Tipped Workers Could Lose $5.8 Billion Under Proposed Change — UPDATE

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UPDATE: On December 14, the Economics Policy Institute issued a correction to its calculation “due to a revised analysis of state laws prohibiting employers from pocketing workers’ tips. The initial analysis had not included Washington and Montana as states with more protective state laws. More protective laws would not be preempted by the proposed rule, thus reducing the rules impact in such states. The addition of Washington and Montana as more protective for workers reduces the total amount of tips transferred from workers to employers from the original estimate of $6.1 billion to $5.8 billion.”

Earlier this month the U.S. Department of Labor issued a proposed rule change to the Fair Labor Standards Act that would rollback an Obama administration change made in 2011 that allowed tipped workers to keep their tips rather than forcing them to share them with non-tipped workers. The change, if approved, could result in the loss of $5.8 billion in income to tipped workers.

Employers who pay the tipped minimum wage have long been allowed to credit up to $5.12 per hour of a tipped employee’s wage to meet the federal minimum hourly wage requirement of $7.25. Since 1974, this so-called tip credit has not been applied to tipped employees who retain all their tips. While not prohibiting pooling of tips, employers can lose the tip-credit if they keep any part of the tip pool and share it with non-tipped workers. If that happens, the employer must pay the full federal minimum wage.

The Obama administration change banned tip-pooling even for businesses that pay the federal minimum wage, and the Trump administrations now wants to eliminate the Obama administration rule and allow employers once again to pool tips only for workers who are paid the tipped minimum wage. According to the Economic Policy Institute (EPI), employers could keep between $563 million and $14.2 billion in tips annually. The EPI’s best estimate is a loss to tipped workers of $5.8 billion.

While that may sound like a reasonably fair thing to do for employees like restaurant dishwashers and cooks who typically are not tipped, EPI is not convinced:

[C]rucially, the rule doesn’t actually require that employers distribute “pooled” tips to workers. Under the administration’s proposed rule, as long as tipped workers earn minimum wage, employers could legally pocket those tips.

The EPI points to research showing that 12% of tipped workers in Chicago, Los Angeles and New York had their tips stolen by their employer or supervisor. Other research indicates that workers in restaurants and bars are much more likely to be paid less than the federal minimum wage. The EPI concludes:

With that much illegal tip theft currently taking place, it’s clear that when employers can legally pocket the tips earned by their employees, many will. And although the bulk of tipped workers are in restaurants, tipped workers outside the restaurant industry—such as nail salon workers, casino dealers, barbers, and hairstylists—could also see their bosses start taking a cut from their tips.

The EPI report includes a full methodology on how it arrived at its dollar loss amount.