Public Comments | Wages, Incomes, and Wealth

EPI comment regarding DOL’s proposed “tip stealing” rule

Press release

February 5, 2018

Submitted via www.regulations.gov

Melissa Smith
Director, Division of Regulations, Legislation, and Interpretation
Wage and Hour Division
U.S. Department of Labor
200 Constitution Ave. NW, Room S-3502
Washington, DC 20210

Re: Notice of Proposed Rulemaking (NPRM), Tip Regulations Under the Fair Labor Standards Act (FLSA), 82 Fed. Reg. 57,395 (Dec. 5, 2017), RIN 1235-AA21

Dear Director Smith:

The Economic Policy Institute (EPI) submits these comments in response to the Department of Labor’s proposal to partially rescind its existing tip regulations under the Fair Labor Standards Act (FLSA).1 The Economic Policy Institute (EPI) is a nonprofit, nonpartisan think tank created in 1986 to include the needs of low- and middle-income workers in economic policy discussions. EPI conducts research and analysis on the economic status of working America, proposes public policies that protect and improve the economic conditions of low- and middle-income workers, and assesses policies with respect to how well they further those goals.

The Department of Labor’s 2011 Final Rule updating the tip credit regulations was a long-overdue change that harmonized those regulations with intervening statutory changes and legislative history; clarified that tips are the property of the employee and may not be confiscated by employers; and strengthened critical wage protections for working people.2 The Department’s proposal to rescind portions of the 2011 Final Rule—in particular abolishing the regulation that prohibits employers from taking workers’ tips—would weaken important wage protections and we oppose this NPRM in the strongest possible terms. We urge the Department to withdraw it.

Given EPI’s focus on economic analysis, the following comments will be focused narrowly on the Department’s quantitative analysis in the NPRM of the impact of the proposed rule—or, in this case, the lack thereof.

In the NPRM, the Department failed to quantify the costs, benefits, and transfers of the rule (apart from a standard quantification of “regulatory familiarization costs,” which are the costs to businesses associated with reviewing the new regulation). The fact that DOL did not quantify the economic impact to the extent possible means that DOL did not provide the public with the information necessary to understand the impact of the rule during the comment period. This in turn means that DOL fell short of compliance with the Department’s obligations under the Administrative Procedure Act (APA).3

This failure alone would be sufficient to render the Department’s actions arbitrary and capricious, in light of its duties to both consider and publicize the likely effect of the proposed rule on working people.4 The recent revelation that the Department did in fact conduct the requisite analysis, but then excluded it from the public NPRM because it did not like the results, indicates an even more brazen dereliction of duty that can only be remedied by the immediate withdrawal of the proposed rule.5

In the NPRM, the Department claimed it could not do the required economic analysis because of uncertainty in how labor market forces will respond: “There are labor market forces that will affect employers’ decisions on tips that employees receive. For example, there are certain market factors that may cause employers not to change their practices with respect to tips, such as employee resistance and a decline in employee morale, as well as the costs of employee turnover. The Department is unable to quantify how customers will respond to proposed regulatory changes, which in turn would affect total tipped income and employer behavior.”6 This justification for omitting a quantitative analysis is flawed and, given the fact that the Department did indeed do an analysis, highly misleading. Obviously, the Department was fully capable of quantifying key economic impacts of the rule in the presence of the type of uncertainty described.

EPI also produced an estimate of the transfer from workers to employers using a methodology that is very much in the spirit of estimates the Department of Labor regularly produces. In particular, EPI used as our primary data source a Bureau of Labor Statistics dataset that the Department routinely uses for such analyses (the Current Population Survey), and arrived at our main estimate by applying standard economic theory. Further, mindful of uncertainty, we provided a range for our main estimate, which is a common DOL practice when quantifying economic impacts in the presence of uncertainty. A report with our estimate, including a detailed description of the methodology, is attached. Also attached is a follow-up piece that includes additional calculations stemming from the same methodology.

Our analysis finds that this rule would be a windfall to restaurant owner and other employers, out of the pockets of tipped workers. We estimate that if the rule is finalized, workers will lose $5.8 billion in tips annually as tips are shifted from workers to employers. Of the $5.8 billion, nearly 80 percent—$4.6 billion—would be taken from women who are working in tipped jobs. The disproportionate impact on women is due in large part to the fact that women are much more likely to be tipped workers.

Though the Department presents this rule to the public as if it is primarily about tip pooling,7 the rule does not require employers to distribute confiscated tips among workers. This means employers would be no more likely to share tips with back-of-the-house or other nontipped workers than they would be to make any other choice about what to do with a new revenue stream, including using the money to make capital improvements to their establishments, to increase executive pay, or to line their own pockets. In fact, basic economic logic dictates that it is highly unlikely that back-of-the-house or other nontipped workers would get more pay if the rule were finalized. There is currently no limit to what these workers can be paid, so employers are already paying their back-of-the-house or other nontipped workers what they need to pay to attract workers willing to work in those jobs. Thus, if employers do distribute some tips to them, it will likely be offset by a reduction in their base pay, leaving their take-home pay largely unaffected.

EPI finds that the economic effects of this proposal are as follows: (1) tipped workers will lose $5.8 billion a year in tips, (2) the take-home pay of back-of-the-house or other nontipped workers will remain largely unchanged, and (3) employers will get a $5.8 billion a year windfall. The $5.8 billion is 16.1 percent of the estimated $36.4 billion in total tips earned by tipped workers annually and amounts to more than $1,000 per year per tipped worker on average across all tipped workers. If customers tip less in response to the rule, that would mean that some of the $5.8 billion shifted away from workers as a result of the rule would be shifted to customers instead of to employers—but workers would still lose $5.8 billion.8

To be sure, any such exercise inherently reflects the decisions and assumptions of the entity conducting it. EPI’s analysis is transparent, reasonable, and justifiable, and unlike the Department, we have provided the public clear information on how we came to these conclusions – such that anyone who would like may review and engage. The Department must provide its own analysis so the public has the opportunity to assess the Department’s decisions and assumptions in quantifying the economic impacts of the rule. The Department is now stating that it will publish a quantitative analysis in the final rule.9 That is not enough, particularly given that the Department chose not to include in the NPRM as analysis that they possessed. The rulemaking process requires that stakeholders have the opportunity to review the Department’s economic analysis, including the decisions and assumptions underlying it, with adequate time to fully respond to such analysis. Including a quantitative analysis that helps the public understand the Department’s assessment of the impact of the rule only in the final rule—and not in an updated NPRM so that the public has a chance to comment—would fall short of compliance with the Department’s obligations under the APA. The Department must publish an updated NPRM so that the public has the opportunity both to comment on the methodology and to comment on the proposal with the Department’s quantitative analysis of its economic impacts in hand.

Thank you for the opportunity to submit comments on the NPRM. Please do not hesitate to contact me at (202) 533-2560 if you have questions about EPI’s estimates of the transfer of tips from workers to employers, or anything else in these comments.

Sincerely,

Heidi Shierholz
Senior Economist and Director of Policy

Attachments:

1.Employers would pocket $5.8 billion of workers’ tips under Trump administration’s proposed ‘tip stealing’ rule: http://www.epi.org/publication/employers-would-pocket-workers-tips-under-trump-administrations-proposed-tip-stealing-rule/

2.Women would lose $4.6 billion in earned tips if the administration’s ‘tip stealing’ rule is finalized: http://www.epi.org/publication/women-would-lose-4-6-billion-in-earned-tips-if-the-administrations-tip-stealing-rule-is-finalized-overall-tipped-workers-would-lose-5-8-billion/

Endnotes

1. U.S. Dep’t of Labor, Notice of Proposed Rulemaking, Tip Regulations Under the Fair Labor Standards Act (FLSA), 82 Fed. Reg. 57,395 (Dec. 5, 2017) (the “Tipped Workers NPRM”).

2. See generally 2011 Final Rule, 76 Fed. Reg. 18,832.

3. See Exec. Order 13,563, at § 1, Improving Regulation and Regulatory Review, 76 Fed. Reg. 3821 (Jan. 21, 2011) (“[E]ach agency is directed to use the best available techniques to quantify anticipated present and future benefits and costs as accurately as possible.”); see also Exec. Order 12,866, at §§ 1(a), 1(b)(6), 6(a)(3)(C), Regulatory Planning and Review, 58 Fed. Reg. 51,735 (Oct. 4, 1993); White House Office of Mgmt. and Budget, Circular A-4, at 18-27 (Sept. 17, 2003).

4. See Perez v. Mortgage Bankers Ass’n, 135 S. Ct. 1199, 1209 (2015) (explaining that “the APA requires an agency to provide more substantial justification when ‘its new policy rests upon factual findings that contradict those which underlay its prior policy’”) (quoting FCC v. Fox Television Stations, Inc., 566 U.S. 502, 515 (2009)); see also Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 57 (1983).

5. Ben Penn, Labor Department Ditches Data on Worker Tips Retained by Business, Bloomberg BNA, Feb. 1, 2018, https://bnanews.bna.com/daily-labor-report/labor-dept-ditches-data-on-worker-tips-retained-by-businesses.

6. Tipped Workers NPRM, 82 Fed. Reg. at 57,396.

7. https://www.dol.gov/newsroom/releases/whd/whd20171204

8. The finding that if customers reduce tips in response to this rule, workers would still lose $5.8 billion, is a natural outgrowth of the methodology used to estimate the $5.8 billion. The $5.8 billion is calculated based on the assumption that employers would only take the tips their tipped workers earn that are over and above the hourly wage those same workers could earn in a nontipped job (since if employers took more than that, those workers would quit and go to the higher-paying nontipped job). In other words, if this rule is finalized and employers gain control of tips, tipped workers would lose the money that they currently earn over and above what they could earn in a nontipped job. That is true regardless of whether customers reduce tips in response to this rule. If customers reduce tips, employers wouldn’t pay tipped workers more, so the $5.8 billion shifted from worker wouldn’t decline, but employers would also likely be unable to take more from tipped workers, so the $5.8 billion shifted from workers also likely wouldn’t increase. Thus if customers reduce tips as a result of the rule, that would mean that some of the $5.8 billion shifted away from workers as a result of the rule would be shifted to customers instead of to employers.

9. https://www.politicopro.com/employment-immigration/whiteboard/2018/02/dol-to-publish-tip-pool-analysis-after-comment-period-ends-527753


See related work on Wages, Incomes, and Wealth

See more work by Heidi Shierholz