United States: DOL Announces Intent To Rescind Rule Restricting The Allocation Of Gratuities To Non-Tipped Employees When The Employer Does Not Take A Tip Credit

Last Updated: August 1 2017
Article by Eli Freedberg

Restaurants, hotels, and other businesses that employ tipped workers have long wrestled with a seemingly simple, but actually intractable, question: who is entitled to receive a share of a guest's gratuities? If an employer applies a tip credit towards a tipped employee's wages, the federal law is clear—the employer is not permitted to retain any of the tips and tips must be retained by the tipped employee, or shared among customarily and regularly tipped employees such as servers, bartenders and bussers. However, the answer becomes muddled for those employers that do not take a tip credit and instead pay all employees, even those who receive tips, at least the full minimum wage. As discussed in more detail below, the U.S. Department of Labor (DOL) and various courts have taken different approaches to this question and, as a result, there exist inconsistent guidelines across the country. Recent developments from the DOL, however, may finally result in some clarity and uniformity.

Brief History of the FLSA's Tipping Laws and Regulations Concerning Employers that do not Apply a Tip Credit

In 1938, Congress passed the Fair Labor Standards Act (FLSA) and set a national minimum wage rate for the first time. For the first 40 years that the FLSA was in effect, there was no differentiation between employees who received tips and those who did not. However, in 1974, Congress amended the FLSA and for the first time allowed employers to apply a tip credit towards the wages of employees who received gratuities. The tip credit allows employers to count a portion of an employee's tips as wages in order to satisfy the minimum wage requirements. In order to apply a tip credit, the statute required that the employer inform the tipped employee of the provisions of the law and also mandated that "all tips received by such employee have been retained by the employee" subject to the creation of a lawful tip pool that allowed the splitting of tips among employees who customarily and regularly received tips.

Since the passage of the 1974 amendment, many courts interpreted the FLSA to prohibit the sharing of tips with non-tipped employees such as kitchen or maintenance staff. These courts also prohibited employers from keeping any portion of gratuities for themselves. In 2010, however, the tide began to change when the U.S. Court of Appeals for the Ninth Circuit, which covers Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington, issued a decision in Cumbie v. Woody Woo, Inc., 596 F.3d 577, 581 (9th Cir. 2010), which held that section 203(m) of the FLSA does not restrict the tip-pooling practices of employers that do not apply a tip credit towards its employees' wages. In other words, the Ninth Circuit said that an employer that pays its employees at least the full minimum wage can mandate a policy where tips are shared among all employees, even those who do not regularly and customarily receive tips such as kitchen and maintenance staff.

In response to the Ninth Circuit's decision in Woody Woo, the DOL, in 2011, promulgated new rules to specify that tips are always the property of the employee. Specifically, the DOL revised 29 C.F.R. § 531.52 by replacing the sentence, "[i]n the absence of an agreement to the contrary between the recipient and a third party, a tip becomes the property of the person in recognition of whose service it is presented by the customer" with the following language "[t]ips are the property of the employee whether or not the employer has taken a tip credit . . . The employer is prohibited from using an employee's tips, whether or not it has taken a tip credit, for any reason other than that which is statutorily permitted in section [the FLSA], as a credit against its minimum wage obligations to the employee, or in furtherance of a valid tip pool."

Several appellate courts have analyzed the propriety of the 2011 regulation and held that the DOL exceeded its authority. These courts further held that the 2011 DOL regulation is invalid because it violates the express language of Section 203(m) of the FLSA. For example, the Tenth Circuit in Marlow v. New Food Guy, Inc., 861 F.3d 1157 (10th Cir. 2017) held that "[a]ll that § 203(m) does is permit a limited tip credit and then state what an employer must do if it wishes to take that credit." The Tenth Circuit covers Colorado, Kansas, New Mexico, Oklahoma, Utah and Wyoming. Likewise, the Fourth Circuit in Trejo v. Ryman Hosp. Props., Inc., 795 F.3d 442, 448 (4th Cir. 2015) found that "§ 203(m) does not state freestanding requirements pertaining to all tipped employees, but rather creates rights and obligations for employers attempting to use tips as a credit against the minimum wage." The Fourth Circuit covers Maryland, North Carolina, South Carolina, Virginia and West Virginia. As a result of these holdings, employers located in the states covered by the Fourth and Tenth Circuits are allowed to retain tips or distribute tips to non-tipped employees, provided they do not take advantage of the tip credit and pay all staff the full minimum wage.

Ironically, the Ninth Circuit, which was the first court to hold that an employer that does not apply a tip credit can keep gratuities, has since reversed course. In Oregon Rest. & Lodging Ass'n v. Perez, 816 F.3d 1080, 1086–89 (9th Cir. 2016), the Ninth Circuit split with the Tenth and Fourth Circuits, finding that the DOL's regulation was entitled to deference, and that the practice of sharing tips with employees who are not customarily and regularly tipped is prohibited by Section 203(m) of the FLSA in all cases. The Oregon. Rest. & Lodging Ass'n case is currently on appeal to the United States Supreme Court.

The DOL Indicates it Will Rescind the 2011 Regulation

In what is likely an attempt to avoid the Supreme Court's review of the DOL's power to issue regulations, the DOL recently announced that it would begin the process of revoking the 2011 regulation that it adopted in response to the Woody Woo decision. In the meantime, the DOL has implemented a nationwide non-enforcement policy concerning the 2011 regulation. Accordingly, once the rule is revoked, under federal law, an employer that does not apply a tip credit towards tipped employees' wages will be able to keep tips, distribute tips to kitchen staff, or otherwise set the parameters for sharing tips in any way it sees fit.

Impact of the Announcement

The DOL's revoking of the 2011 regulation is welcome news to many employers that reside in jurisdictions that solely follow the FLSA. However, the DOL's announcement will have a limited impact in some jurisdictions that have adopted specific laws governing tipping and prohibit distribution of gratuities to non-tipped employees under any circumstances. For example, New York State has adopted laws and regulations that prohibit employers from retaining tips or requiring tipped employees to share tips with supervisory or non-service providing employees. Likewise, the Connecticut Department of Labor's Wage and Workplace Standards Division takes the position that only front-of-house employees who have regular guest interaction may participate in a mandatory or voluntary tip pool. California, too, only permits tip pooling where participants in the tip pool contribute to the patron's service. All employers should consult with an attorney to determine whether their state or locality adopts more stringent requirements than those promulgated by the FLSA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Eli Freedberg
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.