The Consolidated Appropriations Act, which is Congress’s massive omnibus budget bill, was passed in March of 2018. Included in this new law was an amendment to the Fair Labor Standards Act’s (FLSA) rules on tipped employees and tip ownership.
Under section 3(m) of the FLSA, an employer of tipped employees can fulfill its duty to pay the federal minimum wage by paying a wage and counting a portion of an employee’s tips as a partial credit to satisfy the difference between the wage paid and the minimum wage. Certain statutory requirements must be followed to utilize this tip credit, including that a tipped employee either retain all of their tips or participate in a valid tip pool whereby tips are shared among employees who customarily and regularly receive tips. Accordingly, the Department of Labor (DOL) has permitted employers to require tip pooling under certain circumstances.
In 2011, the DOL issued regulations explaining that the FLSA requires that tipped employees retain all of their tips, except for those tips distributed through a tip pool limited to customarily and regularly tipped employees, regardless whether such employees work for an employer that takes a tip credit. Therefore, tipped employees could not be required to share their tips with non-tipped employees, even if an employer paid its tipped employees at or above the federal minimum wage and did not take a tip credit.
Following the issuance of these 2011 regulations, much private litigation ensued. In an effort to modify these divisive provisions, the DOL issued a notice of proposed rulemaking in December of 2017. The DOL sought to rescind the portions of the DOL regulations that imposed restrictions on employers that pay a direct cash wage of at least the full minimum wage and do not use a portion of tips as a credit toward their minimum wage obligations. In short, the proposed regulations would allow employers who did not take a tip credit to require tipped employees to share their tips with non-tipped colleagues. Also, controversially, the proposed regulations would have permitted employers to compel employees to turn tips over to management.
The recently-passed Consolidated Appropriations Act now permits employers who pay at least the federal minimum wage to require tip pooling among tipped and non-tipped employees when no tip credit is taken. Tip pooling is prohibited, however, when a tip credit is involved. Additionally, employers are not permitted to retain any tips earned by employees regardless of whether a tip credit is taken.
In April of 2018, the DOL issued Field Assistance Bulletin No. 2018-3 and Fact Sheet #15 to clarify the application of the FLSA to tipped employees. These guides explain that the 2011 regulations that prohibit tip pooling with non-tipped employees even when an employer does not take a tip credit are no longer in effect. Employers who pay the full federal minimum wage may now allow employees who are not customarily tipped to participate in a tip pool. Furthermore, the Field Assistance Bulletin clarifies that managers and supervisors cannot participate in tip pools and states that the duties test of the executive employee overtime regulations will be used to determine whether an employee is a manger or supervisor.
Despite these changes to the tip credit and tip pooling rules at the federal level, some states and municipalities have imposed more restrictive rules. Therefore, the changes to the FLSA may have no impact on employers in areas with more stringent state and local laws. Employers are thus well-advised to maintain an awareness of obligations under state and local laws, in addition to the requirements of the FLSA, with respect to tip credits and tip pooling.