When the US Department of Labor proposed a new rule in December concerning the treatment of tips under the Fair Labor Standards Act, the proposal drew fire from critics who said it effectively permitted employers such as restaurants to withhold their employees tips. The regulation, which would only apply to employers who pay a full minimum wage and do not take a tip credit, would allow these employers to require that tips be pooled and shared with back-of-house staff who do not traditionally receive direct tips, such as restaurant cooks and dishwashers—a practice banned by the Obama administration.
A stipulation in the regulation that managers could use pooled tip money to make structural improvements, like expanding the dining area, or to lower menu prices, led employee advocates to argue that it would result in many tips not accruing to employees at all. The Labor Department publicly contended that these fears were baseless, but last month, an internal analysis of the proposal’s impact came to light, showing that employees could indeed lose out on billions of dollars in tips. Senior officials in the department shelved the analysis and ordered staff to revise their methodology to produce a more favorable result. The revelation cast doubt on the future of the rule and led to calls from members of Congress to discard it and warnings from state attorneys general that the department may have broken the law in rolling out the proposal.
The rule is still pending, but now, if it does come into effect, it will do so with its critics’ main objection addressed.
Last week, the board of elections in Washington, DC, approved a ballot measure for the upcoming primary election on June 19 that will ask voters whether to raise the minimum wage for tipped employees in the restaurant industry from its current rate of $3.33 per hour to match the capital city’s minimum wage for all other workers by 2026. Advocates of the measure are framing it as a way of protecting low-income workers, especially women, from harassment and abuse, the Washington Post reported:
[C]ritics of the split-wage system say some workers face intimidation and retaliation when they tell their bosses that tips came up short. They say low-income workers in the restaurant industry deserve the same predictable income as other employees. …
“In this Me Too moment, in this Time’s Up moment, we have to stand up for women and empower women and really call this two-tier wage system for what it is: a source of sexual harassment,” said Diana Ramirez, director of the Restaurant Opportunities Center D.C., which is sponsoring the ballot initiative.
“If you know that you are getting a base wage from the employer, and a customer is acting inappropriately with you, you don’t have to put up with that behavior anymore to make a good tip,” she said.
Restaurant owners and some workers who earn much more than the minimum wage on the basis of tips oppose the measure, saying it will eat into restaurants’ already thin profit margins and force them to raise prices, cut jobs, and perhaps abandon tips altogether in favor of a flat hourly wage.
In December, the US Department of Labor proposed a change to regulations under the Fair Labor Standards Act that would permit employers of tipped workers who pay the minimum wage and do not claim a tip credit to require these workers to “shar[e] tips through a tip pool with employees who do not traditionally receive direct tips–such as restaurant cooks and dish washers.” Critics of the proposed rule say it would hurt employees by allowing restaurant managers to skim tips or even conceivably not distribute the tip pool to workers at all.
New revelations have handed ammunition to these critics and thrown the future of the tip-pooling rule into doubt. Last week, Bloomberg Law‘s Ben Penn reported that the Labor Department had shelved an internal analysis of the proposal’s impact that found employees would lose billions of dollars in tips. Senior officials in the department ordered staff to revise the methodology of their analysis to produce a more favorable result, Penn adds, and later calculations showed smaller losses. Ultimately, the White House allowed the Labor Department to publish the proposal without including any estimate of its economic transfer effects.
Opponents of the rule change have leapt on this story as a reason to scuttle the proposal. Massachusetts Senator Elizabeth Warren sent a sternly-worded letter to Secretary of Labor Alexander Acosta requesting copies of all analyses the department conducted on the rule and correspondence pertaining to them, as well as urging the secretary to delay the end of a public notice-and-comment period that was to end Monday, February 5 (he did not). In addition, 17 state attorneys general wrote to the Labor Department, pushing for the proposal to be withdrawn, the Hill reported:
The US Department of Labor this week announced a proposed change to regulations under the Fair Labor Standards Act concerning tipped employees and employers’ right to demand that they pool their tips. The proposed new rule, according to the department’s press release, “applies where employers pay a full minimum wage and do not take a tip credit and allows sharing tips through a tip pool with employees who do not traditionally receive direct tips–such as restaurant cooks and dish washers.”
Notice of the proposed rule was published in the Federal Register on Tuesday, and will be available for public comment for 30 days. If enacted, the rule change would benefit restaurants, which have come under increasing pressure to pay their tipped employees the standard minimum wage and thus forego the tip credit, making more of them subject to these regulations, Lisa Nagele-Piazza explains at SHRM:
“Restaurants and other food service providers should welcome these proposed changes,” said Kathleen Anderson, an attorney with Barnes & Thornburg in Fort Wayne, Ind., and Columbus, Ohio. “Think about it. The restaurant experience is created by the combined efforts of the front and back of the house. Tip sharing allows those in the back of the house to be rewarded for good service.” …
Restaurateur Danny Meyer, the founder of Shake Shack and CEO of the Union Square Hospitality Group, is already famous for his employee-centered approach to restaurant management: By eliminating tipping in favor of higher wages and offering restaurant staff benefits like paid parental leave, he has broken the mold in an industry typically associated with high turnover, unpredictable incomes, and little in the way of job security or growth opportunities.
Meyer’s vision, which Aaron Hurst explored in an in-depth profile at Fast Company last week, is much bigger than simply abolishing tips. He’s looking to fundamentally transform the culture of his businesses, in large part by giving employees both a literal stake in the success of the restaurant and a greater sense of ownership toward the business and their careers:
When I asked Meyer how the change has turned out, he says when you make such a sweeping move across your business you have to make sure everyone is listened to, including your customers and your staff, “Our first priority was engaging and educating our own team in this conversation through a series of internal townhalls, so that they could be genuine ambassadors of the change. We started the conversation about “Hospitality Included” with our own people months before we made the news public or implemented it in any of our restaurants.” …
How do you persuade your waiters to forgo a 20% tip on each table they serve? Meyer says they never wanted to hire people who would only have been nice to you if they assessed it out of the four tables in their section, you were the richest or you were the most generous. “I would never want someone on our team who would go through that calculus. To say, “Who should I bring the food out for first?”
Now, the Wall Street Journal reported on Sunday, Meyer is taking his campaign to change beyond his own restaurants and even beyond the restaurant industry, launching a $220 million private equity fund called Enlightened Hospitality Investments LP to back companies that share his values of pursuing growth by taking the best possible care of their employees. Restaurant industry observers say the fund will likely get favorable terms on many of its investments because businesses want to be associated with Meyer’s brand.