Tip Pool Rule Heads to White House as Regulatory Probe Looms

The Labor Department is moving ahead with a new rule on tip sharing arrangements as an internal watchdog reviews a previous attempt at the rule that ended in controversy last year.

The Labor Department July 26 sent a proposed tip pooling rule to the White House Office of Management and Budget. The regulation would make it easier for restaurants, bars, and other businesses to force tipped employees who make the full minimum wage to share gratuities with back-of-the-house and other workers who aren’t commonly tipped.

A similar proposal hit the skids last year after Bloomberg Law reported it was scrubbed of data showing the rule could allow managers to pocket hundreds of millions of dollars in workers’ gratuities by participating in tip pools. Congress later updated federal law to ban managers from participating in the sharing arrangements.

Former Labor Secretary Alexander Acosta had put the new rule on hold pending the outcome of an inspector general probe, according to sources familiar with the situation. The move to advance the rule came at the end of Acting Labor Secretary Patrick Pizzella’s first week on the job, after Acosta resigned in the face of criticism over his role as prosecutor in the Jeffrey Epstein teen sex trafficking case.

The new rule also would walk back an Obama-era “80/20" policy that forced businesses to pay the full minimum wage to tipped workers for time spent on tasks that don’t generate tips, like prep work. The DOL previously had said workers should get the higher minimum wage for those tasks, as long as they account for at least 20% of weekly hours.

Federal law allows tipped workers to be paid $2.13 per hour, rather than the $7.25 minimum rate for other workers.

“The Department is proposing to revise the existing ‘dual jobs’ regulation to provide greater clarity, consistent with current guidance, regarding an employer’s ability to take a tip credit to satisfy minimum wage obligations for time spent by a tipped employee performing duties that are related to the employee’s tipped occupation,” the department said in its spring regulatory agenda.

Although the regulation initially was posted on the OMB website as a final rule, it was later updated to indicate that the department will first roll out a proposed version of the regulation. That means the public will have an opportunity to weigh in on the proposal in the formal notice and comment period.

Data Scrub Spurs Probe

DOL Inspector General Scott Dahl announced last year that his office was looking into the rulemaking process for the abandoned tip pool rule.

The Labor Department came under fire in February 2018 when Bloomberg Law reported that the DOL proposed a new tip pool regulation without telling the public about an internal analysis showing the rule could allow companies to skim more than $600 million in gratuities from their workers each year.

Acosta convinced OMB Director Mick Mulvaney to overrule complaints from then-White House regulatory chief Neomi Rao that the data should be included in the public-facing proposal. DOL officials argued that the department couldn’t come up with a reliable estimate of the amount of money that might be transferred from tipped workers to managers as a result of expanding the pools.

Acosta, who was grilled about the scrapped analysis during a House hearing, told lawmakers that the department didn’t have the authority to ban managers from participating in tip pools. Congress later used a spending bill to amend federal wage and hour law to close a loophole allowing managers and supervisors to participate in tip sharing arrangements. The DOL said it would reconsider a new regulation.

The update in the spending measure was the result of bipartisan work in both chambers of Congress, National Employment Law Project lobbyist Judy Conti told Bloomberg Law. “The two parties should be able to get together and compromise and that’s what happened,” Conti said.

NELP “enthusiastically supports” the expansion of tip pools for workers already making the full minimum wage, Conti said. But the organization and other worker advocates are concerned about what appears to be the department’s decision to back away from the 80/20 rule, following recent guidance on the question. They fear that will allow businesses to force workers to spend significant amounts of time on non-tipped work while still getting the lower, tipped minimum wage.

“It really is a recipe for disaster,” Conti said. “It will let employers run wild with it if they are not specifically circumscribed in how much work that doesn’t generate tips they can assign.”