If you’ve been paying attention to the news relating to wage and hour law (and really, who isn’t?), you may recently have heard quite a bit about new federal rules on tipped employees, and more recently Congress stepping in with new legislation. There has been a lot of rhetoric on all sides, though not always a lot of clarity, so here is a summary of what employers need to know about the new rules.

What hasn’t changed

To recap, the Fair Labor Standards Act requires employers to pay employees a specified minimum wage, currently $7.25 per hour for most employees. However, under FLSA Section 3(m), employers are allowed to count up to $5.12 per hour of employees’ tips against their total minimum wage obligation. (State and local laws vary.) The DOL’s rules have long made clear that employers cannot take this “tip credit” if any tips are kept by the house, or if the employer requires employees to share tips with managers or employees who do not customarily and regularly receive at least $30 per month in tips (e.g., “back of the house” personnel such as cooks, dishwashers, etc.). These basic rules remain the same.

What has changed

What wasn’t clear, until now, was whether the FLSA imposes any restrictions on tip pooling for employers who don’t take the tip credit. The Obama administration said yes – the restrictions on tip pooling apply regardless of whether an employer takes the tip credit. The Trump administration, and several federal courts, said no – the FLSA only governed minimum wage, it said nothing about what employers can do with tips for employees who are paid the full minimum wage without resort to the tip credit. (See our earlier post on the Trump administration’s proposed rules for more background.)

On March 23, 2018, President Trump signed H.R. 1625 (.pdf), the Consolidated Appropriations Act for 2018. Buried deep in the 878-page law (page 801, if you’re counting) is an easy-to-overlook provision relating to “Tipped Employees.” In that short section, Congress amends the FLSA to specifically prohibit employers from requiring employees to share their tips with the employer, including any managers or supervisors, whether or not the employer takes a tip credit. This is significant, because it means that an employer can now violate the FLSA through an improper tip pooling arrangement even if it is paying employees the full minimum wage.

On April 6, 2018, the DOL issued Field Assistance Bulletin No. 2018-3 (.pdf), explaining how the Department intends to implement the new amendment. There, the DOL states that as an enforcement policy, it will use the duties test for the executive exemption to determine whether an employee is a “manager or supervisor” for purposes of Section 3(m). Interestingly, this may mean that the DOL would not pursue claims against employers where lower-level supervisors or lead workers who don’t meet the test for the executive exemption – for example, because they lack sufficient authority over hiring, firing, discipline, or conditions of employment – participate in a tip pool. However, since this is only an enforcement policy, the DOL could easily change its position, and the courts may not adopt the same rule.

While employers cannot require employees to share their tips with managers and supervisors, the new law eliminates the regulation restricting employers who do not use the tip credit from require tip pooling with employees who are not “customarily and regularly tipped,” until “any future action” by the Administrator of the DOL’s Wage and Hour Division. This means that, for now, employees who are paid at least the minimum wage in cash can be required to share tips with cooks, dishwashers, and other non-management, non-supervisory “back of the house” employees, absent a state or local law to the contrary.

Uncertainty About Tipped Managers

The new law does not address the question of what do with FLSA-exempt employees who customarily and regularly receive tips as part of their work. Exempt employees are not covered by the minimum wage and overtime provisions of the FLSA, so one might think that those employees should not be affected by this amendment. However, the amendment does not distinguish between exempt and non-exempt employees, so the conservative reading would be that it the new rules do apply. Additionally, since the amendment expressly says that employees cannot be required to pool tips with managers or supervisors, this might imply that managers and supervisors cannot be required to pool tips with one another. In other words, it is possible that the new law would restrict even a management-only tip pool. Employers will have to await further guidance from the courts and the DOL to see exactly how the new amendment may apply to exempt managers and supervisors who receive tips.

Penalties for Violations

The new amendment specifies that employers who withhold tips from employees in violation of the law will be liable to employees for the sum of the amount of any tip credit taken and the amount of all tips withheld, plus an equal amount of liquidated damages. Additionally, the law gives the DOL authority to impose civil monetary penalties of up to $1,100 per violation. The DOL’s Field Assistance Bulletin states that the DOL will apply its existing practices with respect to civil monetary penalties, “including by determining whether the violation is repeated or willful.”

Tips For Employers

Here are the major take-aways from the new law and DOL guidance:

  • Employers that maintain tip pooling arrangements should carefully examine their tip pooling practices in light of the new law.
  • For employers who take a tip credit, not much has changed – the same restrictions on tip pooling continue to apply. Employers cannot retain any tips paid to employees, except as part of a valid tip pooling arrangement. Tip pools may not include management or supervisory employees, or other employees who do not customarily and regularly receive tips.
  • Employers who don’t take a tip credit must ensure that managers and supervisory employees are excluded from any tip pooling arrangement as of March 23, 2018.
  • Employers must also ensure that they are not taking any other improper deductions from employee tips, such as charges for credit card processing fees that exceed the employer’s actual cost for such fees. (See this earlier post for a discussion of such charges.)
  • In most jurisdictions, employers that do not use the tip credit are now free to adopt tip pooling arrangements that include “back of the house” employees. However, employers should be sure to check state and local law.