Labor Department Proposes Killing Obama Tip Pooling Rule

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By Ben Penn

The Labor Department wants to remove an Obama-era regulation that restricted the circumstances in which employers could force workers to share tips.

The DOL’s Wage and Hour Division, in a proposed rule released Dec. 4, calls for rescinding the 2011 regulation that prohibited restaurants, bars, and other service industry employers from requiring front-of-house employees, such as servers, to share tips with back-of-house workers, such as 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 permit employers to pay an hourly wage of as little as $2.13, depending on the state, provided that gratuities bring the worker’s average pay up to the federal minimum wage of $7.25 per hour.

Two appellate court arguments in the last two years—one a dissenting opinion—found the agency had exceeded its authority with the 2011 rule. Those court cases are cited heavily in the rulemaking notice as motivating this administration’s reconsideration. “The Department has serious concerns that it incorrectly construed the statute,” in the earlier rule, the proposal states.

Although seemingly limited in scope, the DOL’s move has broad implications for payroll policies at restaurants and other businesses with workers who rely on tips. It elicited outrage from worker rights groups. What is characterized by the DOL as boosting employee freedom and lifting the take-home pay for kitchen staff is seen by critics as enabling employers to retain gratuities and do with them what they please.

Changes to FLSA

The proposal would eliminate from the Fair Labor Standards Act language under the 2011 rule that said tips are the property of the employee regardless of whether the employer has applied a tip credit.

The department’s analysis that unwinding this rule will improve workplace conditions for restaurant employees was immediately opposed by worker advocates and former DOL officials in 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 litigated this issue since the rule was first issued, applauded the Trump administration for understanding the 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 first announced an intent to undo this regulation in the semi-annual regulatory agenda in July, worker advocates and Democrats such as Sen. Patty Murray (Wash.) expressed concern that the department was moving to roll back financial security for low-wage workers in the service industry, most of whom are women. Supporters of the prior administration’s rule argue it protected vulnerable employees from unscrupulous 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 in an interview on condition of anonymity, said that the WHD “will continue to fully and fairly enforce all aspects of the Fair Labor Standards Act.” As to concerns that the proposal frees 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.”

Upon the proposal’s publication in the Federal Register Dec. 5, the public will have 30 days to submit comments, which can be addressed in the final rule.

The department is expecting employers to react by developing tip-sharing arrangements to the benefit of their employees, but the agency also believes workers will benefit if management opts to pay them a full minimum wage and redirect some of their gratuities 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.

Supreme Court Asked to Weigh In

The rescission proposal comes as the U.S. Supreme Court is considering the restaurant association’s petition to invalidate the tip-pool regulation. The Justice Department and Labor Department have until February to file a reply brief to the NRA’s request for the high court to take the case.

Publishing a regulation to nullify the rule may allow the government to sidestep the issue of taking a position in front of the Supreme Court that differs from the stance taken during the Obama administration, when the DOJ defended the rule. It could also lead to the high court opting not to grant review, if they see the administration already in the process of reversing course on the rule.

Some attorneys theorize that the petition’s potential to serve as a vehicle to rein in the administrative law doctrine of Chevron deference is one reason the administration wants to keep it out of the justices’ hands. Chevron is the high court’s 1984 doctrine that judges must defer to agency interpretations of ambiguities in the laws they administer, unless the rulemakings are unreasonable.

Amador, who is counsel of record in the NRA’s pending Supreme Court challenge, said it’s too soon to determine whether his association prefers to carry on with the petition. “We are talking to our attorneys. We will be communicating to the solicitor general’s office and the solicitor’s office at the Department of Labor as well and see if we can come to an agreement,” he said.

To contact the reporter on this story: Ben Penn in Washington at bpenn@bloomberglaw.com

To contact the editor responsible for this story: Chris Opfer at copfer@bloomberglaw.com

For More Information

The proposed rule is available at http://src.bna.com/uE7.

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