Is Trump Really Trying to Steal Employees' Tips?

The latest hysterical overreaction to a regulatory rollback


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Just about every regulatory rollback is greeted by handwringing and hysteria these days. So we shouldn't be surprised by the reaction to the Department of Labor's announcement that it plans to partially repeal an Obama-era rule prohibiting restaurants, bars, and other hospitality businesses from tip pooling—the practice where management collects the tips and then distributes a fixed percentage to cooks, busboys, and other "back-of-the-house" staff.

"Trump Wants You to Tip Restaurant Owners, Not Servers," declares Newsweek. "Proposed rule would protect employers who steal workers' hard-earned tips," says the Employment Policy Institute (EPI), a left-tilting think tank.

By legalizing tip pooling, these groups say, employers will be allowed to vacuum up the tips intended for their employees, something the EPI estimates will cost workers $6.1 billion a year in tips.

All of that sounds pretty bad. It's also not true. To understand why, you have to start with the basics.

Under the current Obama-era rule, employers are prevented from pooling tips among employees not in the "chain of service," meaning employees who don't interact directly with the customer. That includes cooks and busboys, but also managers, supervisors, and owners.

Before this rule was issued by the Department of Labor in 2011, restaurants in 43 states were prohibited from tip pooling. Some restaurant operators had been using "tip credits", or crediting tips their servers earned toward their requirement to pay the minimum wage. Since the 1970s, federal law has prohibited tip credit businesses from tip pooling.

In those states, the imposition of the 2011 rule had no effect, and its repeal will have no effect, says Anthony Anton of the Washington Hospitality Association, a trade group for hotes and restaurants in Washington state. "In the vast majority of states this is a non-issue," he said. Employers claiming a portion of an employee's tips "won't be legal there, whatever the rule."

This is missing from EPI's analysis, which gets its $6.1 billion estimate assuming all tips paid above a state's minimum wage could potentially be taken by employers, regardless of whether a business is currently using a tip credit model or not. These businesses used a tip credit model before Obama's 2011 rule and they'll probably continue to do so after it's gone.

The repeal will mean something in seven western states where tip credits are forbidden, and businesses were previously able to engage in tip pooling.

The repeal of the 2011 rule would allow these businesses to begin tip pooling again but, crucially, most of these tips will be off-limits to employers. That is because of state-level rules that forbid managerial staff, and owners from receiving any tips.

Washington state law forbids this. California's does as well. That leaves five states that could potentially see employers sharing in a cut of tips, something many will be reticent to do out of a desire to reward teamwork or to avoid worker dissatisfaction.

That's a far cry from the Newsweek piece claiming this rule change will "ripple across the economy, hurting families and local businesses and placing new demands on social service programs."

The rule change will, instead, allow restaurants, whose employees might already be sharing their tips with the back of the house informally, "to have a consistent manner in how it deals with" tip pooling, Anton says.

As with most deregulatory actions, Trump's proposal to allow for greater tip pooling is a minor change to a short-lived rule that has since been blown for out of proportion by activists and the press.

Servers and restaurant customers alike should not buy the hype.