Taxicab 'Lease' Racket

How The Taxicab Industry Was Junked

--------------------------------------------------------------------
By BURTON H. WOLFE

Part 1 in a series, published in the April 1998 edition of San Francisco Frontlines

How and why a once beneficial public service has been turned into a private garbage dump operation
at the cost of billions in evaded taxes and the loss of half a century's progressive labor legislation.
 
 

September 1982 -Taxicab driver Dan Wong (real person, fictitious name) has just dropped off a passenger near 26th and Castro streets in San Francisco. Over the radio system he hears a dispatcher announce: "DeSoto cab for Miraloma Park."

Being the experienced, professional driver he is, Wong knows the most sensible option for him is to take that radio order. The location is a short ride into the hills above Castro street, the fare most likely will be a lucrative one to downtown, and Wong will be in a position to get another fare immediately.

So it is that Wong takes the radio order, and the regular DeSoto cab company customer in the remote area of Miraloma Park has obtained a taxicab at the door within 10 minutes of calling for one by phone.

March 1998-Taxicab driver Jason Babar (real person, fictitious name) has just dropped off a passenger near 26th and Castro streets in San Francisco. Over the the radio system he hears a dispatcher announce: "DeSoto cab for Miraloma Park."

Babar is not the experienced driver that Wong was. He is part of a stunning statistic: a forty percent annual turnover of drivers in a taxicab industry, wherein the personnel (more often than not) were formerly experienced long termers, especially at a once efficient company such as DeSoto.

Now the turnover at DeSoto is so fast and frequent that the majority of "cabbies" are inexperienced like Barbar, one of many know- nothing drivers who, with disastrous results, have been hired to replace people like Wong.

Wong knew the city, avoided accidents, kept his cab clean, and in good mechanical condition, serviced the natives, opened the door for passengers, and otherwise conducted himself like the professional driver he was. Drivers that DeSoto has hired in a futile effort to replace Wong are the opposite.They do not know their way around the city, they get into a horrifying number of accidents that has driven up insurance rates, they try to avoid local runs in favor of playing the hotels and the airport, they do not care if the cabs they drive are junkwagons, and they have little if any consideration for passengers. A typical sight is a driver slouched in his seat, smoking a cigarette, while an elderly woman struggles with trembling hand to get the back door open.

Inexperienced, and unprofessional, Babar does not respond to the radio request for a cab in Miraloma Park. Why? In this particular case, it is because he does not even know where Miraloma Park is. Neither do a number of other DeSoto drivers who might be near enough to take a radio order for that area of the city.It will take the dispatcher a while to find a driver who does.

Thus, while a caller in Miralomar Park got a cab in 10 minutes in 1982, it takes an hour before one finally appears in 1998. So long as Barbar has failed to take advantage of the Miralomar Park call, the next best move he can make is to cruise along Castro street, where an occasional pickup is available at 24th street, or perhaps more frequently at 18th street. If Barbar is one of those discriminatory drivers who does not like to pick up homosexuals (the most frequent hailers in the Castro) Barbar can cruise down to Mission street- the main bus line in the Mission district where there is a possibility of being hailed.

But Babar either does not understand that, or he has his mind bent on only one mode of operation: getting back to a downtown hotel stand as rapidly as possible, and hoping for a run to the airport, which he will obtain perhaps one out of 20 times- making it the stupidest of all possible methods of cab driving. So he races his cab down 26th street to either Dolores or Guerrero, the widest streets on which to travel, zinging along at a speed 15 to 20 miles an hour over the limit, and then roaring down Market, not even looking for a pickup, fiercely intent on reaching a hotel stand as rapidly as possible.

THE LEASE RACKET

In that comparison between 1982 and 1998, you have a description of why taxicab service in big American cities like San Francisco has deteriorated so gruesomely, causing exasperating difficulties for customers. Newspaper reporters, magazine writers, and TV and radio commentators have all discussed the rotten service, but have not been able to explain to a puzzled public WHY it has become so bad, and WHY, overall, the taxicab industry has become so unprofessional: a veritable garbage dump operation.

The answer lies in a nationwide scam unknown to the great majority of the public, but known to a few as the "lease racket". In the major part of the taxicab industry of 1998, especially in the big cities, a taxicab company is no longer that: instead it is a "leasing company" in business not to serve the public, but rather to "lease" vehicles to drivers. A hired driver is no longer an employee working for the cab company, but instead a "self-employed lessee" of one or more of the companies vehicles for hire. A work contract is now a "lease agreement". When a driver is terminated from work, he or she is not fired; rather, his or her "lease is canceled".

One day in October 1982, DeSoto's drivers, were converted at the stroke of a pen from unionized employees into "self-employed lessees" not entitled to unionize or obtain any statutory employee benefits such as contributions by employer into the social security fund, and payments of unemployment, disability, and workers compensation. DeSoto management unilaterally changed the classification of non owner drivers by forcing them, as a condition of employment, to sign a purported "contract" called a "Taxicab Lease Agreement".

The Weirdest " Lease" Of All Time

Legal dictionaries define "Lease" as a rental of a property for an agreed-upon period at a fixed price. But in the taxicab industry you are Through the looking Glass into a Lewis Carrillian world dominated by a Humpty Dumpty management that makes a word mean whatever they chose it to mean.

In an ordinary agreement to lease a vehicle, the terms deal essentially with rental period and price. In the "Taxicab Lease Agreement," paragraphs in artificial legal language are devoted to a denial that an employer-employee relationship exists, accompanied by a declaration that the person signing the "agreement" is not entitled to any statutory employee benefits, and will not ask for them.

Furthermore, in the "Taxicab Lease Agreement" the driver is assigned to work a shift, ordered to follow certain rules and regulations of the "Leasing Company", and committed to follow a variety of company policies. If you ask why work relationships and conditions are contained in a contract that is supposed to be nothing more than a lease, the answer is that the "lease agreement" is an unmitigated fraud, a subterfuge to disguise the true status of the employed driver forced to sign it as a condition of work. And so it has been adjudicated in, ignored, and undermined decisions by appellate courts and administrative law judges.

By means of that change under similar titles, and schemes, hundreds of taxicab companies across the country have managed to send 50 to 60 years of progressive labor legislation down the the drain.

Billions In Lost Taxes And Fund Contributions

The "lease agreement" is not only a fraud, but a national disaster, since it has become the dominant means of operation in the taxicab industry. It has created such abominable work conditions for cab drivers that they either have quit in a hurry or have hung on by taking themselves of the tax system. For Dan Wong, with a wife and children to support, operating without statutory and union benefits- no health plan, no pension, no protection from employer abuse-was out of the question. So he returned to his former occupation of baker, which he had left because he preferred driving a taxicab.

At major taxicab companies from coast to coast, the Dan Wong situation is paralleled. Either long-time drivers have quit in exasperation at being thrust into a modern form of peonage, or they have been fired at the whim of increasingly tyrannical management which calls the firing a "lease cancellation.

On the other hand, there is a smaller cadre of professional drivers who have stuck it out because they cannot find other employment, or because they know how to work deals with dispatchers to get special favors and survive the increasingly high cost of operations. Costs of operation include the daily "gate," or shared commission at DeSoto, which has risen from around $40 in 1982 to around $100 in 1998. Add to that the cost of gasoline which the driver must purchase, and the extortion money which must be paid to dispatchers in order to obtain a decent cab and a fair share of radio orders, and you find a driver faced with a daily $125 deficit before leaving the garage to begin a work shift.

No Taxes On Net Earnings Of $400,00

One member of the hard-core cadre remaining is Steve Smith (real driver, fictitious name). Since being converted by DeSoto from employee to "self-employed lessee" in October 1982, he has managed by skill and bribery to net-not gross, but net after all his expenses-an average of $25,000 a year. By the end of this year, Steve Smith will have netted around $400,000 since 1982. Though single with no one to support but himself, and no special exemptions, Steve Smith has not paid a dime in taxes on that $400,000.

Multiply Steve Smith by the thousands of other taxicab driver, either singly or in multiple replacements, who have not paid taxes since the taxicab industry implemented the lease racket. The result is billions of dollars in income taxes lost to the city, state, and federal government since the taxicab companies stopped withholding taxes from the shared commissions-fares and tips-earned by their drivers.

Cities have also lost city payroll tax money. Prior to implementation of the lease racket, the major taxicab companies in San Francisco paid more than a million dollars a year in payroll taxes. Now they pay nothing.

Equally disastrous, billions of dollars formerly paid by the taxicab companies into Social Security, unemployment, and disability funds are no longer collected by the federal and state governments. Other companies and individuals have to make up the loss.

The Government Conspirators In The Lease Racket

The taxicab companies cannot implement the lease racket without co-conspirators at all levels of city, state, and federal government . With some exceptions in certain parts of the nation, the major taxicab companies no longer withhold taxes and statutory employee benefit fund contributions..Nor do they report the names of their "lessees." Thus have the cab companies removed themselves and their employees from the tax and contribution systems of the state and federal governments. Most of the major cab companies also have eliminated themselves from municipal government payroll tax structures and from union collective bargaining agreements.

All of that is accomplished not only by fraudulent classification of cab drivers as "self-employed lessees" or "independent contractors," but also by wholesale violations of labor laws and tax codes. How do they get away with it? The racket is not concealed. To the contrary, it is the most wide-open racket in the United States.

Every legislator, every judge, every tax collector, every taxicab regulatory agency, every government administrator of labor laws, every union official, every district attorney, every state attorney general, and the U.S. Attorney General, all know about the racket. They all know that labor and tax laws are being violated. They all know that taxicab drivers have been fraudulently classified. They all know that the nationwide lease racket has resulted in enormous damage to taxicab drivers, the public, and the city, state, and federal governments. Why are they cooperating with racket?

The Illegal Use Of Permits By Non Drivers

In a number of municipalities there are laws requiring the owner of a taxicab permit to use it for regular driving. Those laws are being undermined on a wholesale basis.

Again, San Francisco is the example. Here, not only by law but also under an appendix to the City Charter, anyone who has obtained a permit to operate a taxicab since 1977 is supposed to be using it to drive that specific cab around 75 percent of day or night work times. But more than half of the individuals who have obtained permits since 1977 have lied about their intention to use them for cab driving. Instead of driving, they have sold the permits to cab company operators who in turn "lease" them to drivers who, in further turn, "sub-lease" them to other drivers.

Thus, there is an illegal triple tiering of "leasing" and "sub-leasing." The Police Chief, the Police Department Taxicab Detail, the Police Commissioners who are supposed to supervise taxicab operations, the Board of Permit Appeals, the members of the Board of Supervisors, the Mayor, the City Attorney, and the District Attorney, all know that the majority of post 1977 taxicab permits have been obtained illegally and sold to cab companies for payments to their owners of $2300 to $2700 a month. But they do nothing to enforce the law and the City Charter.

The Causes Of The Lease Racket

There was a time when there were only two types of taxicab drivers: owners and employees, the latter mostly unionized. As more and more cab companies switched from splitting meter fares with their drivers to fixed "gate" or shared commission arrangements, however, a variety of so-called "rental" or "lease" deals were effected. Drivers were placed on fake "self-employment" or "independent contractor" status, and unionism was banned (under the provisions of the National Labor Relations Act, only employees acknowledged as employees are allowed to unionize).

The National Labor Relations Board (NLRB), various state administrative agencies, and the courts, became ambivalent on the legality of the scheme. More often than not they found it was illegal and ordered the cab companies to desist, but in some instances the lease racket was up-held as bona fide.

In the late 1970's there was a series of federal court cases that turned the tide in favor of the cab companies. Judges were infuriated by the NLRB's contradictory rulings. In one area the NLRB district director would rule that the cab drivers are employees, and in another area the district director would rule the opposite.

Worse yet, in the eyes of federal judges, cab drivers clearly identifiable as independent contractors, and even taxicab owners, were unionized and drawing full union and statutory employee benefits. In the Midwest, for example, there were numerous taxicab companies, banded together under the blanket name "Ace Cab Company," and drivers of all descriptions were enrolled in the Seamen's International Union, of all things. Some of the union members were individual cab owners. Others were on long-term, bona fide lease arrangements with individual owners, but were drawing union-employee benefits even though they were entirely free of control by Ace Cab.

Company management, (employer control) is the leading test for employee status. In the Ace Cab company case and a few others like it, irate federal judges held that there was no excuse for claiming that drivers not under daily control of taxicab company management were employees, and that long-term lease arrangements presented legal justification for independent contractor classification.

On the basis of such narrow, limited court rulings, an organization now known as the International Taxicab and Livery Association ran wild. Within a few years the Association, consisting of almost all the major taxicab companies in the U.S. and some abroad, had arranged model "lease Agreements" for their member firms to use. By the mid-1980's, unionism and employee status, with exceptions in some areas, had disappeared in the major part of the taxicab industry.

After more than a decade of the lease racket, the result is an industry that has been heavily de-professionalized, an accident rate that may be costing more money than the cab companies have saved on union and employee benefits they no longer have to pay, discourteous and dangerous drivers who do not know the city, a decline in the availability of taxicab service, loss of billions of tax dollars, and decimation of laws established for the benefit of workers.

That is the inevitable outcome of a bewildering situation in which all levels of government cooperate with corrupt entrepreneurs in a thoroughly destructive racket-for what reason no one seems able to explain. Alternatives are available. The question remains, can we force the politicians to implement them.

The Social-Political Program Of The Major Taxicab Companies

The major cab companies in the U.S., including those in San Francisco, belong to an organization called the International Taxicab and Livery Association (ITLA). Before the lease racket was firmly established, the ITLA was a rather insignificant trade association operating out of the Washington, D.C. suburb of Kensington, Maryland. Since the nationwide spread of the lease racket has enabled ITLA members to save hundreds of millions of dollars by freeing themselves from payments of union and statutory employee benefits, their contributions to the ITLA have increased spectacularly, enabling the ITLA to become a rich, powerful lobbyist in Congress and the state legislatures.

The nature of the men and women who run the major taxicab companies in the U.S. may be judged by the ITLA's social-political program. Here are the nine major goals pursued by the taxicab owners through the ITLA:

  1. Make it legal to classify all employed taxicab drivers as "independent contractors" who are "self-employed lessees."
  2. Totally eliminate withholding of income tax at the source within the taxicab industry.
  3. Totally eliminate the necessity for taxicab companies, and others who have placed their employees on "independent contractor" status, to provide workers' compensation and contributions to the Social Security, unemployment compensation, and disability funds.
  4. Totally eliminate labor unions from the taxicab industry.
  5. Scrap legislation to make taxicabs wheelchair-accessible and otherwise fit for transporting disabled persons.
  6. Eliminate federal funding of mass public transit systems.
  7. Abandon all efforts to compel cab companies to install safety devices in taxicabs for the protection of drivers.
  8. Totally free employers from requirements to provide health insurance, in whole or in part, for workers.
  9. Eliminate cooperatives in favor of traditional capital-based corporations.
Beneficent, humanitarian people, are they not?

Alternatives To The Lease Racket

There are three basic alternatives to the lease racket - the predominant method of doing business in the major part of the taxicab industry.
  1. Return to union-employee status.
  2. Taxicab company owners claim that if they were forced to return their hired drivers (the ones who do not own taxicabs) to union-employee status, they would be bankrupted. They should be compelled to prove that claim. If they can prove it, restoration of union-employee status is out of the question. Otherwise, it remains an option, one that worked before. Drivers tended to remain in the trade for many years because of the health and welfare benefits, pension, and union protections available.
     

  3. Municipalize the industry.
  4. There are proposals in a number of cities to initiate centralized dispatching in lieu of the present system wherein each cab company runs its own telephone-radio dispatch operation. It has been suggested that if centralized dispatching catches on, it may as well be effected through a municipalized operation wherein drivers are salaried employees on civil service status.

    Those against municipalization will argue that city transit operations are in such horrific state that they cannot be used as a model.

    But there certainly are arguments in favor of municipalization:(1) Government control over, and public input into, whatever is happening in the taxicab industry. (2) A means of ending the bribery, graft, tax cheating, and other skullduggery that render the present situation too crooked for defense on the usual rallying cry: "preserve free enterprise."
     

  5. Form co-ops with every driver an owner.
  6. In London, the drivers own their vehicles, taxicab driving is an honored profession, and there are rigid tests that must be met before anyone can obtain a license to operate a vehicle for hire. By contrast, in big American cities the taxicab companies hire anyone who has not committed a crime or run up a bad driving record in the past three years, and the oftentimes unsavory drivers thus hired enter the trade with little or no training and no knowledge of routes to various destinations. Unable to deal with the increasingly higher gates ("lease payments" in cab company Newspeak) they have to pay, thousands of drivers quit before they ever learn how to be a professional cabbie.

    That situation would change if there were only one category of cab driver: owner. Drivers who own their cabs tend to keep them in good shape, take care of business in the city, cultivate passengers by treating them with politeness, and adopt the trade as their life's work. Freed from the pressure of gates imposed by the cab company boss, they do not feel compelled to race, and they avoid accidents. The ratio of accidents is around one owner accident to every 15 non-owner accidents. That figure alone should be enough to convince almost anyone of the desirability of creating a taxicab industry in which 100 percent of the drivers own their cabs and permits to operate them.

    It would be necessary in this third lease racket alternative to totally outlaw the renting or leasing of taxicabs and taxicab permits. If anyone owning a permit and taxicab were not operating the taxicab himself or herself on a regular basis, that person would be forced to return the permit to the municipality which issued it.

The IRS and FBI Co-Conspirators in the Taxicab Company Rackets

For the past dozen years, two organizations have attempted to enlist the help of the Intemal Revenue Service (IRS) and the Federal Bureau of Investigation (FBI) in breaking up the tax evasion, the lease racket, and a variety of other criminal law violations pervading the taxicab industry. The two organizations are the Homosapiens Educational & Legal Project, of which this writer has been principal director, and the International Taxicab Drivers Safety Council, directed by James L. Szekely out of Huntington, West Virginia (I am his West Coast technical consultant).

Specific law violations and the names of taxicab company personnel responsible for them have been provided to both the IRS and the FBI. Either agency could break the taxicab industry racketeering with little trouble. Neither has been willing to do so. (If I understood why that is, I would tell you. Since nobody at either agency will explain why, it remains incom- prehensible to me.)

But there are two exceptions:

First exception: An FBI agent who spoke to me confidentially told me that he would investigate the rackets if his boss would let him do so. But he has been ordered to leave the taxicab industry alone. Why? "All I know is that it's politics," he replied. "The IRS won't do anything, either. If you went action, go to court. Sue the bastards." (l tried and got nowhere.)

Second exception: Early in l989 I received a long-distance telephone call from Theodore (Ted) Strunk at IRS headquarters in Washington, D.C. He identified himself as the agent in charge of the Program Analysis division of the IRS. He had called, he explained, for two reasons: just to apologize for not helping me crack the lease racket, and second to exchange information with me on the number of drivers evading taxes.

"We know everything you say is true," Strunk told me. "Hell, when I was working in the field I found out the extent to which this hanky-panky is going on. I'm sorry we have left everything to you and haven't provided any help."

"Why not?" I asked. "There was an announcement on the front page of the Wall Street Journal that the IRS was going to crack down on all the fake independent contractor schemes, not just the one in the taxicab industry, because they're costing the government around fifteen billion dollars a year in lost taxes."

"I know," Strunk replied. "We're working on it slowly, but our budget has been cut, so we're shorthanded."

"Well, how can the President and the Congress announce a crackdown on tax evasion schemes when the budget is cut so that the personnel are not available to do the job? The cuts certainly cannot be to save money, since you and I know that every IRS agent of the most minimal competency brings in a hundred times his or her salary in recovery of evaded taxes and penalties. So, from what you say, I can only conclude that the President and the Congress are shucking the public."

"Draw your own conclusion," Strunk said. "Now, as to the exchange of information: Have you talked to many cab drivers about tax evasion?"

"Hundreds of them," I replied.

"What percentage of them are off the tax rolls?" he asked.

"At least seventy-five percent are off completely," I answered, "and the rest are grossly under-reporting their earnings."

"Your figure is too conservative," Strunk retorted. "We know the figure for being off the tax rolls completely is closer lo ninety percent."

"What do you mean, you KNOW?" I asked. "How?"

"Oh, we've taken a study. We know exactly what's going on, and to what extent."

"And you aren't doing anything about it."

"Not right now. We'll be getting to it, but not now"

It has been nine years since I received that phone call, and I am still waiting for them to get to it. All I can do is wait because nobody at the IRS other than Strunk has ever been willing to level with me, and once the higher-ups learned he had talked frankly to me, he was ordered to desist.

To make sure he desisted, the higherups ordered Strunk's private phone number to be changed and kept confidential, and the mail room was ordered to return to me, unopened, any letter I tried to send to Strunk. I tried twice, and both envelopes came back marked "no person of that name employed here." As a check on what was happening, I wrote to the IRS personnel director and asked to find out whether or not a Theodore (Ted) Strunk was employed at IRS headquarters. Back came my letter with a notation at the bottom of it from the personnel director, Tom Nelson: "Theodore Strunk. Program Analyst."

All of this may sound like a work of fiction I have invented, with Nazi Germany Or Stalinist Russia as the setting. But Sinclair Lewis' line, "It Can't Happen Here," is reversed; and, in fact, all of this has happened and is continuing to happen here, in that bulwark of democracy the USA.
 

How Quentin Kopp and Dianne Feinstein Engineered the Lease Racket 
by Defrauding the Voters

In 1977 San Francisco voters were presented with a Proposition K that was ballyhooed by its promulgators, principally Supervisor (now California senator) Quentin Kopp and Supervisor (now U.S. senator) Diane Feinstein, as a measure "to restore free enterprise to the taxicab industry." Kopp and Feinstein arranged the official ballot summary of the proposition to make it seem that only one change in the taxicab industry was at issue: sale of taxicab permits on the open market. The argument was that since the permits had been acquired from the city for just a few hundred dollars, their owners should not be permitted to speculate on them by selling them at prices ranging from $50,000 to $100,000 each.

But in fact that was not the only issue. Buried in the usual ballot summary gobbledygook was a sentence that told voters: oh, by the way, Section 1129 of the Municipal Code (more precisely the Police Code) is hereby repealed.

Now, suppose you are a voter in l977 and you are one of the relatively few who at least take the time to read all of the gobbledygook. There is no summary of what Section 1129 states - only a mention that it is being repealed. Are you going to take the trouble to go over to the City Hall or Financial District Branch of the Public Law Library to look up Section 1129 to see what is being repealed? Hardly.

Nor would you think it necessary to do so. The subject of the proposition on the ballot is the termination of taxicab permit sales on the open market. Repeal of Section 1129, you would conclude, therefore must be part of that subject.

But in fact Section 1129 had nothing whatsoever to do with taxicab permit sales. Section 1129 made it illegal to rent or lease a taxicab permit to anyone unless the person to whom it was rented or leased was an employee of the permit owner. Thus, the purpose of repealing Section 1129 was to make it possible for cab companies to take their drivers out of union-employee status and commence the lease racket.

Without an explanation of that purpose, including repeal of Section 1129 in a proposition dealing in all other aspects with sale of taxicab permits amounted to nothing less than a fraud perpetrated on voters. Not one in a thousand voters understood that a kicker in Proposition K allowed taxicab company owners to change their hired drivers' work status from unionized employees to "self-employed lessees."

So it was that Proposition K was approved by a defrauded majority of voters and became Appendix F to the City Charter. Ever since then the local mass media people have stated almost casually in stories shout the taxicab industry that "in 1977 voters approved a change in the status of taxicab drivers." The fact is that the voters had no idea that would happen as the result of Proposition K. Without that flimflamming of the voters by Kopp, Feinstein, and their colleagues, the lease racket would still be outlawed in San Francisco.


About the Author:

Burton H. Wolfe is the author of several hundred articles published in major magazines and newspapers. Among his published books are The Hippies (New American Library), Hitler and the Nazis (Putnam), and Pileup on Death Row (DoubleDay). As the principal director of the Homosapiens Educational and Legal Project (HELP) and as a technical consultant for the International Taxi Drivers' Safety Council, Wolfe has pursued taxi industry reform for the past 10 years, through proposed legislation, lawsuits, and administrative agency proceedings in which he acted as legal advocate for taxicab drivers.


Back to the Taxi-L Regulation Page