Economy & Business

Deregulate Tipping

At Norm’s Diner in Los Angeles, Calif. (Patrick T. Fallon/Reuters)
Restaurants should not be legally barred from giving tip money to cooks and other back-end employees.

The Trump administration is trying to loosen regulations on tipping, allowing businesses to require “tip pools” in which non-tipped employees such as cooks get some of the money. The proposal is 100 percent correct as a matter of law, and it’s mostly correct as a matter of policy, too. However, Congress and state governments should clarify the conditions — if any — under which employers can outright keep the tips their employees earn.

Here’s how the issue came about. Federal law allows employers to pay tipped workers less than the minimum wage ($2.13 per hour instead of $7.25), but it explicitly says that when employers take advantage of this, they have to let employees keep their tips. Tipped employees can be required to share a tip pool among themselves, but the pool can’t include non-tipped employees or fund other expenses.

There is no such restriction, however, regarding businesses that pay all their employees the full minimum wage or higher. Their tipping systems are supposed to be regulated by the states, if at all. The Obama administration didn’t like this policy, so as was its wont, it made up a new one and declared it the law. According to a 2011 Labor Department regulation, all tips are the property of tipped employees — and no employer can set up a pool that includes non-tipped employees or funds other expenses.

The first big issue, and the easiest, is the statute. It simply does not allow the Department of Labor to do what it tried to do — something many (though not all) of the courts to consider the question have confirmed — so the Trump administration is right to back off, regardless of whether the 2011 regulation was good policy. Congress makes laws; the executive branch is supposed to shut up and enforce them. And the law regulating tip pools applies only to employers who take advantage of the lower minimum wage for tipped employees.

The policy question is slightly harder. One thing that’s obvious is that employers should not be allowed to keep tips that customers gave thinking they were helping employees. The announcement in the Federal Register contains a lot of verbiage about legalizing tip-pooling in particular, but the actual changes to the text of the regulation simply remove the previous limits on how employers treat tips (so long as they pay the full minimum wage).

Before 2011, according to the law firm Seyfarth Shaw, courts held that the law at issue “does not require employers to return tip money to employees if the employer [pays the full minimum wage].” In a similar post, Brad Cave of Holland & Hart summarized a court ruling striking down Obama’s regulation as meaning that “Employer May Keep Tips As Long As Employees Are Paid Minimum Wage.”

When I asked the Labor Department to clarify whether the change would let employers keep tips, a spokesperson provided this delightfully unhelpful statement:

This proposal is about allowing employers and employees to create frameworks that work for them. Both front-of-house and back-of-house employees contribute to the overall customer experience — yet the current rule bars sharing any tips with back-of-house employees. That contributes to wage disparities among employees. This proposal would give workplaces the freedom to share tips among more employees.

A follow-up question produced only “This proposal would give workplaces the freedom to share tips among more employees.”

In the department’s defense, the statute doesn’t appear to authorize restrictions on employers’ keeping tips, either. Thus this is an issue for Congress and the states, which have the power to change the law.

Giving employers the option of tip pools that include cooks and other non-tipped employees, however, is a great idea. Not only does it give the free market more room in which to work out the best arrangement, but it has clear benefits in terms of both fairness and economics.

I’ve never worked as a waiter, and I don’t envy those whose jobs force them to interact with other human beings constantly. But I have worked over the fryers and broiler at a Burger King, and I can assure you that the folks toiling in the back of a restaurant don’t have it any easier. (One benefit of getting a new job at Kmart was that I no longer smelled like a french fry when I came home.) There’s no reason they should be left out of tips under penalty of law, so long as waiters at the restaurant aren’t being paid below minimum wage on the rationale that those very tips will make up for it.

Tip pooling can straighten out some of the warped economics that this bizarre custom creates.

Tip pooling can also straighten out some of the warped economics that this bizarre custom creates, which might be one reason tip-pooling exists in the first place. The normal tip is around 18 percent these days, meaning that of every $1.18 spent at restaurants, something like 18 cents, or 15 percent, comes in the form of tips. There is a correlation between service quality and tipping, but it’s very weak; by and large, tipping is just part of the cost of eating out, expected even if the service was borderline. About half of all customers tip in the narrow range of 16 to 20 percent.

When the law dictates that this money go to a specific group of employees, it essentially creates a price floor: It’s impossible for a restaurant to pay its wait staff less than 15 percent of the revenue that comes in, plus the tipped minimum wage on top of that, no matter how much money that is. If this price floor is above what waiters would earn otherwise, it constitutes an economic “rent.” (See the discussion in this paper.) This isn’t to say that waiters lead lavish lives, but it does mean some might be overpaid in an economic sense — and subjectively, it’s hard to see why waiters should be guaranteed this money, above and beyond the legal minimum wage, while cooks and the like are actively barred from getting any of it.

Some restaurants might, of course, reduce wages for other employees to reflect the fact that they’re getting a share of tips. But this is not a problem. The fact that we have a lower minimum wage for tipped employees suggests we’re okay with employers’ paying less when employees receive tips instead, and any employer who pays his workers less than their market value will lose people to the competition.

More fundamentally, if we think low-wage workers’ market value is too low, the correct solution is to subsidize their wages. It’s not to channel rents to one group of low-wage workers, but not the others, at the expense of the customers and employers who created their jobs to begin with.

The Department of Labor’s proposed regulation is correct as a matter of law, and it’s good policy to let restaurants sort out for themselves how to distribute tips to their employees. Congress and the states should patch up any loophole that allows employers to take their employees’ tips, especially without informing customers of the practice — but that is indeed a job for Congress and the states, not the executive branch.


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