The Fair Labor Standards Act now permits many employers to include back-of-house employees in tip pools, and prohibits employer, manager, and supervisor participation.

On March 23, 2018, President Trump signed the new 2,232 page spending bill into law and in doing so, amended the FLSA with regard to tip pooling, by: (1) prohibiting employers, managers, and supervisors from sharing in tip pools, even if they provide service to guests; (2) instituting new penalties for violations of tip pooling laws; (3) permitting back-of-house employees to share in tip pools if all employees are paid at least the full federal minimum wage, with no federal tip credit taken; and (4) eliminating a series of regulations and proposed regulations, including the U.S. Department of Labor’s (DOL) December 2017 proposed rule. There are several pitfalls and open questions, however, and employers must still comply with more restrictive state and local laws. As a result, tip pooling policies should be carefully reviewed with counsel before implementation to insure compliance with all applicable requirements.

The December 2017 Proposed Regulations are Replaced

In August and December 2017, the DOL announced its intention to rescind its 2011 regulations, which prohibited employers from distributing tips through mandatory tip pools that included back-of-house employees such as dishwashers, cooks, and others. See our prior advisory on the announcement here.

The proposed rule was met with sharp criticism from workers’ rights groups because it did not expressly prohibit employers from sharing in tip pools, arguably permitting managers and supervisors to keep tips for themselves. The FLSA amendment effectively negates this rule and replaces it.

Employer, Manager, and Supervisor Sharing in Tip Pools is Prohibited and Penalized As a result of the outcry against the previously proposed rule, a bipartisan resolution to amend the FLSA was introduced in Congress as part of the spending bill. The amendment makes clear that all tips are the property of employees – not the employer. The FLSA now includes the following unambiguous statement:

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.

Thus, there is a clear prohibition on allowing managers and supervisors to keep any part of tips left for employees. The spending bill also adds new penalties to the FLSA for violations of the prohibition against employer tip-sharing and taking tip credits. These penalties include restitution of the tips and tip credits taken as well as civil penalties of up to $1,100 for each violation.

Back-of-House Tip Pooling is Permitted under the FLSA

Although the spending bill explicitly prohibits employers, managers, and supervisors from keeping employee tips, it does not mention back-of-house employees. Instead, the bill abolishes all provisions of the 2011 regulations that were “not addressed” by the amendment to the FLSA and states that they have no further force or effect. This signals a return to pre-2011 rules, which permitted back-of-house participation in tip pooling. In addition, the DOL has publicly stated that back-of-house employees may now participate in valid tip pools “in appropriate circumstances” under the FLSA.

Given this guidance, it appears that federal law now permits back-of- house employees who are paid the full minimum wage (with no tip credit taken) to participate in tip pools.1 State and local laws, however, must also be taken into account in developing tip-pooling policies. And note that the FLSA amendment does not alter existing laws on service charges, large party table charges, and automatic gratuities because they are not considered tips.

Open Questions

Beyond the key changes discussed above, the spending bill’s language leaves open several key questions, including the extent to which specific provisions of the 2011 regulations are now invalid because they were “not addressed” by the FLSA amendment. Additionally, the FLSA amendment does not provide a definition of “manager” or “supervisor,” or otherwise provide guidance to employers on the issue of whether an employee with any supervisory duties at all can participate in a valid tip pool. The fate of “voluntary” tip pools is also not clear, but employers who encourage employees to voluntarily share or pool tips outside the parameters of local, state and federal law should exercise caution and seek legal counsel. Employers will need to await further clarification by the DOL or the courts on these issues.

Employer Best Practices

  • Develop clear written policies for tip pooling, and ask participating employees to sign an acknowledgement confirming understanding of the policy. In drafting such policies, obtain legal guidance to ensure compliance with local, state and federal law.
  • Ensure that no managers, or supervisors participate in tip pools, whether voluntary or mandatory. If a supervisor works in both supervisory and tipped positions, employers should exercise caution and seek legal guidance as to whether, and under what circumstances, tip-sharing by the supervisor is permitted under local, state, and federal law.
  • Where mandatory tip-pooling with back-of-house employees has been implemented, ensure that all employees are paid the full federal minimum wage (without no tip credit taken), and that all applicable local and state laws are also followed.
  • Allocate tips among the participants in mandatory tip pools in a reasonable and equitable manner that reflects the amount of service that employees provide to guests.
  • Remember that local and state laws may prohibit or further restrict tip pooling policies.

Not All States Permit Tip-Pooling with Back of House Employees

The following are examples of how tip pooling will work in various states.

  • In California, back-of-house employees can now participate in tip pools. Labor Code § 351 permits mandatory tip pooling with back-of-house employees, as long as: (i) tip pools only include employees who provide “direct table service” or who are in the “chain of service” to guests; and (ii) no owner, manager or supervisor of the business participates in the tip pool (even if these individuals are in the chain of service to guests). Thus, with the federal restrictions lifted, California employers can include those back-of-house employees who are in the “chain of service,” which would include dishwashers, line cooks, and others who are not supervisors or managers.
  • In New York, the FLSA amendment does not affect New York’s prohibition on back-of-house employees participating in tip pools. The Hospitality Industry Wage Order (“HIWO”) requires that employees eligible to participate in a tip pool “must perform, or assist in performing, personal service to patrons at a level that is a principal and regular part of their duties and is not merely occasional or incidental” and that only “food service workers may receive distributions from the tip pool." “Food service workers” are defined as “any employee who is primarily engaged in the serving of food or beverages to guests, patrons or customers in the hospitality industry, including, but not limited to, wait staff, bartenders, captains and bussing personnel; and who regularly receive tips from such guests, patrons or customers.” Managers and supervisors are excluded from participation.
  • In Oregon, Washington, and many other jurisdictions, there are no state or local regulations governing tip pooling. Thus, with federal restrictions lifted, Oregon and Washington employers can include in tip pools back-of-house employees anywhere in the chain of service to guests, including dishwashers, line cooks, and others, except for management.

Because of the potential complexities and evolving legal landscape on this issue, employers with tipped employees should consult with legal counsel prior to implementing tip pools for employees.