Labor Dept. Ditches Data Showing Bosses Could Skim Waiters’ Tips

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By Ben Penn

Labor Department leadership scrubbed an unfavorable internal analysis from a new tip pooling proposal, shielding the public from estimates that showed employees could lose out on billions of dollars in gratuities, four current and former DOL sources tell Bloomberg Law.

The agency shelved the economic analysis, compiled by DOL staff, from a December proposal to scrap an Obama administration rule. The proposal would permit tip pooling arrangements that involve restaurant servers and other workers who make tips and back-of-the-house workers who don’t. It sparked outrage from worker advocates who said the move would permit management to essentially skim gratuities by participating in the pools themselves.

Senior department political officials—faced with a government analysis showing that workers could lose billions of dollars in tips as a result of the proposal—ordered staff to revise the data methodology to lessen the expected impact, several of the sources said. Although later calculations showed progressively reduced tip losses, Labor Secretary Alexander Acosta and his team are said to have still been uncomfortable with including the data in the proposal. The officials disagreed with assumptions in the analysis that employers would retain their employees’ gratuities, rather than redistribute the money to other hourly workers. They wound up receiving approval from the White House to publish a proposal Dec. 5 that removed the economic transfer data altogether, the sources said.

The move to drop the analysis means workers, businesses, advocacy groups, and others who want to weigh in on the tip pool proposal will have to do so without seeing the government’s estimate first. The public notice-and-comment period for the proposal is set to end Feb. 5.

The new revelation lends credence to concerns from Democrats and labor organizers that the proposed rule will short change workers. It also raises questions about how much the DOL intends to take public feedback into account in shaping a final version of the rule.

The current and former DOL sources, hailing from both political parties, were all independently briefed by people involved in the rulemaking. They spoke on the condition of anonymity to prevent retaliation against themselves and others.

The Labor Department “works to provide the public accurate analysis based on informed assumptions” a DOL spokesman told Bloomberg Law in an email. The spokesman noted that the department asked the public to comment with suggestions about how to quantify the rule’s impact as part of the proposal. “As previously stated, after receiving public comment, the Department intends to publish an informed cost benefit analysis as part of any final rule.”

The DOL did not address Bloomberg Law’s inquiry as to why the agency did not include the completed transfer analysis in the proposed rule.

The department has previously defended criticism of the proposal by saying the move would lead to higher pay for some low-wage workers who don’t traditionally earn tips, such as dishwashers. The DOL has also argued that managers would be dissuaded from stealing tips, out of fear of employee turnover and decreased morale. The department further noted that it included in the proposal a qualitative analysis, which doesn’t include dollar figures.

OMB Involvement Unclear

Former career and political officials at the DOL and the White House Office of Management and Budget, joined by business and employee-side regulatory attorneys, all told Bloomberg Law that scrapping a completed analysis from a significant proposal would mark a troubling departure from the government’s mission. Agencies and OMB are expected to ensure that all available data are brought to bear during notice-and-comment rulemaking, the sources said.

White House Office of Management and Budget’s regulatory review staff was familiar with the data, before the proposed rule was released, sources said. It’s not clear whether OMB Director Mick Mulvaney approved the deletion of the numbers or whether Neomi Rao, who runs OMB’s Office of Information and Regulatory Affairs, was involved in the decision.

“We do not comment on the interagency review process,” an OMB senior official told Bloomberg Law in an email responding to a series of questions directed at OIRA.

Representatives for the White House and Mulvaney did not respond to requests for comment.

“I have to wonder about the internal pressure brought to bear on OIRA in this case, because historically OIRA’s position has been that analysis is a good thing,” Stuart Shapiro, a career policy analyst at OIRA in the Clinton and Bush presidencies,” told Bloomberg Law. “It helps us make better decisions, it helps us increase the transparency of the regulatory effort.” Shapiro, who reviewed labor regulations in his tenure at the office, is now a Rutgers University professor researching the regulatory process.

Bloomberg Law has filed a Freedom of Information Act request for the transfer report, which is being processed by the DOL’s Wage and Hour Division.

Transparency in Question

The proposal rescinds a 2011 rule that asserted tips are the property of workers who earn them. That revision of the Fair Labor Standards Act covered scenarios in which restaurants and other employers supplemented tipped workers’ earnings by paying at least the full minimum wage.

Since the rule’s release in December, worker advocacy groups and Obama administration officials have vehemently opposed it. They point to language that permits companies to keep gratuities for themselves, provided they pay workers at least the federal minimum wage of $7.25 per hour and don’t apply a tip credit that allows them to pay as little as $2.13 per hour, depending on the state.

The left-leaning think tank Economic Policy Institute attempted to fill the data void by producing an analysis of its own. EPI predicts the proposed rule on tips would lead to $5.8 billion changing hands from workers to businesses, rather than being redistributed among employees as the DOL leadership suggested.

Some worker advocacy attorneys say the absence of the data might violate administrative law.

The existence of economic data has not been previously reported. It comes as President Donald Trump’s labor secretary and OIRA administrator have said they are committed to good government and transparent notice-and-comment rulemaking as they implement the White House demands to cut unnecessary regulations issued during the Obama administration.

Some attorneys have theorized that the Trump administration fast-tracked this rescission to moot the restaurant industry’s request that the U.S. Supreme Court grant review and invalidate the Obama tipping rule.

Acosta Optics

News of the scrapped analysis comes as Acosta has tried to avoid being cast as putting business interests above employees in various legal and regulatory moves.

David Weil, Wage and Hour Division administrator under President Barack Obama, called the new tip rule a boon for the restaurant industry,

“I think it is simply a statement of fact that Secretary Acosta and the people in the political side of the Labor Department who pushed that rule, which was a wonderful Christmas present to the National Restaurant Association, didn’t want the public to understand what kind of transfer we’re talking about,” Weil told Bloomberg Law in December, before the news of an existing analysis publicly surfaced.

Democrats have also placed their thumb on the scale when it comes to regulatory analyses, Leon Sequeira, who ran the DOL policy office in the George W. Bush administration, said.

“Economic analysis is a political football in every administration,” Sequeira told Bloomberg Law. He said the Obama administration DOL provided inadequate cost-benefit analyses that understated the compliance costs on businesses. “If the agency feels that it doesn’t have sufficient information to perform as robust an analysis as some may like, then that’s the precise purpose of the proposed rulemaking—to say to all of these critics, if you’ve got a better idea or different analysis or additional information, by all means send it in.”

“It’s at the final stage, when the agency makes its final decision, that folks need to be concerned about evaluating the rulemaking,” said Sequeira, now a management-side employment attorney in Washington.

The More Data the Better

The DOL insisted in the rule proposal that uncertain employer responses make it difficult to produce reliable estimates of managers participating in tip pools and how customers might change their tipping habits. Former agency officials said, however, that the regulation breaks from protocol because it is still the department’s duty to release a best attempt at the data in the proposed rule.

“To punt on that and say we’ll let the public come up with the economic analysis, that’s really not how the process is intended to work,” Michael Hancock, a former assistant administrator at the WHD, told Bloomberg Law. “The agency has an obligation to provide its best judgment on what the likely impact is economically, and that will give the public an opportunity to comment on that.”

The DOL proposal explained that an analysis of potential benefits and transfers is too speculative at this stage. “The Department is unable to quantify how customers will respond to proposed regulatory changes, which in turn would affect total tipped income and employer behavior,” the agency stated.

One trade association executive, who had no prior knowledge of a shelved analysis, told Bloomberg Law that when it comes to rulemaking, the more information the better. “I would just be troubled if the agency had done economic work that’s directly relevant to rulemaking, and for any reason chose not to include that, because the public has a right to know everything about the rule,” said the source, who spoke on condition of anonymity to address an issue that doesn’t affect the trade association’s members.

The National Restaurant Association, by far the trade group most invested in the rulemaking, has been a massive supporter of the effort. An economic analysis isn’t relevant to this discussion because the 2011 version of the rule didn’t include that type of analysis either, Angelo Amador, the NRA’s senior vice president and regulatory counsel, told Bloomberg Law in December. Plus, Amador said he believes he has the law on his side.

“I do not see how an economic analysis has an impact either way on something that they don’t have the authority to do,” he said. The NRA has litigated the Obama rule since 2011 and has filed a request for review that is pending before the U.S. Supreme Court. Two circuit courts have called the rule an abuse of agency rulemaking authority.

Tough to Estimate

In reality, both business and employee-side sources told Bloomberg Law that it’s difficult to arrive at a confident estimate on this rule change, because of many possible employer and customer reactions, and interactions with a maze of state and local minimum wage laws.

The new methods ordered by the DOL leadership on the tip pool rule reduced the transfer total by changing the industries affected and how the rule would interact with state laws, which dropped the total, a few sources said.

Hancock, whose 20-year career at the WHD spanned three presidents from both parties, said that during the approximately 15-20 economically significant rules he’s worked on, he never once witnessed the agency excluding the cost-benefit analysis from a significant regulation. Lack of data accuracy is no excuse, Hancock said.

“If their view is they’re not really confident with the data you have, you put it out there, you identify those areas where you have uncertainty about the data, and invite the public to fill in those gaps,” said Hancock, who is now of counsel at plaintiff-side firm Cohen Milstein in New York.

The Labor Department’s policy shop played a central role in the tip pooling proposal, as is customary for significant rules. Sequeira, who was heavily involved with the WHD and other agencies in developing regulatory economic analyses in the prior Republican DOL, stopped short of saying whether the DOL behaved inappropriately in this circumstance.

“It’s hard to say,” Sequeira said. “That’s the age-old conspiracy theory with virtually every regulatory proposal that comes out.”

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