United States: DOL Issues Proposed Rule To Rescind 2011 Regulations That Impose Tip-Sharing Restrictions On Employers That Pay The Full Federal Minimum Wage To Employees

Last Updated: December 6 2017
Article by Eli Freedberg and David B. Jordan

The U.S. Department of Labor (DOL) has issued a proposed rule to rescind the Department's position that employers must comply with tip-pooling requirements even when paying the full minimum wage. This proposal, if finalized, would allow employers that pay employees at least the full federal minimum wage to require employees to share tips with employees who are not otherwise customarily tipped, such as cooks, dishwashers, porters and maintenance staff. This rule would not affect employers that apply a tip credit towards employees' wages.

Background

In 1966, Congress enacted an amendment to the federal Fair Labor Standards Act (FLSA) that permitted employers to utilize tips received by employees as a credit against part of the employer's minimum wage obligations. In 1974, Congress passed another amendment to the FLSA that conditioned an employer's ability to use this "tip credit" by requiring that an employer inform its employees of the provisions of the FLSA's tip credit provision and requiring that employees retain all tips, except that tip pooling among customarily and regularly tipped employees was permitted.

In 2011, the DOL amended FLSA regulations to reflect its view at the time that the tip-pooling requirements apply to all employees receiving tips, even if the employer paid an employee at or above minimum wage, and did not take a tip credit against the minimum wage paid to employees. On December 4, 2017, the DOL published a Notice of Proposed Rule Making (NPRM) that would rescind these portions of the 2011 tip regulations.

New Proposed Rule

The DOL noted that it was motivated by several factors to issue the NPRM. First and foremost, the DOL believes it is not authorized to issue a regulation that affects employers that do not apply a tip credit, and therefore acted beyond its authority in promulgating the 2011 regulation. Indeed, the DOL stated, "[t]he Department has serious concerns that it incorrectly construed the [FLSA] in promulgating its current regulations, the scope of which extends to employers that have paid the full Federal minimum wage to their tipped employees, particularly insofar as those employers, rather than taking tips for their own purposes, provide for such tips to be shared with other employees through a tip pool."

Second, the DOL indicated that a motivating factor behind the NPRM was to provide clarity for the significant amount of private litigation involving assertions of improper tip pooling and tip-retention practices of employers that pay a direct cash wage of at least the federal minimum wage and do not take a tip credit.1 In addition to the increase in litigation, the DOL noted that in 2011, when it promulgated its most recent tip-pooling regulations, approximately 17% of the states had laws that required employers to pay employees a direct cash wage that exceeded the full federal minimum wage. As of December 2017, that number has almost doubled and approximately 31% of the states require employers to pay employees a direct cash wage that exceeds the full federal minimum wage. In light of this "changed landscape and extensive litigation," the DOL found it incumbent to issue a retraction of a regulation it now deems to improperly construe the FLSA.

The DOL is inviting the public to submit comments, which should include supporting data whenever possible, on the proposed rescission of the 2011 tip regulations that apply to employers that pay tipped employees a direct cash wage that is equal to or in excess of the federal minimum wage and that do not claim a tip credit. Specifically, the DOL has solicited feedback regarding the following issues:

  1. Among employers that currently pay a direct cash wage of at least the federal minimum wage and do not take a tip credit, what portion reallocate tips with other employees? And, among that population of employers, what portion of the total tips do they retain or reallocate?
  2. How prevalent are employer-required, or mandatory, tip pools? What factors determine whether an employer institutes a mandatory tip pool? What portion of the tips received by employees do employers anticipate being contributed to the tip pool? What kinds of factors might influence an employer's decision to exclude some tips from inclusion in a mandatory tip pool?
  3. Do tipped employees receiving money from a mandatory tip pool typically receive a fixed dollar amount, or a fixed percentage of the pool? Is it common for some employees to receive a larger share of the tip pool than others, or are tips typically distributed on an even basis among all participants in the tip pool?
  4. If this proposed rule were adopted as proposed, what kinds of employees would employers choose to include in mandatory tip pools?
  5. If this proposed rule were adopted as proposed, would customers' tipping practices change?
  6. If this proposed rule were adopted as proposed, would some employers respond by reallocating tipped income to their non-tipped employees? Would such a response reduce the disparity in take-home earnings between tipped and non-tipped employees in service industry establishments?
  7. If this rule were adopted as proposed, what non-regulatory limitations would employers and employees face when deciding whether and how to design a tip-pooling arrangement? Are there any market norms or other behavioral reasons why some types of tip pooling are more prevalent than others? To what extent is the endowment effect (that is, customarily and regularly tipped employees potentially valuing tips more than wages of the same average amount) relevant for explaining potential tip behavior in a relatively less-regulated market?

The DOL also recognized that if employers decide to pay the full FLSA minimum wage without applying a tip credit, they may have cost savings, because they will no longer need to keep the specific records required under 29 CFR 516.28. On the other hand, the DOL recognized that some employers that choose to change their practices and pay at least the full FLSA minimum wage in cash and not apply a tip credit may incur costs related to revising their employee handbooks, adjusting their payroll systems, and advising affected employees. Accordingly, the DOL has also solicited feedback to ascertain the cost-benefit thought process employers would undergo if the DOL rescinds the 2011 rule.

Next Steps

Comments in response to the NPRM are due by January 4, 2018. In the meantime, employers in states that follow the FLSA should consider the pros and cons of eliminating the tip credit. In particular, employers should start evaluating whether they can withstand the payroll cost increase from raising front-of-house staff wages to the full federal minimum wage rate and simultaneously lowering back-of-house and other non-regularly tipped employees' wage rates and by offsetting that reduction by allowing these employees to participate in a tip pool.

One word of caution: Several states, such as New York, have implemented laws and regulations that outright prohibit the sharing of tips with employees who are not primarily engaged in guest service. The NPRM will have little effect on employers in these states, so as always, check whether any state of local laws contain more stringent prohibitions.

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
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 you may opt out by clicking here

    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.

    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.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    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.

    By clicking Register you state you have read and agree to our Terms and Conditions