Late last month, the Department of Labor (DOL) moved to rescind an Obama-era ban on the practice of restaurant “tip-pooling.” Also known as “tip-sharing,” it’s a common—and sometimes controversial—industry practice that supporters say can help level the income playing field in a notoriously low-wage sector. But that’s assuming employers use their control to pool tips, rather than pocket the tips for themselves—and that they are transparent about the practice to their staff.
In theory, tip-sharing works this way: The house collects and combines tips received by its front-of-house workers (wait staff, servers, bartenders) and redistributes them to both tipped and traditionally non-tipped, hourly employees (the back-of-house workers like dishwashers, cooks, and chefs). But it doesn’t always work as desired. In 2012, for instance, New York chef Mario Batali was ordered to pay over $5 million dollars to the more than 1,000 workers at his restaurants who had accused him of skimming their tips for nearly eight years. Rather than result in fairer compensation, the system allegedly made it easier for employees to be paid unfairly.
To understand the somewhat controversial economics behind tip-pooling, it helps to first detail the pay structure for food service workers. In most states, employers can fulfill their minimum wage obligation by paying their front-of-house workers a “tipped wage” rate, which varies by state but can be as little as $2.13 an hour. This is also known as taking a “tip credit,” and is allowed so long as the difference between that rate and the federal minimum wage is bridged by tips.
But after passing minimum wage laws, seven states (including Montana and Nevada), have eliminated that “tipped wage” rate system, meaning that workers must be paid the state minimum wage, regardless of whether or not they also make tips. And here’s where things get messy(er).
In 2010, the United States Court of Appeals for the Ninth Circuit—a circuit that includes the seven states that eliminated the tipped wage system—ruled in a class-action suit that a Portland, Oregon-based restaurant was not in violation of the Fair Labor Standards Act (FLSA) when it pooled tips between wait staff and kitchen staff. In its decision, the court wrote that the FLSA did not prohibit employers from doing just that. (Since it was passed in 1938, the FLSA has set basic requirements on wages and overtime pay, but did not —at the time of the court’s decision — include language explicitly disallowing employers who don’t take tip credits from tip pooling.)
The DOL disagreed, saying in part that the Ninth Circuit’s ruling created a “loophole” by which employers could “use those tips to pay the minimum wage or for any other purpose.”
And the DOL offers up a pretty clear example of how this loophole could play out: If a tipped employee earns $10 an hour in tips, an employer can pay the federal tipped minimum wage of $2.13, which means the employee effectively earns $12.13 per hour. Or the employer can pay the federal non-tipped minimum wage of $7.25, and do as they please with what remains of the earned tip—in other words, “for any other purpose.”
So, in 2011 the DOL announced it was updating the regulations included under the FLSA.
Here’s what happened next: A class of hospitality associations in 2012 challenged the DOL’s interpretation of the FLSA and sued. The case rambled around the halls of the Ninth Circuit until 2016, when the court sided with the DOL, essentially flipping its 2010 decision.
In January of this year, the industry trade group National Restaurant Association (NRA) filed a petition with the Supreme Court in hopes it will review the circuit ruling. NRA director of media relations Sarah Dolan said in an e-mail that the group’s petition is currently pending a response from the DOL.
That response may not be forthcoming. As Law 360 reported (paywall) last month, the DOL recently sent a notice to the Office of Management and Budget proposing to rescind its ban on tip-pooling.
Labor activists say they are concerned that the tip-pooling debate is eclipsing a larger issue.
“All this stuff about tip-pooling is really a distraction and a red herring,” says Saru Jayaraman, director of the Food Labor Research Center at UC Berkeley. “It’s nothing new. The new part is: Who owns the tips? Who has ownership over the tips? Who has control over the tips? Is it workers, who it’s been forever, or is it employers?”
Jayaraman adds that repealing the ban would also make workers in the restaurant industry, who are disproportionately female, even more vulnerable to abuse.
“Now, these women would have to put up with harassment from customers in order to earn the tips, and then turn around and put up with harassment from managers, who would have the right to potentially keep the tips.”
The NRA, on the other hand, says it is concerned about the process by which labor laws should be enacted. “If they do not like the law as it is, they need to go to Congress,” says Angelo Amador, regulatory counsel for the association.