Dipping Your Toe in the Tip Pool: The Department of Labor Issues New FLSA Guidance

FLB Law      Jan. 6, 2021

Image of a tip left at a restaurant[Update: President Biden’s administration withdrew three opinion letters issued by the prior administration.]

The Fair Labor Standards Act (FLSA) establishes minimum wage, overtime pay, recordkeeping, and youth employment standards affecting employees in both private and government sectors. On December 22, 2020, the United States Department of Labor (DOL) announced a Final Rule addressing amendments made to the FLSA in recent years in an attempt to clarify how tipped employees must be compensated.  This clarification particularly affects employers and workers in the food services and hospitality industries and others with tip pool arrangements.

In general, the FLSA requires that covered employers pay employees at least the federal minimum wage (currently, $7.25 per hour). However, as amended, the FLSA allows employers to count a limited amount of the tips received by its “tipped employees” (i.e., employees who regularly receive more than $30 per month in tips) as a credit toward the federal minimum wage payment obligation. By using the tip credit, employers can pay tipped workers the lower minimum wage of $2.13 per hour. Employers may take advantage of the tip credit when using a “tip pool” arrangement, so long as the pooled tips are shared only among employees who customarily and regularly receive tips. A valid tip pool may include employees who do not customarily and regularly receive tips, such as dishwashers, cooks, chefs, and janitors.  However, if those employees are included, the employer may not take the tip credit.  Employers are always prohibited from keeping or diverting employees’ tips for purposes of, for example, allowing managers or supervisors to participate in the tip pool or keep any portion of employees’ tips. If an employer unlawfully keeps or diverts tips, affected workers or the DOL may sue to recover the tips, as well as an equal amount of liquidated damages, and attorneys’ fees and court costs. The DOL also has authority to impose civil penalties.

What Does the DOL Final Rule Change?

Among other things, the DOL Final Rule changes and clarifies federal regulations concerning employee tips as follows:

  • Incorporates the new FLSA statutory language prohibiting employers or its managers and supervisors from keeping employee tips.
  • Allows employers to require tip pooling, and to require pooling that includes employees who do not traditionally receive tips, such as cooks and dishwashers (so long as the employer does not take the tip credit).
  • Incorporates a new recordkeeping requirement for employers that do not take a tip credit, but collect employee tips to operate a mandatory tip pool.
  • Allows an employer to take a tip credit for time spent by an employee in a tipped occupation performing related, non-tipped duties contemporaneously with tipped duties, or for a reasonable time immediately before or after performing the tipped duties. (The Final Rule also describes which non-tipped duties are related to a tip-producing occupation.)
  • Requires an employer that collects tips to facilitate a mandatory tip pool to fully redistribute the tips no less often than when it pays wages, in order to avoid “keeping” the tips.
  • Incorporates requirements regarding civil money penalties for violating rules regarding employee tips.

The DOL estimates that this Final Rule could result in a potential transfer of $109 million among employees, as tip pools are expanded from front-of-the-house employees alone to include back-of-the-house employees.

When are These Changes Effective?

The Final Rule has been submitted to the Office of the Federal Register (OFR) for publication, and is currently pending placement on public inspection at the OFR and publication in the Federal Register. The Final Rule is anticipated to become effective in early 2021.

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