On January 11, 2018, Jon Nash of Emory University School of Law and I submitted comments  to the Department of Labor (“DOL”) on its proposed regulation regarding the freedom of employers that pay direct cash wages of at least the Federal minimum wage and do not take a tip credit to engage in the pooling of tips, even among employees who are not customarily and regularly tipped.  We are also publishing  a forthcoming article on the very subject of the proposed regulation, Samuel Estreicher & Jonathan Remy Nash, The Case for Tipping and Unrestricted Tip Pooling: Promoting Intrafirm Cooperation, 59 Boston College Law Review (Issue No.1, Jan. 2018). Our comments make the following principal points:

The DOL’s proposed regulation properly allows an employer that pays direct cash wages of at least the Federal minimum wage and does not claim a tip credit for the tipped employee or other participants in the tip pool to include in the pool non-ownership-level employees even if they are not customarily and regularly tipped.

1. Tipping is a valuable economic practice that can benefit both employees and owners.  Tipping helps to solve a principal-agent problem between management and workers.  When customers tip based upon the quantity and quality of service, they provide an important feedback mechanism concerning employee performance in circumstances where the employer cannot readily monitor that performance. Tipping facilitates a form of “buyer monitoring.”

Tip income is related to the size of the overall bill, but it is also a function of customer satisfaction, with lower or no tips going to servers who do not serve customers properly.   Employees unhappy with their tips will improve their performance or change jobs.

Tip-pooling is a generally desirable practice also because it promotes cooperation among employees towards achieving the goals of the enterprise.  Most legal restrictions on tip-pooling are ill-advised.  Serving customers is often a cooperative endeavor among several employees only some of whom deal directly with the customer.  Tip-pooling arrangements provide a mechanism for employers to reward cooperation among employees.  Legal restrictions on tip-pooling can preclude employers from putting in place arrangements which would further the shared objectives of all the employees.  These restrictions also may fuel unnecessary friction among employees, when only some of the employees engaged in the cooperative effort are legally eligible to participate in tip-pooling.

The existing DOL regulation places severe limits on tip-pooling.  Supervisory employees, such as the head waiter in a restaurant, may not participate in tip-pooling.  Back-of-the-house employees are also ineligible to participate in employer-mandated tip-pooling.  The proposed regulation properly removes these limits.

The delivery of services in the context we are considering is a cooperative endeavor.  No single employee can provide service, let alone ensure that the service provided is quality service.  Yet, while customers are relatively well-positioned to monitor front-of-the-house employees, they are not in a position to monitor back-of-the-house employees; after all, customers rarely come in contact with back-of-the-house employees, or to observe clearly the quality of the services they render.  But front-of-the-house employees are well positioned to monitor the quality that back-of-the-house employees render.

The foregoing provides a sound basis for front-of-the-house employees voluntarily to enter to tip-pooling arrangements that include back-of-the-house employees. Although not the subject of the proposed regulation, we posit that owners should be permitted to mandate such arrangements [for reasons set forth in our comments on the proposed regulation].

2. The DOL’s proposed regulation properly corrects for the mistaken premise of the agency’s prior regulation that the Department has regulatory authority under the Fair Labor Standards Act (“FLSA” or “Act”) over employer practices with respect to tip income even when the employer is paying direct cash wages of at least the Federal minimum wage and does not claim the tip credit for any of the participants in the tip pool.

The DOL’s proposed regulation also importantly corrects the premise of the existing regulation that the Department has authority under the Fair Labor Standards Act to regulate employer practices concerning tip income where the employer pays direct cash wages of at least the Federal minimum wage and does not claim the tip credit for any of the participants in the tip pool.  In the instant context, other than policing record-keeping obligations, the agency’s regulatory authority is limited to ensuring that employees covered by the Act are paid at least the Federal minimum wage and receive the overtime premium for hours worked beyond 40 hours in a work week.  Because the Act provides a “tip credit” exception from the Federal minimum for “tipped employees,” the agency also has authority to ensure that tip income is properly allocated only to those employees.

The existing regulation, however, reflects an assumption that the agency has additional authority to regulate employer practices regarding tip income even where there is no derogation of the Federal minimum wage, the overtime obligation, or the integrity of the “tip credit” exception to the Federal minimum.  The proposed regulation properly corrects this problem of want of regulatory authority.

Not all restrictions on tip-pooling should be eliminated.  This is presently a subject for state law.  In our view, owners (including employees with a controlling interest in the enterprise by dint of their ownership share) should be barred for appropriating tip income. Cf. American Law Institute, Restatement of Employment Law § 1.03 (2015).  Customers give tips in the expectation that this income will be distributed to non-owner staff.  A clear legal rule enforces that expectation and will yield maximum benefits of a tipping regime; any ambiguity will discourage tipping.  The no-tipping-income-for-owners rule operates, in effect, as a bonding device assuring customers that tips will go to the employees. Moreover, the incentive effects of tipping apply to employees not owners.  Ownership puts its capital at risk in running the business and enjoys the profit upside.  As such, they already have a strong incentive to provide good service.  Thus, owners should have no claim to customers’ tips, monies that are designed to reward non-owner employees for providing quality service.  Whether tip-pooling should extend to non-owners who are managerial employees is also a subject for state law.