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Trump's aim to allow tip pooling could cost workers $6 billion

MarketWatch logo MarketWatch 12/13/2017 Kari Paul
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Waiters and waitresses could take home significantly less money if a new rule proposed by the Trump administration this month is passed, critics say.

Changes proposed by the Department of Labor on Dec. 5 would allow employers to legally pocket tips that servers earn at restaurants. The change, which would repeal part of a 2011 ruling that said employers could not pocket their workers’ tips, is meant to level a growing disparity between what tipped employees like servers make compared with back-of-house employees like cooks. After the changes, employees could take all tips earned by servers and redistribute them to employees that are not tipped.

That sounds like a fair plan, in theory.

However, there is no guarantee employers would redistribute pooled tips and critics say economic models show they will likely pocket them instead. “We estimate that under this rule, employers would pocket $6.1 billion in tips earned by tipped workers each year,” according to a new analysis from nonpartisan think tank the Economic Policy Institute. This equates to 17% of the estimated $36.4 billion in tips earned by tipped workers annually.

“The big lie is that it will lead to restaurants sharing these tips with back of house,” Heidi Shierholz, senior economist and director policy at the Economic Policy Institute said. “The biggest effect of it will be employers being able to control tips and take a big chunk of them as long as they pay the minimum wage.” (The proposal would require staff to make minimum wage but allow tips to be pooled beyond that)

person preparing food in a restaurant: Waitresses could see less profit under new rule.© Provided by Dow Jones & Company, Inc. Waitresses could see less profit under new rule.

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The Economic Policy Institute said the Department of Labor did not provide estimates of the number of tips that would be shifted from employers to employees under the new ruling, and the Department of Labor did not immediately respond to request for comment. However, 12% of tipped workers had tips stolen by their employer or supervisor, according to a 2009 study from Center for Urban Economic Development, often leading to minimum wage violations.

Some industry workers say the Department of Labor changes are sorely needed as restaurants struggle to pay back-of-house workers like kitchen porters fairly in an industry with notoriously tight profit margins. “In order for back-of-house workers to receive annual increases, tip credit needs to remain in place,” said Joshua Chaisson, a server in Portland, Maine who has been involved in a grassroots campaign to undo similar legislation. Restaurants can then focus on increasing hourly wages, he said.

By his group’s estimations, removing the tip credit would require restaurants to increase hourly wages of servers by 220%as long as they still received the standard tip rate of 20% from most customers — an unsustainable amount of pay for restaurants. This rise in wages for servers has led to more restaurants closing and fewer jobs for people in the service industry, Chaisson argues.

But the EPI’s analysis suggested bigger profits would likely not be redistributed among workers, but rather go into the pockets of owners. To truly help back-of-house, low-income workers, wages need to be increased and employers should not be allowed to take tips, she added. “There is far more incentive for them to pocket that money than to give it to employees,” she said.

The proposed rule is up for public comment until Feb. 3, after which it will be voted on by the Department of Labor.

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