Comments in Response to Proposed Rulemaking: Tip Regulations Under the Fair Labor Standards Act (FLSA)

Tuesday, January 30, 2018
Dear Ms. Melissa Smith:
 
The National Urban League writes in response to the Department of Labor’s (the Department) Notice of Proposed Rulemaking (NPRM), whereby the Department seeks to rescind portions of tip regulations it issued in 2011 (the 2011 Final Rule) pursuant to the Fair Labor Standards Act (FLSA).  We oppose this NPRM in the strongest possible terms and urge the Department to withdraw it.  
 
As an historic civil rights and urban advocacy organization, the National Urban League is dedicated to economic empowerment in historically underserved urban communities. We are committed to promoting fairness in the workplace and supporting the economic security of working families. One of our key Empowerment Goals for 2025 is that “Every American has access to jobs with a living wage and good benefits.”
 
By rescinding portions of the 2011 Final Rule that clarify employers’ obligations to their tipped employees under section 3(m) of the FLSA and, in particular, abolishing the regulation affirming that tips are the property of the employee who earned them, the Department departs from longstanding practice and precedent and threatens the economic security of millions of working people and their families. Tipped workers in the United States stand to lose an estimated $5.8 billion dollars in tips each year if the Department’s rule goes into effect—where women would bear the overwhelming share of this loss: $4.6 billion; Black non-Hispanic tipped workers would lose $480.2 million; Hispanic workers of any race would lose $1.4 billion; and white non-Hispanic tipped workers would lose $3.5 billion.  
 
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 to bolster their profits or subsidize their operating costs; and strengthened critical wage protections for working people.  While the Department cites legal challenges to the Department’s 2011 Final Rule as a primary rationale for its proposed reversal,  pending litigation challenging a rule is not a reasoned basis for reversing an agency’s prior considered position—especially where one of the two courts of appeals to consider direct challenges to the 2011 Final Rule has agreed with the Department’s prior view that the 2011 Final Rule is a valid exercise of agency discretion.  Nor does the Department’s argument that state minimum wage changes since 2011 have reduced the number of employers who may claim a tip credit under the FLSA provide a credible basis for revisiting the 2011 Final Rule;  relying on the enactment of stronger state-law protections to weaken federal standards is a perverse argument that would undermine the fundamental goals of the FLSA, the purpose of which “is to establish a national floor under which wage protections cannot drop.”  It would turn congressional intent on its head for the Department to lower federal standards under the FLSA in response to state-law developments that aim to provide greater protections for working people.
 
The Department should let the judicial challenges run their course before deciding whether to revisit the rule, withdraw its current proposal, and instead focus its energies on advancing policies that strengthen—rather than undermine—the ability of people working in low-wage jobs, including tipped workers, to support themselves and their families.
 
I. The Proposed Rule Will Increase Economic Insecurity For People of Color and Women, Who Are Overrepresented Among People Who Work For Tips. 
Women—disproportionately women of color—represent nearly two-thirds of tipped workers nationwide: women make up 65.5 percent of tipped workers, and women of color are 25.2 percent of tipped workers, compared to 17.5 percent of all workers.  In 32 states, at least 7 in 10 tipped workers are women.  Median hourly earnings for people working in tipped jobs hover around $10, including tips,  and poverty rates for tipped workers are more than twice as high as rates for working people overall—with tipped workers who are women, and especially women of color, at a particular disadvantage.  As recognized in the NPRM, working people in tipped occupations rely on tips as a major source of income.  The National Employment Law Project and Restaurant Opportunities Centers United estimate that tips typically represent close to 60 percent of hourly earnings for servers and 54 percent for bartenders; they report that Black workers in these occupations have a median hourly wage of $9.62, including tips, and Latino workers earn $9.93 – suggesting that taking gratuities away from tipped workers will greatly impact workers of color and their families.  Reducing the amount of tips that working people can take home to their families will undoubtedly harm this already low-paid workforce, especially people of color and women who disproportionately hold these roles; people of color represent 44.1 percent of the tipped workforce, compared to 36.5 percent of the overall workforce.  
 
Yet this is precisely what the proposed rule would do, by allowing employers to retain employee tips for their own purposes—whatever those purposes may be, including increasing profits. While the NPRM suggests that the Department’s rule change is motivated by a desire to allow employers to decrease wage disparities between front- and back-of-house workers through tip pooling arrangements, such arrangements are already permissible under existing regulations when employees voluntarily share their tips. Allowing employers to require redistribution of tips to back-of-house workers merely provides an incentive for employers to keep base wages low for cooks, dishwashers, and others, subsidized by the earnings from bartenders and wait staff. And the proposed rule itself—which would apply to all tipped workers, not just those in restaurants or other settings where tip pooling is relevant—simply removes all limits on employer control of employee tips, so long as the employer pays the employee the federal minimum wage.  
 
Evidence already demonstrates that even under current law, employers are illegally pocketing worker tips. One study surveying workers in Chicago, Los Angeles, and New York found that 12 percent of tipped workers had wages stolen by their employer or supervisor.  The Economic Policy Institute now estimates (conservatively) that under the proposed rule, employers would claim $5.8 billion dollars taken legally from their employees, representing 16 percent of tips earned by workers annually.  And an astounding $4.6 billion of this $5.8 billion—nearly 80 percent—would be tips earned by women.
 
Even the slight protection offered by the rule’s requirement that employers forego the federal tip credit before taking control of employee tips may prove illusory. As the Department acknowledges in the NPRM, its proposal could allow employers to “circumvent[] the protections of section 3(m) [of the FLSA] . . . [by] utilizing its employees’ tips towards its minimum wage obligations to a greater extent than permitted under the statute for employers that take the tip credit.”  The risk here is clear: money is fungible, and so long as an employer pays its tipped employees the full minimum wage in week one, there is nothing in the proposed rule that would prevent the employer from taking all of the tips earned in week one to subsidize payment of all or some of the minimum wage in week two, and so on. In this scenario, except for the first week of work, an employee’s tips are the source of the minimum wage payments and the employer is in effect taking a tip credit without abiding by the protections of section 3(m) of the FLSA. Moreover, the assurance of receiving $7.25 an hour before tips does little to change the employee’s dependence on those tips, as the inadequate federal minimum wage leaves a mother supporting one or more children thousands of dollars below the poverty line, even if she works full time.  
 
In sum, the Department’s adoption of the changes proposed in this NPRM will likely result in lower earnings for the already vulnerable tipped workforce, an increased number of people of color  and women living in poverty, and reduced incentives for employers to raise base wages across the board now or in the future.  
 
II. The Department Has Failed To Engage in Necessary Quantitative Analysis of Its Proposed Rule.
 
In a highly unusual move, the Department has failed to even attempt to quantitatively analyze the costs and benefits of the proposed rule, counter to standard practice and multiple rulemaking authorities.  Yet the impact of this rule is eminently quantifiable, as shown by the Economic Policy Institute (EPI) which, in less than two weeks, engaged in the analysis that the Department would not.  It would be arbitrary and capricious for the Department to proceed with this rulemaking without understanding the likely effect of the proposed rule on working people —and should the Department conduct the requisite analysis, we have every confidence that its estimates, like EPI’s, will show that the Department should not move forward with this rulemaking because of the harm it would cause to the working people the Department is charged with protecting. 
The National Urban League therefore strongly urges the Department to withdraw the proposed rule, and instead focus its energies on promoting policies that will improve economic security for all people working in low-wage jobs.  
 
On behalf of the National Urban League, thank you for the opportunity to submit comments on the NPRM. 
 
Marc H. Morial
President and CEO
National Urban League
 

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