Proposed DOL Rule to Allow Tip Pooling 

The Department of Labor (DOL) Recently Proposed New Tip Regulations To Allow Tip Pooling Under the Fair Labor Standards Act (FLSA)

Last month, the Department of Labor (DOL) proposed new tip regulations under the Fair Labor Standards Act (FLSA). If enacted, the new tip pooling rules would provide greater flexibility to restaurant owners and other employers that pay a direct cash wage of least the full federal minimum wage and do not claim a tip credit under the FLSA. The proposed tip regulations would specifically allow employers to create a mandatory tip pool that is not limited to customarily and regularly tipped employees, thereby allowing kitchen staff, dishwashers, and other “back of the house” staff to share in the tips provided to servers.

Tipped Employees Under the FLSA

Under the FLSA, an employer may take a tip credit toward its minimum wage obligation for tipped employees equal to the difference between the required cash wage (at least $2.13) and the federal minimum wage (currently $7.25). To avoid wage issues, employers must be able to show that tipped employees receive at least the minimum wage when direct (or cash) wages and the tip credit amount are combined. If not, the employer must make up the difference.

An employer may take a tip credit under the FLSA only if, among other things, its tipped employees retain all of their tips. The employer taking a tip credit is allowed, however, to implement a tip pool in which tips are shared only among those employees who “customarily and regularly receive tips.” The statute contains no such express restrictions for employers that do not claim a tip credit.

DOL’s 2011 Tip Regulation

In 2011, the DOL issued tip regulations establishing that tips are exclusively the property of the employee. Accordingly, they could not be shared with other non-customarily tipped employees or retained by the employer even if the employee was paid the full minimum wage (as opposed to via a tip credit).

In pronouncing the new rule, the DOL reasoned that “[w]hen the employer uses tips for its own purposes, whether to supplement wage payments to non-tipped employees or to otherwise offset its own business expenses … it is in effect making a deduction from employees’ wages. To this end, the department is not regulating the employer’s use of the tips; it is regulating the employer’s statutory wage payment obligation.”

The DOL rule change sparked several employment lawsuits challenging the DOL’s authority to promulgate the provisions that restrict an employer’s use of tips received by its employees when the employer pays a direct cash wage of at least the federal minimum wage and does not take a tip credit. The federal circuit courts have reached differing conclusions regarding whether the regulation is valid. In recent years, several states have also enacted laws that require employers to pay tipped employees a direct cash wage that is at least the federal minimum wage, which has resulted in fewer employers being able to take the FLSA tip credit. 

DOL’s New Proposed Rulemaking

In its Notice of Proposed Rulemaking, the DOL is seeking to rescind the parts of its tip regulations that bar tip-sharing arrangements in establishments where the employers pay full federal minimum wage and do not take a tip credit against their minimum wage obligations. The proposed rule applies only to employers that pay direct cash wages of at least the federal minimum wage and do not take a tip credit. It does not apply to employers who pay less than the federal minimum wage and take a tip credit.

“This would likely increase the earnings of those employees who are newly added to the tip pool and further incentivize them to provide good customer service,” the DOL maintains. “The proposed rule would additionally provide employers greater flexibility in determining pay practices for tipped and non-tipped workers. It also may allow for a reduction in wage disparities among employees who all contribute to the customers’ experience.”

Not surprisingly, the DOL is receiving a lot of feedback on the proposed rule. In response, the agency recently extended the deadline for submitting comments to February 5, 2018. Restaurant owners have overwhelmingly voiced support for the rule, citing that it will give them the flexibility to address inequities in pay between the so-called back and front of the house. Meanwhile, critics of the proposed rule maintain that server tips shouldn’t be used to subsidize higher wages for kitchen staff.

Wage and hour issues can be particularly challenging for employers, particularly those in the hospitality industry. If your company needs guidance regarding tip credits or tip pools, contact a member of the Scarinci Hollenbeck Labor & Employment Practice Group.

Do you have any questions? Would you like to discuss the matter further? If so, please contact me, Gary Young, at 201-806-3364.