Budget Brings Ambiguity on Tip-Sharing Issue

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By Ben Penn

A budgetary compromise that quiets the controversy on restaurant tip skimming is now creating an ambiguous path forward for federal wage-and-hour law.

The government spending bill, signed into law March 23, includes a policy rider to amend the Fair Labor Standards Act by prohibiting employers—including managers and supervisors—from participating in tip-pooling arrangements. The DOL leadership and a bipartisan team of Senate and House members agreed on the language to prevent businesses from retaining workers’ gratuities as a result of the department’s contentious rulemaking that allows restaurants to require employees who directly earn tips to share them with workers who don’t.

The December 2017 rule proposal may now be pulled entirely or revised to conform with the omnibus bill. But the legislative provision leaves a few glaring holes on the next steps, attorneys representing workers and businesses told Bloomberg Law. The biggest uncertainty, they said, is that the FLSA doesn’t define the terms manager and supervisor.

“I think there are some ambiguities that are going to be a breeding ground for litigation,” Noah Finkel, a partner at Seyfarth Shaw and and co-chair of its national wage-hour practice, told Bloomberg Law. The issue of which employees constitute “supervisors” and “managers” will lead to class actions alleging restaurant chains are improperly including low-level supervisors who earn tips directly, such as lead waiters or lead bartenders, in the tip pool, Finkel said.

Hospitality businesses frequently give some tipped workers a small amount of authority over their co-workers, assigning them titles such as “shift lead.”

“Maybe they can direct the work of the hourly employees but they don’t have the authority to discipline anyone—is that person allowed to be included in the tip pool or not?” Jeffrey Brecher, who heads management-side firm Jackson Lewis’ national wage-hour practice, told Bloomberg Law. “And if not, now it’s governed by federal law and the penalties are stiff.”

Mixed Bag From Worker Perspective

The bill was largely hailed as a victory by Democratic leaders and worker advocacy groups. They were pleased that the rule essentially nullifies the piece of the DOL’s pending regulation that would’ve given businesses the right to include managers in the tip pool.

Labor Secretary Alexander Acosta urged Congress to reach this deal in the aftermath of controversy that escalated after Bloomberg Law reported Feb. 1 that the agency buried from the proposed rule internal estimates showing the regulation could lead workers to lose out on up to billions of dollars in gratuities per year. The concerns about this rule then reignited in response to a March 20 Bloomberg Law article revealing that Acosta proceeded to delete a reduced version of that analysis—projecting management would skim $640 million per year—by gaining approval from Office of Management and Budget Director Mick Mulvaney.

The spending bill updates to the FLSA now render those estimates moot by making it illegal to transfer tips to management. But to one former official at the DOL Wage and Hour Division, the language doesn’t go far enough to protect workers.

The rider “completely ignores the fact that the owner of the business may not fit either” the manager or supervisor category, Michael Hancock, a WHD assistant secretary under President Barack Obama who now represents plaintiffs at Cohen Milstein, told Bloomberg Law. The language “seems like a fairly superficial attempt to quell the outcry over the pending regulation. They could have explicitly said that the owner of the business is precluded from directly or indirectly benefiting from or taking any part of the tips.”

While the manager and supervisor matter could have more clarity, the takeaway is this is “certainly a big win for restaurant workers,” Douglas Werman, a partner at plaintiff firm Werman Salas in Chicago, said.

“It’s a bit astounding that the advocacy groups behind the change pulled this off, since it’s contrary to the current DOL’s most recent proposed regulatory change,” Werman told Bloomberg Law.

Werman was also pleased the bill gives the secretary of labor the power to assess civil monetary penalties and that employees can collect double damages from any employers found in violation of the new FLSA provision.

The damages workers can now collect caused Angelo Amador, the National Restaurant Association’s senior vice president and regulatory counsel, to stop short of endorsing this rider.

“As the voice for restaurants in every local community, we want to ensure that servers, bussers, dishwashers, cooks, and others who work as a team to provide great customer service in the industry have access to share in tips left by customers, as this legislation clearly allows,” Amador, who is also executive director of the Restaurant Law Center, said in a statement. “Our concern is the enforcement and penalty language for unintentional violations goes too far.”

Next Procedural Steps?

The new ambiguities from the spending bill might be clarified by the next regulatory moves from the DOL.

The 2017 proposed rule was an attempt to rescind a 2011 regulation that had asserted tips are the property of employees who earn them. But the rider now states that the original Obama-era rule shall have “no further force or effect until any future action taken by the Administrator of the Wage and Hour Division.”

The department will “need to draft a regulation to conform with this legislation,” Judy Conti, federal advocacy coordinator at the National Employment Law Project, told Bloomberg Law. “I think they have two choices: one is pull the NPRM and start over, or two, issue an amendment to the current NPRM to conform with the new law and offer a notice and comment period.”

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