A tempest over tipping, as Labor Department weighs rule change

Should restaurant owners and other bosses be allowed to pool worker tips? Some say it'll help spread gratuities to the back of the kitchen, others that it's a license for employers to raid the tip jar.

On a good night, Melissa Aucoin clears $150 in tips from the tables she waits on at a suburban Italian restaurant, where entrees start at $16.

Her hourly salary is only $3.75, so like many tipped hospitality workers she relies on gratuities to pay the rent.

“Whatever tips you get from those tables are yours,” she says.

Back in the kitchen, cooks and dishwashers make more per hour, but don’t see any of the tips from customers, creating a widening disparity in earnings that has vexed some restaurant owners and raised public discussion about where tips go and who should benefit. 

Ms. Aucoin, who has worked as a waitress for more than two decades, among other jobs, says that it’s only fair that she keeps the tips since she’s hustling to satisfy her customers, though she understands the frustrations of cooks who also work hard. Still, she adds, “It’s up to the restaurant to pay the kitchen staff and ‘back-of-the-house’ fairly.”

Fairness is one thing. Federal law is another. Since 2011, employers have been barred from pooling tips, except among staff like Aucoin who work in tipped positions like waiter or bartender or busboy. That Obama-era ruling infuriated restaurant-industry groups who, along with individual restaurant owners, have sued in federal court to overturn it.

Now the litigants seem likely to get their way under a controversial new proposal from the Department of Labor that would give a free hand to employers to run tip pools. The proposal issued last month is subject to public comment through Feb. 5, after which a final decision is expected.

How the debate plays out could put a stamp on issues of fairness that affect millions of workers in hospitality industries who don't always fit neatly into minimum-wage policies. Should tips go to line cooks and dishwashers, or should they simply earn more? And will some employers unfairly raid the tip jar?

While it won't settle those questions, the Labor Department's pending action is stirring public discussion, from worker outcries to pundits questioning whether America's culture of tipping – bigger than in many nations – makes sense.

The new regulation’s biggest effect would likely be in California and six other Western states that don’t allow tips to count toward servers’ incomes. In other states, employers pay as little as $2.13 an hour to tipped workers and claim a “tip credit,” under a requirement to ensure that employees are paid at least the equivalent of the minimum wage.

Not all employers are likely to adopt tip pools, say employment-law experts, as they can be tricky to manage and only apply to tipped staff making minimum wage or above. But the proposal has sparked outrage from pro-labor groups who say the Trump administration is opening the door to wage theft by allowing employers to decide how to pony up gratuities.

The risk of cheating

The amount of earnings at stake isn’t trivial. The Economic Policy Institute, a left-leaning think tank, estimates that tipped workers earn $36.4 billion a year in tips, based on tax returns that underestimate actual earnings. Surveys of tipped workers and prosecutions of abusive employers show that wage theft is already a persistent problem.

Critics point out that the Department of Labor’s proposal doesn’t require managers to share tip pools with employees; gratuities can be diverted to cover other business costs or can simply be pocketed by unscrupulous managers.

“There’s a lot of different ways you can cheat workers out of their pay, and when you add tips into the mix it adds a whole 'nother way to do it,” says Patricia Smith, the former solicitor of the Department of Labor under Obama.

She says the existing rule is designed to ensure that customers know that their tips are going to the employees that they see serving them and not being withheld, particularly when most bills are settled by card, not cash, so there’s no tip jar to monitor. Take away that certainty, and tippers might reconsider their generosity.

But this setup doesn’t benefit workers in the kitchen, argues Angelo Amador, who runs the legal arm of the National Restaurant Association, which has sued the Department of Labor. “We think that if you pay your employees above the minimum wage in cash, you should be able to share tips with the back of the house, which are also helping with customers’ experiences,” he says.

This is also about fairness, he adds, pointing to those who are grilling steaks and washing pots. “If you look at the back of the house, it’s mostly minorities.”

Still, there’s no guarantee that tip pools will benefit those workers – or those at the car wash or nail salons where there is no back of the house, says Ms. Smith, who is the legal counsel at the National Employment Law Project. “If the employer starts paying them $7.25 an hour, there’s nothing to stop them pocketing the rest.”

Some employers don’t need encouragement. In 2014, a Philadelphia sports bar and restaurant chain, Chickie’s & Pete’s, was forced to pay $6.8 million to more than 1,000 current and former employees after the Department of Labor found that it was illegally stealing tips, among other abuses. Managers forced servers to pay cash into a tip pool at the end of their shift and would pocket more than half of the money.

State laws will matter

Such practices could still be illegal under state law: Many states explicitly prohibit management sharing in tip pools. And any employer who seeks to exploit the proposed federal rules could face expensive litigation, says Francis Bingham, an employment attorney in Boston who has represented large restaurant companies.

He’s skeptical that many restaurants will embrace tip pools and says those that do would need to be upfront with servers about where the money goes, given the potential for mistrust.

“You’re probably not going to see see a tidal wave, but a trickle of employers doing this model,” he says. “Dealing with tips is a headache for restaurant owners. It engenders mistrust.”

Joshua Chaisson, a restaurant server in Portland, Maine, argues that concerns over wage theft by employers running tip pools are overblown. “No tipped employee in his or her right mind would sign up to work in a restaurant where the agreement between staff and management says that all tips are kept by the owner,” he wrote in the conservative Washington Examiner, which titled his opinion piece, “The progressive case for Trump’s tip-pooling rule.”

Last year Mr. Chaisson and other servers successfully lobbied lawmakers in Maine to retain the tip credit under the state’s new minimum-wage law, arguing that forcing owners to pay them a higher wage could, paradoxically, lower their income if customers then tipped less. He’s suspicious of labor-funded groups that push for minimum wages in lieu of tipped positions.

But Chiasson, who says he’s “a staunch Democrat,” is fine with restaurants having the flexibility to share tips with kitchen staff under the proposed rules if it closes the pay gap.  

Some restaurants have tried to tackle pay imbalances by changing their pricing structure.

In 2015, Danny Meyer, a prominent chef and owner in New York, made waves when he ended tipping at his restaurants, raised menu prices, and added a service charge to be shared among workers, echoing a common practice in Europe. Other upscale restaurants in New York and other cities have followed suit, despite complaints from some waitstaff of lower incomes under the no-tipping model.

One owner's new approach

“We’re trying to address a long-standing disparity in wages between the front and back of house,” says David Doyle, a restaurant owner in Boston who praises Mr. Meyer’s approach.

His solution is not to end tipping at Tres Gatos, his restaurant-cum-book-and-record store, but to add a 3.75 percent administrative fee to the bill and share the proceeds with back-of-the-house employees. On average, he says, this means an extra $2 or $3 an hour, which is a nice bump for junior cooks making $12 or $13 an hour.

Mr. Doyle sees this as a better alternative than tip pools that may stir resentment among tipped employees. Before the new charge was introduced in late 2015, he held “intense meetings” with staff who were concerned that they could lose out on tips. That hasn’t happened, he says, as customers continue to tip – and to expect good service.

“Servers and bartenders work really hard for their tips. It’s a reflection of the services that they give to their guests,” he says. “Tipping is an entrenched part of our culture.”