As far as restaurants are concerned, announcements by the Department of Labor (DOL) have been a mixed bag over the past couple of years. The most recent rules guidance on tip pooling is no exception. The Trump Administration’s DOL recently released a roll-back of Obama-era protections that prohibited restaurant operators from capturing tips and distributing them across the entire staff for any given shift.
Unlike the Obama Administration’s other major DOL rules change for overtime eligibility which only impacted salaried employees, this rule change may have far reaching consequences in the industry.
The included video gives you a decent overview of the statutory changes, but in this post we are going to focus on three groups that will be directly impacted by this ruling -- publicly traded large/med chains, privately owned small group/independents operators, and hourly employees. Each of these groups have different interests and consequently can’t see this ruling the same way.
However, before we address the impact on these groups, we should comment on the current landscape. Our assumptions below require that most or all restaurant operators change their policies to align with the new DOL rule. Very few full service restaurants do so at this time and those that have experience tumult with their guests and staff. It’s unlikely that this rule change will have sweeping impact on the current restaurant tipping paradigm. That being said, as minimum wages rise with the Fight for $15 and other advocacy, you could see a shift based on the simple motivation of maximizing profit.
The Big Guys
Let’s start with the publicly traded companies and how this ruling will impact their decision making. Rising labor costs is one of the key issues at play here that is common to all three groups. By law, publicly traded companies have a fiduciary responsibility to maximize profits. A ruling like this gives these corporations not only the opportunity to decrease their labor costs by distributing tips to all employees, but also may hasten the end of tipping as we know it.
With rising minimum wages a reality, the boards and shareholders will put pressure on these operators to reduce costs. By pooling, they can lower their out of pocket labor expenses and do so without cutting hours or compromising their standards. This is likely the precursor to a service charge approach. Critics have raised concerns whether there will be transparency and if operators will guarantee all the money is 100% distributed as wages. It’s a fair concern, but with a public corporation, they will have a difficult time doing that without the public finding out. More likely, operators will depress wages and use 100% of tips to make up the difference
Independent or Private
The greater risk for wage theft comes from the small restaurant chain and independent operators that aren’t publicly traded. This rule change doesn’t preclude them from taking the tips for themselves and not giving them to staff. They would obviously have to pay minimum wage to their staff as a result. But in many communities, servers’ tipped wages allow folks to make a decent living, even when paid a form of minimum wage. This is obviously more important in states that allow tip credit, but would likely equalize itself as guests, staff, and operators become accustomed to the paradigm.
Let’s be honest. These folks want to make profit too and it stands to reason if this switch can reduce their out of pocket across their entire staff, then they’re going to leverage it. As we referenced before, this is likely the beginning of the end of tipping. The tension created by raising minimum wage will also affect the independent and privately held small chains. This ruling could be like a lifeline to equalize their labor from the FOH to BOH as well as reduce their internal cost. If labor competition continues, you may even see it raising overall wages in restaurants. This is the best case scenario for staff, because they are the only ones with no control over that outcome.
The Rank and File Employee
It’s pretty much all bad news for this constituency. By taking control over the tips received, the operators now determines how that money is distributed. There is a credible argument that servers and bartenders (who serve food) rely heavily on the FOH supports staff as well as the full BOH team to earn tips. Consequently, splitting the gratuity sounds fair in concept. However, we all know the dynamic between FOH and BOH is more complicated than this.
This is just another proof that if this rule sticks and isn’t overturned at a federal level (unlikely, given the court’s continued support for less regulatory control in business) that tipping is likely to slowly fade from the restaurant landscape. This will dramatically change the character of candidates available to operators. People that came to our business because they were personable and solid at selling will now see no advantage to serving. Nor will they stick around because of the earnings potential. Eventually, the change will equalize, but it’s going to be a bit chaotic getting there.
This story is newsworthy because it is another rollback by the Trump Administration of Obama-era rules, but also because of the timing. Tipping has been the hot topic for a couple years and this DOL guidance offers a glimmer into how powerful restaurant lobbyists want to secure the best regulation for operators. Now it comes down to how you want to run your business, because it appears the law is now on your side.