Officials Buried a Key Analysis in Tip Rule Change That Could Cost Workers $5.8B

Back-of-house restaurant workers are not likely to benefit from the proposed tip rule change, economists say. GERARD JULIEN/AFP/Getty Images

The Department of Labor (DOL) came under fire Thursday morning when several current and former employees told Bloomberg Law that the department had intentionally left out an economic analysis in a labor rule change proposal that showed tip workers could lose billions of dollars a year under the proposed regulation.

Sources told Bloomberg Law that a DOL official wasn’t happy with the amount of economic impact shown in the first analysis and ordered the DOL staff to revise the research methodology to lessen the impact.

Although the second calculation was significantly lower than the first one, the department was still unsatisfied and ended up removing the analysis in the final proposal, which was published on December 5 for a public notice-and-comment period.

Bloomberg Law wasn’t able to obtain specific numbers in the analysis, but the Economic Policy Institute (EPI), a nonprofit think tank based in Washington, D.C., estimates the amount to be “well into the billions,” Heidi Shierholz, a senior economist at the EPI, said in a press conference on Thursday.

An EPI-conducted analysis shows that the DOL’s proposed rule change would allow employers to take $5.8 billion of tip income a year from their workers.

The amount represents about 16 percent of the total tips earned a year by workers in the U.S., and 80 percent of the impact will be on women workers. Shierholz said the analysis used the same data as the DOL and a similar methodology.

“This is an outrageous process violation, and completely overturns 40 years of consistent interpretation of the Fair Labor Standards Act,” Shierholz said. 

The DOL proposal seeks to change a section of the current tip regulations under the Fair Labor Standards Act. Current tip regulations prohibit employers from taking tip income from employees in order to protect workers who make sub-minimum wages. (Employers are allowed to count the sum of base wages and tips to fulfill the federal minimum wage requirement.)

The DOL proposed to lift the tip-sharing ban for employers who pay minimum wages before tips.

As a result, under the proposed changes, employers (who pay minimum wages) will be allowed to take the tips received by their workers, in what’s called “tip-pooling.” The DOL argues that such a change could benefit low-wage workers who don’t regularly receive tips, such as restaurant cooks and dishwashers, because the new rule would allow employers to redistribute pooled tips to these group of people.

Economists counter that the rational conflicts with the law of economics.

“The term ‘tip pooling’ makes it sound more egalitarian for back-of-house workers, but basic economic rule suggests that employers are not likely to distribute the pooled income to back-of-house workers.“ Shierholz said.

She added that restaurant owners would be much more likely to use the money for upgrading their restaurants and keeping for themselves.

Saru Jayaraman, president of the Restaurant Opportunities Center United, a nonprofit representing more than 25,000 restaurant workers, said the rule change was pointless in the first place, because existing tip protection law already sees a high percentage violation rate.

“The new rule would only exacerbate the problem by making it legal for employers to take tips from workers.” she said.

Jayaraman advocated that both tip protection law and minimum wage law need to exist to ensure workplace safety. ROC United researchers found a strong correlation between pay legislation and workplace sexual harassment.

States which have both a tip protection law and a minimum wage law record much lower sexual harassment offenses than states that have only one of the two, or neither.

Officials Buried a Key Analysis in Tip Rule Change That Could Cost Workers $5.8B