Labor Department leadership convinced OMB Director Mick Mulvaney to overrule the White House regulatory affairs chief and release a controversial tip-sharing rule without data showing it could allow businesses to skim $640 million in gratuities.
Mulvaney sided with Labor Secretary Alexander Acosta over the government’s rulemaking clearinghouse—a little-known but critical wing of the White House called the Office of Information and Regulatory Affairs—three current and former executive branch officials told Bloomberg Law. That allowed the department to delete from the proposal internal estimates showing businesses could take hundreds of millions in gratuities from their workers.
The proposed rule, which reverses a 2011 regulation, generally makes it easier for restaurants to implement tip-sharing arrangements among workers who directly earn gratuities and those who don’t.
Acosta and his team elevated the dispute to Mulvaney, who as Office of Management and Budget director oversees OIRA, after Trump-appointed OIRA Administrator Neomi Rao and her staff attempted to block the Labor Department from issuing the tip pool regulation. Rao wanted the department to reinsert estimates quantifying how much workers could lose out on tips to their bosses, who would be allowed to participate in the tip pool.
Bloomberg Law reported Feb. 1 that the original analysis compiled by DOL staff totaled billions of dollars. The department’s political leadership ordered new methodologies that progressively lessened the expected impact, according to sources.
“The department does not comment on deliberative processes,” a DOL spokesman told Bloomberg Law. Spokespeople for OMB and OIRA did not respond to Bloomberg Law’s requests for comment. A White House spokesman referred Bloomberg Law to OMB.
The Labor Department’s successful effort to override OIRA’s objections may reinvigorate Democratic and worker advocacy opposition to an obscure rule that’s turned into the most contentious issue Acosta has faced in an otherwise low-profile tenure. OIRA losing this battle is raising concerns from regulatory experts and former government officials from both parties that Trump’s sweeping effort to cut government red tape may happen without keeping the public apprised of the costs and benefits.
“Mulvaney’s acceding to an agreement that there be no analysis really serves to undermine the cause of analysis in the regulatory process,” Stuart Shapiro, a Rutgers University professor who researches the regulatory process, told Bloomberg Law. “The message it sends is that getting rid of regulations we don’t like is more important than good economics.”
Shapiro reviewed labor rules as a career analyst at OIRA under Presidents George W. Bush and Bill Clinton.
The sources were all briefed on the matter by people directly involved in the process. They spoke on condition of anonymity to discuss sensitive inter-agency deliberations that are now under investigation by the DOL’s Inspector General and the subject of congressional oversight from Democrats.
The accounts in this story are corroborated in part by a copy of the scrubbed draft analysis obtained by Bloomberg Law. The sources said Rao initially opposed publishing the regulation without the analysis, but could not rule out the possibility that Rao was later persuaded by Acosta, Mulvaney, or other administration officials.
The proposed rule would let businesses impose tip-sharing arrangements that enable back-of-house workers such as dishwashers to participate, provided the front-of-house workers (such as servers), are paid the full minimum wage of at least $7.25 per hour. It would reverse an Obama DOL regulation that stated tips are the property of employees.
Acosta has said the department doesn’t want to allow managers to participate in those sharing arrangements. He recently told Congress that the DOL hasn’t been delegated the legal authority to ban tip skimming, and urged lawmakers to intervene with a legislative fix.
Since OIRA’s inception in 1981 as the White House’s regulatory gatekeeper, Cabinet secretaries from both political parties—including Acosta’s Democratic predecessor Thomas Perez—have on rare occasions taken OIRA disputes up the chain of command, former White House and DOL officials told Bloomberg Law. However, those policy debates typically led to a compromise on regulatory language, rather than the complete exclusion of data.
Part of OIRA’s core mission is to ensure agencies assess and inform the public of the potential positive and negative economic effects of significant new regulations. Rao has trumpeted her commitment to transparent cost-benefit analysis, including in deregulatory actions. When asked about the tip pool rule at a February press call, Rao said the prior administration also didn’t include an analysis in the 2011 version of the rule.
Bloomberg Law interviewed 15 former Cabinet agency and White House officials for this story. They said that in their senior-level government rulemaking experience, they couldn’t recall a single instance in which OIRA was ordered to approve a regulation that didn’t include any form of quantitative analysis when OIRA knew such data was available.
“Politically, you don’t want that to happen if you’re the administrator of OIRA,” Veronica Stidvent, who worked on regulations for President George W. Bush as both a special assistant to the OIRA administrator and a DOL assistant secretary for policy, told Bloomberg Law. “OIRA has been the voice of reason and I think in many cases the honest broker for regulations for a long time.”
“It’s a prerogative of the OMB director to overrule the administrator, but it does suggest a big disagreement—on the rule and on the analysis,” added Stidvent, now a public policy consultant in Texas. “Whether it’s tip pooling or any other regulatory or deregulatory action, it’s really critical that everyone believes in the process, that agencies strictly adhere to the process, and that OIRA has that influence and power to maintain it.”
From Billions to $640 Million
The figure that OIRA demanded the department include, before Mulvaney’s intervention, placed the total at $640 million in tips per year possibly retained by businesses, according to the newly obtained copy of the draft analysis. The analysis describes several shortcomings to the methodology and states that the approach “has a tendency toward overestimation.”
OIRA still had a copy of this estimate because the office was working with the DOL during the earlier, informal deliberations on the rule. Although $640 million was significantly less than the initial estimate, agency leaders decided this figure was still unreliable and moved to exclude a quantitative analysis from the proposal altogether, four current and former DOL sources told Bloomberg Law.
The department did include a qualitative economic analysis, without dollar figures, and stated that it was unable to quantify the total number of tips that would be transferred to managers. The agency asked the public to submit comments that would inform an estimate in the final version of the rule. The public comment period expired Feb. 5, and the department is now reviewing some 270,000 comments as it embarks on a final rule.
Rep. Rosa DeLauro (D-Conn.) grilled Acosta on the decision to withhold the data during a March 6 House appropriations hearing. The secretary offered a window into the department’s internal decision to exclude the numbers from the rule.
“We looked at whether or not we could conduct an analysis that had assumptions based on data,” Acosta said. "[T]here are assumptions that have to be made. Will 100 percent of restaurants choose to share” tips “with management, or will zero percent of restaurants choose to share that with management? Depending on that assumption, we can generate pretty much any number. And so at the end of the day the determination was that the draft lacked sufficient data.”
IG Probe, Budget Rider
The Labor Department’s Office of the Inspector General, the agency’s internal watchdog, is investigating the department’s rulemaking process, including interactions with OIRA. An OIG spokesman told Bloomberg Law the office opened its probe Feb. 5 in response to the controversy created by the initial report on the scrubbed data.
An OIG spokeswoman declined to comment this week on the OMB and OIRA handling of the regulation. The office isn’t likely to release a report to the public for at least a few months.
In the meantime, some of the opposition to the rule could be assuaged by a rider in the fiscal year 2018 spending bill being negotiated this week in Congress. Acosta on March 6 asked congressional appropriators to consider adopting a revision to the Fair Labor Standards Act that would ban employers from participating in tip pools.
It’s far from certain if this language would pass in the immediate spending bill. If it becomes law, the provision would negate the controversy about the rule transferring tips to employers.
Susan Dudley, George W. Bush’s OIRA administrator, said she would need more insight into the closed-door White House deliberations to determine if the tip pool situation presents a problematic and abnormal precedent.
“OIRA always should be that gatekeeper and there should be analysis supporting both deregulatory and regulatory actions,” Dudley, who directs the George Washington University Regulatory Studies Center, told Bloomberg Law. “In reality, that doesn’t always happen. OIRA would like to ensure quality analysis supports decisions, but sometimes other factors drive decisions, especially the pace of decisions.”
For instance, court-imposed deadlines have caused the Justice Department to intervene and pressure an agency to issue a regulation over OIRA’s wishes.
The National Restaurant Association asked the U.S. Supreme Court in 2017 to consider a legal challenge to the Obama version of the tip-pooling regulation. The high court has given the DOJ’s Solicitor General seven extensions to file a reply brief to the restaurant association’s petition. The DOJ said it needs more time because of the ongoing discussions to reverse the 2011 tip pool rule.
Once finalized, the new tip pool rule could moot the case before the Supreme Court.
It’s not clear if Solicitor General Noel Francisco has exerted pressure on the DOL and OIRA to fast-track the regulation, and whether that played a role in the decision to remove a completed analysis.
”The Justice Department and the Department of Labor and OIRA are, in the end, all agents to one extent or another to the president atop the executive branch,” Adam White, who replaced Rao as director of George Mason University’s Center for the Study of the Administrative State, told Bloomberg Law. “It’s impossible to know what’s happening behind the scenes, but in theory they all should be rowing in the same direction to the maximum extent possible under applicable law.”
To Amit Narang, a regulatory policy advocate at Public Citizen, Acosta and Mulvaney winning the day on the tip pool proposal suggests a disturbing pattern emerging of OIRA’s role being undermined under Trump. The White House has also been suspected of overruling OIRA in clearing Environmental Protection Agency regulations that would erase Obama-era rules.
“It’s pretty apparent that in this case and potentially others, that the administration and OMB are willing to manipulate the cost-benefit numbers to make them look good for their attempts to roll back regulatory protections,” Narang told Bloomberg Law. “This is a transparency concern, a legal concern, and I think it’s got to be a concern for the legitimacy and the integrity of the deregulatory agenda writ large.”