Published January 17, 2018 by the Economic Policy Institute
By Heidi Shierholz, David Cooper, Julia Wolfe, and Ben Zipperer
The Department of Labor (DOL) has proposed a rule that would make it legal for employers to pocket their workers’ tips, as long as they pay those workers at least the minimum wage. The proposed rule rescinds portions of longstanding DOL regulations that prohibit employers from taking tips. We estimate that if the rule is finalized, every year workers will lose $5.8 billion in tips, as tips are shifted from workers to employers. Of the $5.8 billion, nearly 80 percent—$4.6 billion—would be taken from women who are working in tipped jobs.
DOL has masked the fact that this rule would be a windfall to restaurant owners and other employers—out of the pockets of tipped workers—by making it sound as if this rule is about tip pooling. Of course, once employers have full control of tips, one of the things they could do with those tips is distribute them to “back of the house” workers like dishwashers and cooks. But the proposed rule does not require employers to distribute the tips, so employers would be no more likely to share tips with back-of-the-house workers than they would be to make any other choice about what to do with a business windfall, including using the money to make capital improvements to their establishments, to increase executive pay, or to line their own pockets.
Many employers pocket tips even now, when it is illegal for them to do so (for example, research on workers in Chicago, Los Angeles, and New York found that 12 percent of tipped workers had tips stolen from them by their employer or supervisor). The fact that illegal tip theft is so prevalent underscores that when employers can legally pocket tips, many will. And basic economic logic dictates that it is highly unlikely that back-of-the-house workers will get more pay. There is currently no limit to what these workers can be paid, so employers are already paying their back-of-the-house workers what they need to pay to attract workers willing to work in those jobs. If employers do share some tips with them, it will likely be offset by a reduction in their base pay, leaving their take-home pay largely unaffected.
The economic effects of this rule are as follows: (1) tipped workers will lose $5.8 billion a year in tips, (2) the take-home pay of back-of-the-house workers will remain largely unchanged, and (3) employers will get a $5.8 billion a year windfall. The $5.8 billion is 16.1 percent of the estimated $36.4 billion in tips earned by tipped workers annually and amounts to more than $1,000 per year on average across all tipped workers.
Women working in tipped jobs would lose $4.6 billion annually as a result of the rule, while men working in tipped jobs would lose $1.2 billion. In other words, nearly 80 percent of the tips that would be taken by employers as a result of this rule would come out of the pockets of women and their families. (The specific share, calculated from unrounded numbers, is 78.7 percent.) Because women are both more likely to be tipped workers and to earn lower wages, this rule would disproportionately harm them.
White non-Hispanic tipped workers would lose $3.5 billion, black non-Hispanic tipped workers would lose $480.2 million, Hispanic workers of any race would lose $1.4 billion, Asian workers would lose $382.5 million, and tipped workers who are of another race would lose $102.4 million. The differences among these groups can be attributed to several broad factors, including differences among the groups in number of tipped workers, amount of tips earned, and share of tips earned at or above the minimum wage (the last factor matters since, under the proposed rule, employers must pay workers the full minimum wage before they can legally take tips).7 There are likely many root sources of these underlying differences, including differences in job opportunities and pay, discrimination in tipping, and different concentrations of groups in states that allow employers to take large tip credits.
Tellingly, DOL did not provide an estimate of the amount of tips that will be shifted from workers to employers—even though it was legally required, as a part of the rulemaking process, to assess all quantifiable costs and benefits “to the fullest extent that these can be usefully estimated.”8 EPI easily produced an estimate using a methodology that is very much in the spirit of estimates the Department of Labor regularly produces; DOL obviously could have produced an estimate. But they couldn’t both produce a good faith estimate (which would necessarily have shown a substantial shift of tips from workers to employers) and maintain the fiction that this rule is primarily about tip pooling, so they opted to ignore legally required steps in the rulemaking process.
This is a proposed rule and, as of the writing of this paper, is open for public comment. Until the comment period closes on February 5, anyone can submit a comment, and the Department of Labor is required to read all public comments before deciding what the final rule will look like.