Executive Summary: On December 5, 2017, the U.S. Department of Labor (DOL) published its Notice of Proposed Rulemaking (NPRM) to reverse the Obama Administration’s tip rule prohibiting the distribution of tips to anyone other than the tipped-employees who earned them (available here). The Obama-era rule has been lauded by employee-advocates as a needed protection from employer abuse, while criticized by employers for stifling their ability to share tips with other non-tipped employees. It has also created legal uncertainty throughout the country, and caused a split among federal courts. Although the DOL’s newly proposed rule will provide increased short-term certainty for employers, legal challenges on this issue are likely to continue.

Background: Under the Fair Labor Standards Act (FLSA), employers who utilize a tip credit and pay tipped-employees less than the minimum wage (i.e., $2.13/hour instead of $7.25/hour) are prohibited from pooling or sharing such tips with non-tipped workers or the employer. In 2011, however, the DOL expanded this prohibition and issued a rule stating: “Tips are the property of the employee whether or not the employer has taken a tip credit.” Practically speaking, the rule made it unlawful for employers to keep or share tips with non-tipped employees even if the tipped-employee earned the full minimum wage. Tipped employees usually include servers, bartenders, and bussers. Non-tipped employees usually include cooks, dishwashers, and other staff.

Federal courts are split on whether the 2011 tip rule is valid. In Oregon Restaurant and Lodging Association v. Perez, the Ninth Circuit upheld the Obama-era rule and granted deference to the DOL’s position. The Ninth Circuit determined that the FLSA was “silent as to the tip pooling practices of employers who do not take a tip credit” and, therefore, the rule was “consistent with the FLSA’s language, legislative history, and purpose.” The National Restaurant Association and others have filed a petition for writ of certiorari to the U.S. Supreme Court (which is currently pending). On the other hand, the Tenth Circuit, in Marlow v. The New Food Guy Inc., ruled that the DOL’s rule was invalid because it exceeds the DOL’s authority. Rejecting the Ninth Circuit’s analysis, the Tenth Circuit held that the language of the FLSA was not ambiguous, nor was there a “gap” in the law for the DOL to fill.

New Proposed Rule: This week, the DOL announced its intent to reverse the 2011 rule. In support of this roll-back, the DOL stated that the updated position would allow “sharing tips through a tip pool with employees who do not traditionally receive direct tips – such as restaurant cooks and dishwashers.” The DOL further stated that the proposed rule provides “employers and employees greater flexibility in determining pay policies for tipped and non-tipped workers . . . [and] allows them to reduce wage disparities among employees who all contribute to the customer’s experience and to incentivize all employees to improve that experience regardless of their position.” Critics of the change, however, note that the proposed rule will also give the employer the ability to retain employee tips for itself or managers—including, for example, using tips for capital expenditures. Critics also charge that, contrary to the DOL’s position, employees seldom have the authority to determine the tip-pooling policies that are applied to them by their employer.

The DOL’s proposed change does not affect the rules governing tip credits, and only applies to tipped-employees who earn the full minimum wage.

Employers’ Bottom Line: The DOL’s proposed rule change may significantly impact the operations of thousands of restaurants and other service industries around the country regarding sharing the tips of employees who receive the full minimum wage. Nonetheless, although the position is a positive development for employers, the DOL’s new rule will likely be subject to immediate legal challenges (just like the Obama-era rule). Therefore, employers will continue to have some legal uncertainty with respect to this issue.

Individuals may submit comments regarding the proposed rule to the DOL on or before January 4, 2018. Comments may be submitted via mail or electronically by visiting the Federal eRulemaking Portal at http://www.regulations.gov and using Regulatory Information Number (RIN) 1235-AA21.