New Federal Spending Law Scales Back Proposed Regulation Change on Tip Pooling

By Patricia Mumford, Compliance Counsel and Adam Roberts, Legislative Analyst

Published on March 27, 2018

President Trump signed an omnibus bill into law March 23, 2018 that contained several provisions funding the federal government and avoiding a government shutdown. The bill also contained policy provisions, including a plan to scale back the administration’s proposed tip pooling regulation from late 2017.

Background: Minimum Wage and Tip Pooling

The Fair Labor Standards Act (FLSA) has a tip credit provision that allows employers to pay a reduced hourly wage or subminimum wage to tipped employees, provided the tipped employees receive enough tips to bring their hourly rate to the prevailing minimum wage. Employers can claim credit for tips the employees have received directly, as well as credit for tips distributed from a valid tip pool.

The FLSA allows for tip pooling (or sharing) arrangements among service employees who regularly receive tips. For example, at the end of a shift, waitstaff may be required to pool tips with bussers and bartenders for equal disbursement. Prior to the passage of the spending bill, tipped employees were not required to pool tips with employees who do not normally receive them.

2011 Regulations

In 2011, the U.S. Department of Labor (DOL) amended the FLSA so that tip-pooling requirements applied to ALL employees receiving tips.

The DOL regulation 29 C.F.R. § 531.52 was revised to:

…Tips are the property of the employee whether or not the employer has taken a tip credit under section 3(m) of the FLSA. The employer is prohibited from using an employee’s tips, whether or not it has taken a tip credit, for any reason other than that which is statutorily permitted in section 3(m): As a credit against its minimum wage obligations to the employee, or in furtherance of a valid tip pool…

Notably, the regulation that prevented tip pooling between tipped and non-tipped employees applied regardless of the wage rate paid. Since 2011, a significant amount of private litigation involving tip pooling and tip retention practices ensued.  There were also inconsistent federal court decisions regarding whether employers who paid the higher wage could distribute tips to non-tipped employees.

2017 Notice of Proposed Rule-Making

In December 2017, the DOL proposed rescinding the 2011 regulation, asserting it had contributed to pay disparities between servers and other staff like cooks and dishwasher.  The DOL officially published the proposed regulations December 5, 2017, in the Federal Register, and approximately 374,000 comments were received.

Tip Pooling Today

The changes to the FLSA can be found in Title XII on page 2025 of the spending bill.

The bill did roll back the 2011 regulations that prohibited sharing of tipped employees with nontipped employees, but only in cases where the employer pays the higher minimum wage. This means when workers are paid the full minimum wage, it is legal for tipped employees to share their tips with non-tipped employees. However, the bill prohibits employers, managers, or supervisors from collecting or retaining tips made by employees.

“An employer may not keep tips received by its employees for any purposes, including allowing managers or supervisors to keep any portion of employees’ tips, regardless of whether or not the employer takes a tip credit.”

Lastly the bill contains a monetary penalty for violations.

‘‘Any employer who violates section 3(m)(2)(B) shall be liable to the employee or employees affected in the amount of the sum of any tip credit taken by the employer and all such tips unlawfully kept by the employer, and in an additional equal amount as liquidated damages.’’

PLEASE NOTE: Tip pooling laws vary by state and local jurisdictions; this blog exclusively discusses federal tip pool regulations. Employers should consult with counsel to determine whether their state or local jurisdictions have adopted more stringent requirements than those promulgated by the FLSA.

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