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New Tip Rules From the U.S. Department of Labor

The U.S. Department of Labor recently announced that it will allow several new rules to go into effect regarding tips paid to employees under the Fair Labor Standards Act (FLSA). These rules were originally proposed while President Trump was still in office, but once President Biden was sworn in, the DOL placed these rules on hold to see if other changes needed to made before the rules went into effect. Now it appears that the DOL will move forward with part of the proposed rules, but not all of them.

These new rules (1) include “a prohibition on employers, including supervisors and managers, [against] keeping tips received by workers, regardless of whether the employer takes a tip credit,” and (2) allow an “employer that does not take a tip credit to include non-tipped workers, such as cooks and dishwashers, in nontraditional tip-sharing agreements.”

Rule Number 1 is a flat out prohibition on managers and supervisors from stealing tips from their employees (called “wage theft”). Managers and supervisors already get paid either a higher hourly wage or a salary, while the employees who typically receive tips make a much lower wage. For waiters and waitresses, that hourly wage can be as low as $2.13/hour. The DOL seeks to protect those lower wage earners from unscrupulous managers who seek to take tips that do not belong to them.

Rule Number 2 deals with what the DOL calls “tip pools,” where employees (typically a restaurant) combine all of their tips into a joint pool and then divide out the proceeds equally at the end of the night. There’s been a lot of confusion over whether backline/back of the house employees can be included in that tip pool, since most of those employees get paid a regular hourly wage while wait staff often gets paid $2.13 plus tips. Different courts have come to different conclusions, so this rule is designed to clear up any lingering confusion. So under this new rule, back line staff can only participate in the tip pool IF the restaurant pays all of its waiters at least a full minimum wage of $7.25/hour. If the restaurant pays $2.13/hour plus tips to wait staff (called taking a “tip credit”), then the employer cannot force waiters to pay part of their tips to cooks and kitchen staff. Period.

These new rules will likely take effect later this year, and I’ll provide an update at that point as well. In the meantime, if you are an employee whose tips are being taken by your manager or are being forced to share with the kitchen staff, you should probably speak with an FLSA lawyer in more detail.

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Tip Pooling Changes under the Fair Labor Standards Act

For many employees in the restaurant or hospitality business, the term “tip pooling” does not evoke fun aquatic romps through mounds of valuable currency like Scrooge McDuck diving into his glorious (and curiously soft and forgiving) lake of golden coinage.

Instead, for most employees (especially wait staff), tip pooling means that part or all of their tips goes into a collective pot and gets divided at the end of the day between all of the employees. I understand quite personally how such a violative act feels, since one Halloween, my mother pooled all of my and my siblings’ Halloween candy into one giant bowl, took her rather generous cut, and then doled out the remainder in tiny portions over what seemed like the next 12 to 14 years. So, essentially communism.

Anyway, all childhood trauma aside, new changes are afoot in the tip pooling realm

In March 2018, President Trump signed into law the Consolidated Appropriations Act of 2018 (CAA), which included a tiny provision on one page in a nearly 900 page law that affects the Fair Labor Standards Act and tip pooling. Before the CAA was passed, the U.S. Department of Labor had issued regulations that prohibited tip pooling when employees were paid at least minimum wage and the employee didn’t take a tip credit.

The new amendments to the FLSA prohibit managers and owners from partaking in shared tips, which most plaintiff’s employment lawyers considered wage theft and has been a fairly common practice. This rule applies regardless of whether the employee is taking a tip credit. (A tip credit is when the employee is paid $2.13 an hour, with the remainder of wages coming from tips. The difference between $2.13 and $7.25 is called a “tip credit,” because the employer gets credit for paying full minimum wage, even though that difference is paid by customers in the form of tips.)

The CAA also addressed tip pooling by officially permitting non-tipped “back of the house” employees, like cooks, dishwashers, and busboys (buspeople?), to participate in an otherwise valid tip pool. That means that they can share in tips earned by the “front of the house” employees, like waitresses and hostesses, as part of the tip pool.

Takeaways for Employers and Employees on Tip Pooling

The biggest practical change caused by this new law is for employers. Before March 2018, the law prohibited only employers who took a tip credit (i.e., paid their employees $2.13 plus tips) from taking tips or sharing in a tip pool with the employees. Now, however, Congress has restricted all employers. including supervisors and managers, from participating in tip pools with the tipped employees, regardless of whether the business takes a tip credit.

For employees, the same basic question will apply in determining the legality of a tip pool: Are the people taking part in a tip pool legally permitted to do so? (In other words, are only non-manager employees in the tip pool?) If there are any managers or supervisors in the tip pool unlawfully, then the tipped employee is still the victim of wage theft.

If you’re an employee participating in an employer-mandated illegal tip pool, you should seek legal advice on all of your rights and remedies under the law.