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DOL Proposes New Rule To Allow Tip-Pooling Among All Employees

Published by on January 12, 2018

Under the proposed rule, employers that do not elect to claim the tip credit may distribute tips among all employees.

In an effort to spread tips among more employees, including those that might not ever receive tips, the Trump Administration is rewriting an Obama-era regulation to once again allow tip-pooling. The Department of Labor’s notice of the proposed rulemaking was published in the Federal Register on December 5, 2017, and the rule was open to public comment until January 4, 2018. Under the new rule, employers that do not claim a tip credit and pay employees at least the minimum wage may collect tips and distribute them as they see fit to all employees.

Under the Fair Labor Standard Act (FLSA), all non-exempt employees are entitled to receive the minimum wage. The federal minimum wage is currently $7.25 per hour, and many states provide a higher minimum wage. Where employees regularly receive tips, such as restaurants, employers may elect to claim a tip credit under the FLSA to offset the wages paid by the employer with the tips received. With a tip credit, employers are obligated to pay employees $2.13 per hour under the FLSA, so long as the employee actually receives enough compensation in tips to meet or exceed the minimum wage. Whether an employee has been paid the minimum wage under the FLSA depends on actual compensation and hours worked within a set workweek.

Under the current federal regulation, which has been in place since 2011, tips are the property of the employee, and the employer may only use the employee’s tips as a credit against its minimum wage obligations, or for a valid tip pool. 29 C.F.R. § 531.52. A valid tip pool, under the regulation, “can only include those employees who customarily and regularly receive tips.” 29 C.F.R. § 531.54. With the exception of a valid tip pool, all tips are to be retained by the employee that received the tip. 29 C.F.R. § 531.59(b). This limitation on tip-pooling under the FLSA has been subject to much litigation, and was found inapplicable to employers that do not take the tip credit and pay a full minimum wage by the U.S. Court of Appeals for Fourth and Eleventh Circuits, while the Ninth Circuit interpreted it to ban taking tips regardless of tip credit.

The proposed rule would permit employers that pay the full minimum wage and forego the tip credit to elect to collect tips and institute a tip pool, and include employees in the pool that are not traditionally tipped, so-called “back-of-the-house employees.” DOL stated that the new rule seeks to “decrease wage disparities between tipped and non-tipped workers.” It would not affect employers that claim a tip credit.

Some critics believe that tips are earned by, and thus should be solely retained by, the receiving employee who interacted with the tipping customer, such as the server. Proponents counter that back-of-the-house employees, such as cooks and dishwashers, play as important of the service industry as the server, and deserve a share of the tips. As the DOL stated, “back-of-the-house employees contribute to the overall customer experience, but may receive less compensation than their traditionally tipped co-workers.” Studies have shown that wages for servers have greatly increased over recent decades, while wages for back-of-the-house employees have made only modest increases. Other critics note that the rule does not require the employer to distribute the pooled tips at all, and would allow them to keep the tips and have all employees work for a set wage.

Welter Insight

Employers should be aware that the rollback on the federal prohibition on tip pooling is not yet final. Additionally, many states have enacted laws that completely prohibit tip credits and/or tip pooling, or have set additional requirements for employers to claim a permissible tip credit or tip pooling. Although it is unlikely the final rule will differ from the proposed rule, DOL will need to consider all comments received during the comment period before publishing the final rule. If the proposed rule is ultimately adopted, employers in the hospitality and restaurant industry should be aware of this potential mechanism under federal law to distribute tips among all employees, including back-of-the-house employees.

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