2.6.18

Yesterday, the Office of Inspector General of the U.S. Department of Labor announced that it will launch an audit into the DOL’s rulemaking process in issuing a proposed tip-pooling rule that was published in December 2017. In a memorandum to Bryan Jarrett, acting administrator of the Labor Department's Wage and Hour Division, Elliott P. Lewis, assistant Inspector General for Audit, said that the full cooperation of the Wage and Hour Division of the DOL “and all officials at the Labor Department” was expected.

The audit is believed to have come about after reports that the DOL “leadership scrubbed an unfavorable internal analysis . . . that showed employees could lose out on billions of dollars in gratuities” if employers retained the gratuities. According to a February 1 report in Bloomberg BNA’s Daily Labor Report,

senior department officials at the DOL ordered staff to revise the data methodology to lessen the expected impact . . .. 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. Senior officials then received approval from the White House to publish the proposal without the economic transfer data.

The proposed rule was published in the Federal Register on December 5, 2017, and the comment period ended at midnight yesterday.

A DOL spokesperson quoted in the Bloomberg BNA article responded that the proposed rule asked the public to comment on how to quantify the rule’s impact. The DOL “works to provide the public accurate analysis based on informed assumptions,” the spokesperson said. “After receiving public comment, the Department intends to publish an informed cost benefit analysis as part of any final rule.”

Background

On December 5, 2017, the U.S. Department of Labor published a Notice of Proposed Rulemaking regarding changes to its tip regulations under the Fair Labor Standards Act. According to the DOL News Release, “Under the proposed rule, workplaces would have the freedom to allow sharing of tips among more employees.”

According to the DOL, its proposal “only 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.”  (Emphasis added.)  The DOL added, “These ‘back of the house’ employees contribute to the overall customer experience, but may receive less compensation than their traditionally tipped co-workers.”

The proposal would rescind a 2011 regulation that asserted that tips were the property of the workers who served the patrons. The DOL said,  “Since 2011, there has been a significant amount of litigation involving the tip pooling and tip retention practices of employers that pay a wage of at least the federal minimum wage, and do not claim an FLSA  tip credit. There has also been litigation directly challenging the Department’s authority to promulgate the provisions of the 2011 regulations that restrict sharing of tips. . . . The Department’s proposed new rule follows these [and other] developments, along with serious concerns that it incorrectly construed the statute when promulgating the 2011 regulations.”

Agencies are required to conduct a quantitative assessment of the costs and benefits of rules that are “economically significant.” The DOL, however, did not provide any quantitative analysis of the proposed rule’s effect on compensation received by workers, claiming it was “‘unable to quantify how customers will respond to proposed regulatory changes.’” For example, the DOL did not publish an estimate of how much tip income the proposal might transfer from traditionally tipped workers, such as servers, to traditionally non-tipped employees, such as those who work in the kitchens. Although the proposed regulations would empower businesses to collect their tipped employees’ gratuities and encourages them to redistribute the income back to workers, the rule doesn’t actually require businesses to do so. And so, in the DOL’s internal analysis, drafted at the time the proposed regulation was issued, DOL staffers’ estimate regarding the number of employers that would keep the tips for themselves resulted in a projected transfer to employers of $4.6 billion. Secretary Acosta thought that number was too high and that the assumption on which it was based was inaccurate.

We will continue to follow this issue and will keep you up to date.

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