Here’s a Tip — for the Owners

Terry H. Schwadron

Dec. 9, 2019

A Trump administration proposal that, in effect, takes tips from workers and gives them to employers, takes effect today.

To save your eyes, the Labor Department argues blandly in administrative language that these changes are simply to align policies with recent congressional legislation to protect employee tips and to allow back-of-restaurant employees to share in server tips. But the fine print tells a different story favoring owners.

The Economic Policy Institute estimates that it will cost workers more than $700 million a year as work is shifted from tipped workers to become non-tipped workers. The details basically incent employers to give normally tipped workers “non-tipped” food-service duties, a status that reduced tips to workers and, overall, costs employers less in reported expenses.

Employers are not allowed to pocket workers’ tips, which must remain with workers.

But employers can legally “capture” some of workers’ tips by paying tipped workers less in base wages. For example, the federal minimum wage is $7.25 an hour, but employers can pay tipped workers a “tipped minimum wage” of $2.13 an hour as long as employees’ base wage and the tips they receive over the course of a week are the equivalent of at least $7.25 per hour. All but seven states have a sub-minimum wage for tipped workers.

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According to EPI, in a system like this, the more non-tipped work that is done by tipped workers earning the sub-minimum wage, the more employers benefit.

EPI argues that employment in non-tipped food service occupations will decline by 5% and employment in tipped occupations will increase by 12%, resulting in 243,000 jobs shifting from being non-tipped to being tipped. Further, EPI argues that non-tipped jobs are more likely to be held by people of color.

Here’s how EPI explains it: Consider a restaurant with a tipped worker and a non-tipped work working 40 hours a week. The tipped worker is paid $2.50 an hour, but, say $10 an hour in tips on average, for a total of $12.50 an hour. The non-tipped worker is paid $7.50 an hour. Do the math, and the restaurant pays workers a total of $400 per week, and the workers take home a total of $800 with $400 of that coming from tips.

But if the restaurant makes both those workers tipped workers, with each doing half tipped work, the restaurant pays them both $2.50 an hour, and they will each get $5 an hour in tips on average since now they each spend half their time on non-tipped work while being paid $7.50 an hour. In this scenario, the restaurant pays out a total of $200 per week, and the workers take home a total of $600. The restaurant’s gain of $200 is the workers’ loss of $200, simply by having tipped workers spend time doing non-tipped work.

EPI says that to limit the amount of tips employers can capture in this way, the federal Department of Labor has always restricted the amount of time tipped workers can spend doing non-tipped work for sub-minimum wage. The department has capped non-tipped work at 20% of their time.

This 80/20 rule prevents employers from expecting servers to spend hours washing dishes at the end of the night, or prepping ingredients for hours before the restaurant opens. Occasionally, a server might play the role of the host, seating guests when a line has formed, or filling salt and pepper shakers when dining service has ended — but such activities cannot take up more than 20% of their time without employers paying them the full minimum wage, regardless of tips.

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But now the Labor Department has proposed killing the 80/20 rule. Workers would be left with a toothless protection in which employers would be allowed to take a tip credit “for any amount of time that an employee performs related, non-tipped duties contemporaneously with his or her tipped duties, or for a reasonable time immediately before or after performing the tipped duties.”
With no meaningful limit on the amount of time tipped workers may perform non-tipped work, employers could capture more of workers’ tips. It is not hard to imagine how employers of tipped workers might exploit this change in the regulation. Why would a restaurant continue using a cleaning service each night if it could simply require servers to spend an extra hour or two performing such work and only pay them the tipped minimum wage of $2.13 per hour? Or maybe require servers to do a few dishes to save the cost of that extra dishwasher?

The Labor Department acknowledges that workers will lose out under this change, stating that “tipped workers might lose tipped income by spending more of their time performing duties where they are not earning tips, while still receiving cash wages of less than minimum wage.”

When Trump administration officials, including the president himself, stand up and say they are out to protect workers, we ought to look a little closer.

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