Quite a bit of effort goes into making an enjoyable restaurant experience, such as good food, prompt service and, of course, cleanliness. Want to reward the dishwashers for providing you with spotless silverware, expediters for bringing out your food while it is still hot or the chef for cooking the perfect meal by leaving a generous tip? Not so fast. Cooks, expediters and other back-of-the house employees historically have not been able to legally share in the tips that are pooled and distributed among the servers, hosts and others in the front of the house.

However, there may be some relief in sight. On July 20th, the Department of Labor (DOL) announced its intent to rescind its previously issued tip-pooling restrictions, which limited employers’ ability to force employees to share tips. This announcement does not immediately change the law, but is promising news for what is on the horizon for restaurants and other employers who use tip pools.

Tip Pooling Basics

Tipped employees are those who customarily and regularly receive more than $30 per month in tips. The Fair Labor Standards Act (FLSA) allows employers to take a tip credit toward the minimum wage obligation for tipped employees equal to the difference between the required cash wage (which must be at least $2.13) and the federal minimum wage ($7.25; higher in some states).

The FLSA also allows employees to contribute some portion of their tips to a tip pool which is then shared among other employees. Employers who require the pooling of tips must inform the employees of the FLSA’s tip pooling provisions. Many employers required employees to share their tips with other “front of the house” employees such as hostesses, bussers and bartenders in tip pools. The FLSA left employers with confusion if back of the house staff, such as cooks and dishwashers, could also benefit from a tip pool. Confusion invariably leads to litigation, and countless restaurants have found themselves on the receiving end of lawsuits alleging they are operating illegal tip pools and owe their employees tens of thousands of dollars plus attorneys’ fees.

The Courts Weigh in on the DOL’s Tip Pooling Regulation

In 2011, the DOL issued controversial rules establishing that tips are the property of the employee who actually received the tip and could not be shared with other non-customarily tipped employees or retained by the employer even if the employee was not paid on a tip credit basis and was paid the full minimum wage. The DOL justified its rule by reasoning that, “[w]hen the employer uses tips for its own purposes, whether to supplement wage payments to nontipped 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’s 2011 Regulation gained support from the Ninth Circuit Court of Appeals, which governs employers operating in California, Nevada, Washington, Arizona, Oregon, Idaho, Montana, Hawaii, and Alaska. In Oregon Restaurant and Lodging Association v. Perez, decided in February 2016, the Ninth Circuit held that since the FLSA was silent on defining tip pools, the DOL had the authority to interpret the statute as it saw fit. On the other hand, the Tenth Circuit Court of Appeals, governing Colorado, Kansas, Oklahoma, Utah, Wyoming and New Mexico, recently ruled that the DOL’s regulation is invalid, holding the tip credit provision does not apply where an employer pays employees at least the required minimum wage, and in such situations the employer may thus retain the tips. The Tenth Circuit’s decision agreed with previously-issued decisions from other federal appellate courts in the Fourth (Maryland, Virginia, West Virginia, North Carolina and South Carolina) and Eleventh Circuits (Alabama, Florida and Georgia).

The National Restaurant Association along with others such as Wynn Las Vegas have asked the United States Supreme Court to address what they perceive to be overreach by the DOL and a conflict among the Circuits. The DOL’s recent announcement could lead the Supreme Court appeal to be rendered moot.

What Happens Next?

In its Notice of Proposed Rulemaking, the DOL proposes to rescind the restrictions on tip pooling by employers that pay tipped employees the full minimum wage directly. Put another way, if an employer chooses to pay its employees the full minimum wage, it can require the employee to share tips with back of the house staff who certainly contribute to the restaurant experience.

For now, employers outside the Fourth, Tenth, and Eleventh Circuits (particularly those in the Ninth Circuit) should continue to follow the regulation until rescinded. Employers in the Fourth, Tenth, and Eleventh Circuits can feel more confident that their tip pooling arrangements are less likely to be subject to DOL scrutiny. But no matter what Circuit(s) you are in, employers should continue to keep abreast of state and local laws which could limit or prohibit their use of tip pooling arrangements or require some type of notification or posting such as what is required in Colorado. It is not unusual to see an uptick in local legislation in such circumstances.

Employer’s Bottom Line

While the rescission process will take time, it is always best to be prepared for change. Employers should take this time to audit their tipping policies, practices and notices to determine what changes, if any, will need to be made to them once rescission occurs. Employers should also evaluate whether an employer-required tip pooling arrangement makes sense for their establishment. The tip-out practice your employees have created themselves may be satisfactory so there is no need to “rock the boat” with management involvement.