“The Office of Inspector General is initiating an audit of the rulemaking process used by the Wage and Hour Division related to its proposal to rescind portions of its tip regulations issued pursuant to the Fair Labor Standards Act,” the Office of the Inspector General said in a statement Monday.
The audit will examine whether officials followed protocol when they moved to undo the Barack Obama-era regulation that declared tips the property of the workers who collected them.
The decision came less than a week after Bloomberg Law reported that the Labor Department hid an “unfavorable” economic analysis of its proposed measure on tips, according to four sources who leaked the information to reporters.
Under the proposed measure, unveiled in December, restaurants and other establishments could require waiters, bartenders and delivery drivers — any employee who receives tips — to share the cash with their co-workers or bosses.
The rule would apply only to companies that pay tipped employees at least the federal minimum wage of $7.25 an hour and allow income-splitting through a “tip pool” with back-of-the-house workers.
Critics of the proposal said it could open the way for employers to pocket all of the tips. Supporters said it would boost earnings for dishwashers and other workers who don’t interact with patrons.
“The proposal would help decrease wage disparities between tipped and non-tipped workers,” the Labor Department said in a statement at the time. “These ‘back of the house’ employees contribute to the overall customer experience, but may receive less compensation than their traditionally tipped co-workers.”
On Monday, a Labor Department spokesperson said the agency intends to publish a cost-benefit analysis as part of any final rule. The proposal has already undergone public comment, receiving 371,000 comments.
Paul DeCamp, a Washington lawyer who represents the National Restaurant Association and previously worked for the Bush administration's Labor Department, said federal agencies must study the potential impact of major economic decisions under law, and the Labor Department appears to have met that standard.
“Agencies aren't required to anticipate to the penny what effect a regulation would have on the economy or on groups or individuals,” he said.
The Labor Department had said it was unable to say how the proposal could affect workers' earnings, arguing that it could not predict how customers would react to proposals of tip sharing.
“The Department is unable to quantify how customers will respond to proposed regulatory changes, which in turn would affect total tipped income and employer behavior,” according to the proposal's text. “The Department currently lacks data to quantify possible reallocations of tips through newly expanded tip pools to employees who do not customarily and regularly receive tips.”
But Harry Holzer, a public policy professor at Georgetown University who served as chief economist at the Labor Department under Bill Clinton, said the agency needed to do more research before releasing its proposal.
“It’s a bizarre thing for the Labor Department to say we don’t really know enough to estimate the impact of this thing, but we’re going to do it, anyway,” Holzer said. “You don’t just dive in blindly.”
Heidi Shierholz, who was chief economist at the agency under Obama, was so troubled by the lack of estimates on how the proposed rule would affect workers’ wages that she did the calculations herself.
Shierholz and her team at the Economic Policy Institute, a Washington think tank, looked at IRS filings, accounted for state laws and concluded the proposal could cost workers' up to $5.8 billion each year.
“Restaurants have wanted to get their hands on this revenue forever,” she said. “It would literally mean billions out of the pockets of workers.”