Do Tips Belong to the Employees Who Receive Them?

Charles Cottle —


It appears, thanks to a Trump administration initiative, that the lives of many tipped employees in restaurants may soon get much worse. On December 5, 2017 the U.S. Department of Labor filed a request to rescind several regulations imposed on employers by the Fair Labor Standards Act (FLSA). Under an executive order issued during the Obama administration, businesses with tipped employees (restaurants, hair salons, parking garages, and so forth) are prohibited from tip pooling, a practice advocated by the National Restaurant Association that allows restaurant owners to share the tips of tipped employees with non-tipped employees. In restaurants, for example, non-tipped employees are those who work in the kitchen or those who receive guests at the front door but who do not wait on customers.

The regulations under the FLSA currently read:

Tips are the property of the employee. The employer is prohibited from using an employee’s tips for any reason other than as a credit against its minimum wage obligation to the employee (“tip credit”) or in furtherance of a valid tip pool. Only tips actually received by the employee may be counted in determining whether the employee is a tipped employee and in applying the tip credit. (Fact Sheet #15: Tipped Employees Under the Fairs Labor Standards Act [FLSA])

Note: It should be pointed out that the regulation quoted above is presumably out of date due to recent events. But as of this date the language on the Department of Labor website has not changed. Please keep reading for the explanation below.

Many states have a lower minimum wage for tipped employees than for non-tipped employees. The employer “tip credit” is the difference between the state minimum wage for tipped employees and the federal, and sometimes state, minimum wage. Under federal law, every employee must make at least the federal minimum wage, currently $7.25 an hour.

Also, in the regulation above note that a “valid tip pool” can exist only for employees who “customarily and regularly” receive tips. Thus, dishwashers, cooks, janitors, and so forth are excluded from a valid tip pool.

The National Restaurant Association argues against these FLSA regulations claiming that it is only fair that those who work in the kitchen receive wages on par with waiters and waitresses who often, through receipt of tips, make much more than cooks and dishwashers. Importantly, the Trump administration proposal does not state that confiscated tips must be pooled among all the workers. Owners might also simply pocket the money.

Critics of the proposal point out that (1) the vast majority of tipped employees do not work in high-end restaurants where meals are expensive and tips are generous. While tipped employees in those establishments might make six figure wages, most tipped waiters and waitresses work at the Applebees, the IHOP’s, the Perkins, and the Waffle Houses of the nation. In those and other national chain restaurants employees have a difficult time making ends meet. It is claimed that to lose wages due to tip pooling would likely be financially devastating. And (2), tips are given by patrons to employees in exchange for good service. Thus, tips are earned directly by the tipped employee and not by the non-tipped employee. As such, tips rightly belong to the tipped employee.

February 5, 2018 was the closing date for public comment on the proposed regulations. As might be expected, there was enormous opposition to the administration’s proposal. And at this point, a compromise has been reached. As reported in the New York Times, Senator Patty Murray of Washington and Labor Secretary R. Alexander Acosta reached a compromise agreement that was inserted into the budget bill just passed. Under the agreement, only restaurants that pay the standard minimum wage, not the lower minimum wage that exists for tipped personnel in many jurisdictions, would be allowed to pool tips. The agreement further stipulates that under no circumstances will owners be allowed to receive any of the tip redistribution. What this means is that restaurants in states with a two tiered system of minimum wages will most likely avoid tip pooling as they would have to raise everyone’s wage to the standard minimum wage. Consequently, the math of tip pooling would most likely not favor the restaurant’s bottom line. However, in those states where restaurants already pay the standard minimum wage, tip pooling will be allowed.

What will be the effect of the compromise agreement? At this time it is difficult to say.  The laws regarding the minimum wage for tipped employees vary widely across the United States. Seventeen states, Puerto Rico, and the Virgin Islands have no minimum wage laws. Thus, they go by the federal regulations. Under current federal law, the minimum wage for tipped employees is $2.13 per hour. Owners are expected, as discussed above, to make up any difference if necessary between that wage and $7.25 per hour, the minimum wage for non-tipped employees. It seems likely that most tipped employees in these states will not see a change in the wages they now earn.

California, Oregon, Washington, Nevada, Montana, and Minnesota, however, all have minimum wages equal or greater than the federal minimum wage, and they do not make a distinction between tipped employees and non-tipped employees. In those states, wait staff in restaurants receive the state minimum wage plus their tips. (For more information on minimum wages for tipped employee see the map at the U.S. Department of Labor website.) In these states it seems likely that many restaurants will opt for tip pooling as they already meet the basic requirement of paying the standard minimum wage. The motivation for tip pooling, however, may be weakened insofar as restaurant owners are prohibited from confiscating any of the tips for themselves. Only time will tell if back house employees are disgruntled enough to force restaurant owners toward sharing the tips of other with them.

Clearly, the loss of tips would create serious financial problems for the vast majority of tipped employees. At least 70% of tipped employees are women, many of whom are single mothers struggling to make ends meet. In many restaurants working conditions are burdensome. They often involve split shifts, no overtime, and no employee benefits; that is, there is no medical insurance, no pension plan, nor paid holidays. And to make these jobs worse, sexual harassment can be ongoing and frequent when compared to other work environments. For female employees who are dependent on the largesse of the paying public for tips, there is little recourse to challenge sexual harassment from customers, and in many cases, from employers. In a recent New York Times exposé waitresses from different areas of the United States report on this onerous aspect of being a waitress.

Another wrinkle involving the controversy over tipping is that the issue is currently in the courts. There are at present two writs of certiorari before the Supreme Court to hear the dispute. The 9th Circuit Court of Appeals has ruled in favor of wait staff in a case involving tip pooling (“Recent Developments Regarding Tip Pooling”) The 10th Circuit, the 4th Circuit (“Fourth Circuit Says Tip Pooling Rules Only Apply if Employer Claims Tip Credit”), and the 11th Circuit, however, have ruled against wait staff in favor of owners who want to engage in tip pooling (Strong, 2018). This means that the Supreme Court, if it wishes, can resolve the dispute. In the absence of a Supreme Court decision, however, the recent compromise decision will be the law in force.

When discussing the issues related to tipping, there is a tendency to focus on the immediate situation of tipped employees. Should tip pooling be allowed? Should restaurants abolish tipping and simply charge an extra percentage for each order? Should the parallel track for tipped and non-tipped workers be abolished? These and other issues are frequently discussed in numerous articles. Yet, the place of tipping in the larger picture of labor-management relations is seldom discussed.

We should recognize that tipping is a pernicious institution that exploits the weakest members of the economy. Tipping is an increase in the cost of services rendered. For most of us that is an increase in the cost of food at restaurants. The tip is an increase in the real cost of the food consumed. Yet, it is not a cost borne by the business owner, but rather by the employee who serves the food. If restaurants were to charge the true cost of food, instead of placing part of the price on the back of employees, the prices would undoubtedly be higher than they are. Many argue that tipping should be abolished and wait staff paid a livable wage. Such an arrangement would make the wait staff less dependent on the customer base and would make the owner shoulder more of the true cost of the business. Owners, of course, often object arguing they could not compete in such an environment. Their argument, however, ignores the successful restaurant scenes in cities on the west coast of the United States in which there is no parallel minimum wage for tipped workers, and in which the state minimum wages are all above the federal minimum of $7.25 an hour.

Complicating the picture is the reality that many tipped workers, not only owners, object to the abolition of tipping because they do pretty well working in a tipping environment. These are usually wait staff and bartenders working in upscale restaurants and bars. For the vast majority of tipped employees, however, the institution of tipping makes employees dependent on the goodwill of customers, and subjects female (and some male) employees to frequent rudeness and sexual harassment. Moreover, restaurant chains routinely control the hours of employees so they cannot be classified as “full-time” and consequently, they do not qualify for pensions or health benefits. It is also true, according to the U.S. Department of Labor (Low Wage, High Violation Industries) that many restaurants violate the rules for the payment of wait staff in regards to their minimum wage obligations. That is, tipped employees often do not get the pay they have earned. In such cases, the onus is on the employee to file the claim, a task most employees are reluctant to do for obvious reasons.

Tipping is an exploitative practice, but it is unlikely that it will go away soon. As paying customers for services from tipped workers, we should protest the adoption of tip pooling made possible by the recent compromise. Tip sharing is wage theft, and its adoption will drive increasing numbers of employees into poverty, thereby generating even greater national inequality in the distribution of income. As increasing numbers of people qualify for public assistance programs, the beneficiaries in this scenario will be the private and corporate owners of the restaurants and businesses who hire tipped employees. We, the paying public, will be forced to subsidize their businesses with our tax dollars whether we eat at their restaurants or not. This is a little recognized, but very real, form of corporate welfare. Both the paying public and the workers will be cheated.

 

Sources:

Crotty, Jonathan M. and Michel Vanesse. “Fourth Circuit Says Tip Pooling Rules Only Apply if Employer Claims Tip Credit.” Parker Poe News and Events (August 24, 2015). http://www.parkerpoe.com/newsevents/2015/08/fourth-circuit-says-tip-pooling-rules-only-apply

Einhort, Catrin and Rachel Adams. “The Tipping Equation.” The New York Times (March 12, 2018).

Galarza, Daniela. “Restaurant Workers File More Sexual Harassment Claims than Employees of Any Other Industry.” Eater (December 7, 2017). https://www.eater.com/2017/12/7/16746064/sexual-harassment-restaurant-workers-data-servers-cooks-bartenders

National Law Review. “Recent Developments Regarding Tip Pooling” (March 14, 2018, originally published September 28, 2017). https://www.natlawreview.com/article/recent-developments-regarding-tip-pooling

Scheiber, Noam. “Trump Administration Retreats on Tip-Sharing Plan in Compromise.” The New York Times (March 23, 2018).

Strong, Andrea. “What’s Next for Restaurant Tip-Pooling Laws?” Eater (January 31, 2018). https://www.eater.com/2018/1/31/16955620/tip-pooling-laws-whats-next

Vo, Lam Thuy. “We Got Government Data On 20 Years of Wordplace Sexual Harassment Claims. These Charts Break It Down.” BuzzFeed News (December 5, 2017). https://www.buzzfeed.com/lamvo/eeoc-sexual-harassment-data?utm_term=.wtRMZyOm8e#.uuQ9W82X0Z

Wage and Hour Division, U.S. Department of Labor. “Fact Sheet #15: Tipped Employees Under the Fair Labor Standards Act (FLSA)” (December 2016). https://www.dol.gov/whd/regs/compliance/whdfs15.pdf

Wage and Hour Division, U.S. Department of Labor. “Low Wage, High Violation Industries” (2001-2017). https://www.dol.gov/whd/data/datatables.htm

Wage and Hour Division, U.S. Department of Labor. “Minimum Wages for Tipped Employees” (January 2018). https://www.dol.gov/whd/state/tipped.htm

 

About Charles Cottle (17 Articles)
I'm retired after teaching political theory and social science research methods for 35 years at the University of Wisconsin-Whitewater. I'm interested in lots of things - mainly social issues, photography, and politics.

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