On December 5, 2017, the US Department of Labor (DOL) announced a Notice of Proposed Rulemaking (NPRM) regarding the tip regulations under the Fair Labor Standards Act (FLSA). Under the proposed rule, employers would have the ability to allow the sharing of tips among a wider range of employees. According to the DOL, the proposal “would help decrease wage disparities between tipped and non-tipped workers, an option that is currently restricted by a rule promulgated in 2011 that has been challenged in a number of courts.”
Section 3(m) of the FLSA permits an employer to take a partial credit against its minimum wage obligations on account of tips received by its employees, but only if, among other things, its tipped employees retain all of their tips. Section 3(m), however, does not preclude an employer that takes a tip credit from implementing a tip pool in which tips are shared only among those employees who “customarily and regularly receive tips.”
The purpose of Section 3(m)'s tip credit provision is to allow an employer to subsidize a portion of its Federal minimum wage obligation by crediting the tips customers give to employees. If an employer takes a tip credit against its wage obligations, Section 3(m) applies, along with its attendant protections that restrict the employer's use of tips received by its employees. The DOL has stated that “where an employer has paid a direct cash wage of at least the full Federal minimum wage and does not take the employee tips directly, a strong argument exists that the statutory protections of Section 3(m) do not apply.”
The NPRM only applies where employers pay at least a full minimum wage and do not take a tip credit, as permitted by Section 3(m) the FLSA. It would allow sharing tips through a tip pool with employees who do not traditionally receive direct tips – such as restaurant cooks and dish washers. The DOL reasoned that these “back of the house” employees “contribute to the overall customer experience, but may receive less compensation than their traditionally tipped co-workers.” The proposal would not affect current rules applicable to employers that claim a tip credit under the FLSA.
The DOL issued tip regulations in 2011 that restricted this option to reflect its then-existing view that the statutory conditions in Section 3(m) of the FLSA require that tipped employees retain all of their tips, except for those tips distributed through a tip pool limited to customarily and regularly tipped employees, regardless whether such employees work for an employer that takes a tip credit.
The DOL observed that since 2011, “there has been a significant amount of litigation involving the tip pooling and tip retention practices of employers that pay a direct cash wage of at least the federal minimum wage and do not claim an FLSA tip credit. There has also been litigation directly challenging the Department’s authority to promulgate the provisions of the 2011 regulations that restrict sharing of tips.”
The DOL also observed that in the past several years, several states have changed their laws to require employers to pay tipped employees a direct cash wage that is at least the federal minimum wage. This means that fewer employers can take the FLSA tip credit. The DOL’s proposed new rule follows these developments, “along with serious concerns that it incorrectly construed the statute when promulgating the 2011 regulations.”
According to the DOL, “promulgation of the regulation would also make clear that where an employer does not claim the tip credit under Section 3(m) and pays a direct wage that satisfies the FLSA's minimum wage requirements, the treatment and disposition of tips is a matter of agreement between the employer and employees or of state law.”
Historically, six western states (Alaska, California, Montana, Nevada, Oregon, and Washington) have prohibited employers from using tips received by employees as a credit against their state minimum wages—all of which today equal or exceed the Federal minimum wage—thereby preventing employers in these states from claiming a Section 3(m) tip credit to reduce the direct cash wage they pay without incurring liability under state law. More recently, the same impact occurs under minimum wage laws in Minnesota, Hawaii, New York, Arizona, and Colorado.
The NPRM was published in the Federal Register on Dec. 5, 2017, and is available for public comment for 30 days. The DOL encourages interested parties to submit comments on the proposed rule by January 4, 2018. The NPRM, along with the procedures for submitting comments, can be found at the Wage and Hour Division’s Proposed Rule website.