The Fair Labor Standards Act (FLSA) outlines federal tip credit and tip pooling provisions.
What is tip credit and tip pooling under Federal Law?
- Under a valid tip credit policy, employers are able to pay tipped employees an hourly rate that is less than minimum wage – provided that the tipped employee’s hourly wage plus tips equals or exceeds the required minimum wage.
- A tip pooling agreement requires tipped employees to deposit a portion of their customer tips into a common “tip pool” to be shared with other employees. A valid Tip Pooling arrangement must meet all the requirements of the FLSA provisions (and any state requirements) for tipped employees.
Continue reading Federal Tip Credit and Tip Pooling Basics
Buried in its 2,232 pages, the 2017 Omnibus Budget Bill contains a short provision making important amendments to the Fair Labor Standards Act as it relates to tip pooling arrangements. These amendments may have immediate and important ramifications for employers and may require changes to existing tip pooling arrangements in order to remain in compliance with the law.
The Long and Short of It
First, the bill makes it unlawful for employers, including managers and supervisors, to keep any portion of tips received by their employees, regardless of whether or not the employer takes a tip credit. Previously, the FLSA was vague on whether an employer could retain a portion of employee tips when the employer did not take a tip credit (i.e., when the employer paid the employee at least minimum wage not including tips). This update to the law brings the FLSA in line with previous Department of Labor (DOL) regulations that prohibited employers from sharing in employee tips at any time.
The second significant change brought about by the bill is that the FLSA now permits employers to require tipped employees to share their tips with back of house employees when the employer does not take a tip credit. Thus, under the FLSA, employers who pay their tipped employees at least the full federal minimum wage may now require tipped employees such as severs and bartenders to share their tips with employees who are not customarily tipped, such as dishwashers, cooks, and bussers. This amendment invalidates previous DOL regulations prohibiting employers from requiring such tip sharing with non-tipped employees.
DOL Guidance Continue reading FLSA Requirements for Tip Pooling Quietly Changed
Tip Pooling: A business’s practice of dividing customer tips among the staff.
While it is clear that management employees are not permitted to participate in a tip pool, there has been an ongoing debate as to whether the tip pool can be extended to those working in the “back of the house” (i.e. dishwashers, cooks, chefs, janitors, etc.) or if the pool is limited only to those working in the “front of the house” (i.e. servers, bartenders, etc.)
In 2011, the US Department of Labor issued a rule stating that stating that tips are the sole property of the tipped employee and only those employees who customarily and regularly receive tips (like waiters, waitresses, bellhops, counter personnel, bussers, and bartenders) can participate in a tip pool. In other words, “back of the house” employees were excluded from the tip pool because they do not customarily and regularly receive tips.
After this rule was published (in July 2012), several West Coast restaurant and lodging associations filed a lawsuit (Oregon Rest. & Lodging Association v. Perez) against the DOL arguing that the rule was invalid because the DOL had exceeded its statutory authority by issuing that rule. In 2013, a federal district court invalidated the DOL’s new tip-pooling regulations (thereby allowing “back of the house” employees to be included in the tip pool).
The DOL appealed the district court’s ruling and, earlier this year, the 9th Circuit issued its decision and held that the DOL’s tip pooling rule was valid.
What does this mean for employers?
For those employers who have included “back of the house” employees in a tip pool, they must rethink how their tip pool operates, as these employees can no longer be included in the traditional tip pool. Some alternatives:
- Exclude the “back of the house” employees from the tip pool;
- Include a separate line on guest checks for “back of the house” employees and have a separate tip pool for those employees;
- Eliminate the mandatory tip pool for all employees;
- Eliminate tipping altogether and charge all customers a mandatory service fee.