A proposal brought forward this week by the U.S. Department of Labor could change the way tips are handled in the service industry. In essence, tips would become the property of the restaurant owners, rather than the employees who’ve earned them. And they could be freely pooled and shared among both front- and back-of-house employees. 

According to the DOL, the reasoning behind the new proposal is to "help decrease wage disparities between tipped and non-tipped workers – an option that is currently restricted by a rule promulgated in 2011 that has been challenged in a number of courts."

And that sounds just grand; in fact, it’s an effort supported by the National Restaurant Association, which favors pooled tips as a way to boost compensation for kitchen staff rather than paying cooks and dishwashers higher wages.

But not everyone agrees that it’s the best course of action.

What would the new regulations mean?

In Wisconsin, a good percentage of employers utilize the so-called "tip credit," which allows them to pay tipped employees less than the minimum wage (as low as $2.13) as long as the total of the employee’s base pay and tips equals at least $7.25 an hour. Under this model, all tips earned belong to the employee. 

In a restaurant, that means that most waitstaff are paid $2.13 (or slightly more) per hour, plus tips. Meanwhile, back of house workers like dishwashers are paid minimum wage with no tips.

Under current regulations, which were imposed by the Obama administration in 2011 (and would be rescinded under the new proposal), tips are prohibited from being distributed to anyone other than front-of-house staff. Employers are also restricted from use of those tips: "an employer must notify its employees of any required tip pool contribution amount, may only take a tip credit for the amount of tips each employee ultimately receives, and may not retain any of the employee’s tips for any other purpose."

However, here’s the rub. Under the new proposed ruling, an employer could decide to pay minimum wage to all employees. In that case, the tips no longer belong to the tipped employees Rather, they are the property of the employer. And that employer can choose to split those tips among multiple employees in both back and front of house. Or, ostensibly, they could use those tips for … well, just about anything, including making ends meet for a struggling restaurant.

The latter is what’s causing the most concern among industry veterans.

Business owners like John Dye of Bryant’s and The Jazz Estate note that the new regulations have the potential to bring out the worst in less-than-honest employers.

"I think it is a huge slippery slope to allow owners to give tips to non-tipped employees," he says. "Especially since I have personally worked for some pretty dishonest employers who have kept portions of tips for themselves. Maybe the best road would be for employers to have the freedom to require servers to give a percentage of their tips to back of house (many already do this) without such broad control with how tips are pooled."

And Dye’s concerns aren’t so far fetched. After all, recent research shows that illegal wage theft by employers exceeds $15 billion every year.  Among those particularly vulnerable to being victimized by such theft are undocumented and immigrant workers who may not feel empowered to file complaints against their employers. 

The good and the bad

Industry professionals seem to agree that the legislation could be a step in the right direction in terms of reducing income inequality between front and back of house workers.

"The proposed change is for the best, as long as it isn’t abused," notes Orry Leon, co-owner of Amilinda. "It allows some great people to be tipped out that would otherwise miss out, like the dishwasher. For years, we tipped out the hostess, etc. Most servers agree with it. Since we aren’t allowed to tip out the dishwasher currently, our staff has been known to just give them cash at the end of the evening."

But some have misgivings.

Jennifer Grundy of Wolf Peach, a server who is currently paid a server minimum of $2.33 per hour, plus tips says she doesn’t have a problem with sharing tips with back-of-house workers.

"They’re often not sufficiently compensated for their work," she says, adding that it’s the loophole the proposed law contains that makes her uneasy. "What is disconcerting to me is that there is no language in the document from the Department of Labor stating that the tips would be pooled, and not used for random costs of running the restaurant. That money belongs to the workers who earned it, and no one else."

Dye says he has mixed feelings about the legislation for other reasons, noting that it has the potential to bring down the wages for all employees, rather than solving equity issues.

"I think there is fundamentally something wrong with the tip system, especially given that some people in the industry earn tons of money, while others (usually in the kitchen) work just as hard, are just as creative, and earn a fraction of that money," he says. "Servers and bartenders are some of the only people who get paid a decent amount for their work in the service industry. This should not go away. It is a true stepping stone if a server choses to treat it that way.

"Many of the tipped employees I know use the money so that they can go to school, support a career that doesn't pay well (e.g., artist), or they use it buy a house which they could leverage in the future to open their own business (that's what I did). If anything, the other employees who don't receive tips ought to be brought up that living wage level, not the other way around. This law could easily bring down pay for all employees, rather than lifting the back of the house. That's pretty scary."

Is elimination of tipping a solution?

Dye says the topic is one of the reasons why some business owners support the idea of eliminating tipping altogether and raising prices to allow them to pay employees a fixed living wage. It’s common practice in other developed countries (as well as with New York’s Union Square Hospitality Group) and one that some food economists enthusiastically support. 

Folks like Aaron Patin of Iron Grate BBQ Co. agree.

"As much as people don’t want to do away with tips, there’s benefit there," he says. "I think it’s important to talk about changing the mentality of the business owner. This whole idea of relying on tips to bring people to a living wage has to go."

"Eliminating the low-hour, high tip employee and pay them a higher wage just makes more sense," he says. "You have happier people and they give you way more. If you pay people a good hourly rate, the tips are a bonus. And that’s security. When people feel secure, that’s the ideal. The mentality for the greater good doesn’t translate unless you develop a team environment."

"In the end this really points to the problems that the service industry has in terms of the equity in pay," says Dye. "The questions we really should be looking at are: How do we structure this so that everyone is making a living wage? Servers often make a good living, but that’s not the case with the back of house. And how do we do that without driving customers away with increased costs?

"Hopefully this is a good conversation starter," he adds. "I’m just a bit nervous that it could go too far in one direction."

Voice your opinion

Do you have opinions on the issue? From now through Jan. 4, the Department of Labor is accepting public comments on the proposed legislation.  Additional information on the full proposal is available here.