they do is in decline? Is it right for them to be protected from the laws of the marketplace?

Most the plans for "reforming" Proposition K, for instance, call for putting more taxis on the street. The people who drew up these plans act as if the current recession didn't exist. As such, these plans as disconnected from the economic realities of our time. Would this be happening if the companies were actually in the cab business instead of the leasing business?

Is the public truly being served by this system? The major complaint about the taxi service in San Francisco is that it's hard to get a taxi in the outlying neighborhoods. But a company cannot tell an Independent Contractor what to do. That would make the driver an employee. Therefore, the companies cannot assign a driver to a call or tell him or her to work a specific area or neighborhood. Because the drivers themselves are on a gate system, they cannot afford to stay in neighborhoods with little business and naturally head back toward the busy areas as fast as they can.

Because the City has not allowed companies to raise gates thus shrinking their income and to avoid legal problems arising from the current system, taxi companies are more and more going to long term leases. They give up their day to day control but they don't have to sweat the details either.

This is a big problem for dispatchers by the way. The days of FIVE in and FIVE out are becoming a thing of the past. They're lucky if the long term lease drivers toss 'em TWO a couple of times a month ... and that's how it should be.

However, it's difficult to see how the long term leases serve the public. Most of the drivers appear to work the airport and the companies have no control over them whatsoever. It's hard to envision these guys spending a lot of time in the Sunset taking radio calls.

I'm tempted to say that I think the system is broken and needs a drastic reform. In fact, in an earlier version, I did. But that's a drastic exaggeration. I got carried away by my own rhetoric.

On the other hand, the public isn't being served as well as it should be, the drivers are treated unfairly and the companies themselves might do better under a different set up.

The gate and gas system may be outdated. As it is the only way the drivers can make more money is by raising the fares and the only way the companies can make more money is by raising the gates. The fares are already among the highest in the country and it's hard to see how raising them now would do anything other than lose business. The gates are already too high for the amount of business we have.

There has to be a better way. All we need is a Solomon to figure it out.