Hospitality employers should be aware that the U.S. Department of Labor’s Wage & Hour Division recently issued a final regulation addressing a number of issues under the Fair Labor Standards Act (FLSA). The new rules became effective on May 5, 2011.

Of particular interest to the hospitality industry are three new provisions related to employees who receive tips as part of their wages. First, the Department specified what an employer must tell employees who receive the tip credit wage. Second, the Department eliminated the 15% cap on employee contributions to a mandatory tip pool. Finally, the Department stated that tips are the property of the employee who earns them. The final regulation requires an employer to inform its employees that it intends to avail itself of the tip wage credit. Specifically, an employer seeking to use the tip credit must inform a tipped employee (before it utilizes the tip credit wage) of the following:

  • the direct cash wage the employer is paying the tipped employee;
  • the additional amount the employer is using as a credit against tips received, which cannot exceed the difference between the minimum wage and the actual cash wage paid by the employer to the employee;
  • that the additional amount claimed by the employer on account of tips as the tip credit may not exceed the value of the tips actually received by the employee;
  • that the tip credit shall not apply with respect to any tipped employee unless the employee has been informed of the tip credit provisions; and
  • that all tips received by the tipped employee must be retained by the employee except for the pooling of tips among employees who customarily and regularly receive tips.

Furthermore, although the Department is not requiring written notification of these terms to the employees, it notes that “employers may wish to do so, since a physical document would, if the notice is adequate, permit employers to document that they have met” these requirements.

The final regulation also addresses the issue of the maximum amount an employer may require an employee to contribute to a tip pool. It eliminates the existing cap on the maximum permissible contribution percentage (15%). Going forward, employers must notify employees of tip pool contribution requirements. Additionally, employers may not use a tip credit in an amount greater than the amount of tips ultimately received.

Furthermore, employers “may not retain any of the employees’ tips for any other purpose.” It is not clear whether the Department will continue to require that the tip pool contributions be “customary and reasonable.”

Finally, the Department states that tips are the property of the employee – with the exception of contributions to a valid tip pool – even when the employer does not take a tip credit.

As a result of the final rule, hospitality employers should ensure that they are providing the required notice to tipped employees. In certain circumstances (e.g., multi-state operations, multiple pay rates within the same position), this may require a notice that has been specifically tailored to an individual facility or employee. Hospitality employers should also take this opportunity to review their tip pooling arrangements to confirm that only those employees who may participate in a tip pool are doing so.

Remember, of course, that the FLSA does not pre-empt state wage and hour laws. Thus, employers should take care to review applicable state laws that may place different requirements on an employer’s use of tips.