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Labor Department Moves to Kill Obama-Era Tip Pooling Rule

The Labor Department is considering an end to Obama-era regulations that restricted the scenarios in which employers could compel workers to share tips.

In a proposed rule released earlier this month, the DOL’s Wage and Hour Division calls for abolishing the 2011 regulation that prohibited restaurants, bars, and other service employers from requiring front-of-house workers (like the wait staff) to share tips with back-of-house workers like cooks and dishwashers.

“Our proposal only applies where an employer pays a full minimum wage and does not take the tip credit,” a Labor Department official told Bloomberg Law. “These are restaurant cooks and dishwashers, back-of-the-house staff. The concept here is these employees are as integral to the experience of the customer as front-of-the-office staff, and often they are not compensated to the same degree potentially as front-of-the-house staff.”

Tip credits allow businesses to pay hourly wages as low as $2.13 per hour, depending on the state, as long as the gratuities bring the employee’s average pay up to the federal minimum wage of $7.25 per hour.

Over the past two years, two appellate court arguments—one issuing a dissenting opinion—determined that the agency had exceeded its authority with the 2011 rule. Those court cases are cited regularly in the rulemaking notice as an underlying motivation for the Trump administration’s reconsideration. “The Department has serious concerns that it incorrectly construed the statute,” in the earlier rule, the proposal states.

While seemingly limited in scope, the DOL’s decision has widespread implications for payroll policies at bars, restaurants and other businesses where workers depend on their tips. It created outrage from worker rights groups. What is spun by the DOL as enhancing employee freedom and raising the take-home pay for kitchen staff is considered by critics as enabling employers to hold back gratuities and do with them what they please.

Changes to FLSA

The proposal would throw out the Fair Labor Standards Act language under the 2011 rule affirming that tips are the property of the employee regardless of whether their boss has applied a tip credit.

The department’s prediction that dismantling this rule would enhance workplace conditions for restaurant employees was opposed by worker advocates and former DOL officials within the Obama administration. “There is nothing” in the proposed rule “that would preclude an employer from keeping the tips of workers as long as he’s paid them $7.25 an hour,” Sharon Block, who ran the DOL’s policy shop in the Obama White House, told Bloomberg Law.

Meanwhile, the National Restaurant Association, which has aggressively litigated this issue since the rule was first drafted, applauded the Trump administration for “getting” the actual structure of restaurant operations. The rescission “points out what we have been saying for years: taking care of the disparities of the back-of-the-house and front-of-the-house is very important to have that team spirit,” Angelo Amador, the NRA’s senior vice president and regulatory counsel, told Bloomberg Law.

Free Pass to Restaurants?

When the DOL initially announced its intention of undoing this regulation last July, worker advocates and Democrats like Senator Patty Murray of Washington worried that the department was decreasing financial security for low-wage workers in the service industry, the majority of whom are women. Those who backed the Obama administration’s rule claimed that it protected vulnerable employees from dishonest managers who might skim tips.

“It is a license to steal the money that customers clearly intended to be a gratuity to a worker for the service provided,” Michael Hancock, a Wage and Hour Division assistant administrator in the Obama administration, said of the proposed rule.

The current DOL official, speaking on condition of anonymity, said that the WHD “will continue to fully and fairly enforce all aspects of the Fair Labor Standards Act.” Regarding concerns that the proposal creates an opportunity for management to retain tips, the DOL does not anticipate this response from businesses, the official said.

“Employers have every incentive to continue to maintain a tipped system at their workplace to provide the incentives necessary to provide the best customer service to the public,” the DOL official said. Skimming tips “is not going to happen is our best guess, but we’re looking forward to getting comments about that.” Currently, the public has 30 days to submit comments, which can be addressed in the final rule.

The department anticipates that employers will move to develop tip-sharing agreements that benefit their employees, but the agency has also said that workers will be better off if management decides to pay them a full minimum wage and redirect some of their tips away from direct worker compensation.

“To the extent employers may otherwise make an arrangement to allocate any customer tips to make capital improvements to their establishments” or offer new benefits to workers such as paid time off, “these are also potential benefits to employees and the economy overall that may result under the proposed rule,” the department states.

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