United States: The DOL Serves Up A Major Overhaul Of Its Tip-Sharing Regulations

Last Updated: December 18 2017
Article by Ashlee C. Grant

Citing a "significant amount of private litigation," recent changes in state wage laws, and "independent and serious concerns" of public policy, the U.S. Department of Labor (DOL) is proposing to rescind an Obama-era rule that prohibits employers from implementing tip-sharing pools comprised of both tipped and non-tipped employees.

Last week, the DOL published a Notice of proposed rulemaking (NPRM) that would scale back the tip-pool regulations under the Fair Labor Standards Act (FLSA) and allow employers to include more employees in its tip-sharing pools. Under the new proposed regulations, if an employer pays its employees an amount equal or greater to the minimum wage without utilizing the tip credit provision found in Section 3(m), then the employer would no longer be bound to Section 3(m)'s prohibitions on tip-sharing amongst traditionally non-tipped employees. Instead, the new rule would allow employers to expand their tip sharing pools to include employees who are not customarily tipped, such as dishwashers and restaurant cooks, but who "contribute to the customers' experience."

Congress Amended Section 3(m) of the FLSA to Allow Employers to "Credit" to Their Minimum Wage Obligations Tips Paid to Employees.

The FLSA generally requires covered employers to pay its employees a federal minimum wage of at least $7.25/hour. In 1966, Congress amended Section 3(m) of the statute, defining the term "wage" to include a provision that permitted an employer to utilize tips received by employees to subsidize up to 50 percent of its minimum wage obligations. In other words, an employer could use the amount of tips an employee receives as a partial credit to satisfy the difference between the statutorily required minimum wage and the direct wages paid to the employee.

Congress again amended Section 3(m) in 1974 to further limit when an employer could credit an employee's tips to its minimum wages obligations. Specifically, the 1974 amendment provided that employee tips could be credited to the employees' wages only if the tipped employees were allowed to retain all of their tips. Congress included a specific carve-out, however, that allowed employers to still use the tip credit in instances where the employer required employees to deposit their tips into a tip pool shared only among those employees who "customarily and regularly" received tips.

Despite this significant amendment to the tip credit provision, it took the DOL nearly 40 years to revise its regulations to reflect and address the 1974 amendments to the FLSA's tip-credit provision.

Under the DOL's 2011 Rules on Tipping, All Employers, Regardless of Whether They Utilize Section 3(m)'s Tip Credit, Are Prohibited From Including Nontipped Employees in Tip-Sharing Pools.

In 2011 the DOL issued a Final Rule addressing tip pooling, the tip credit, and other regulations pertaining to other permissible uses of employee tips. In pertinent part, the 2011 Final Rule stated: "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 3(m): As a credit against its minimum wage obligations to the employee, or in furtherance of a valid tip pool."

These regulations barred all employers from implementing tip-sharing pools that included employees who did not customarily and regularly receive tips, regardless of whether or not the employer was utilizing Section 3(m)'s tip credit for purposes of satisfying its minimum wage obligations. In other words, an employer was still bound by Section 3(m) limitations on tip-sharing pools even if that employer paid its employees above minimum wage without applying a tip credit.

Since the passing of the regulations, employers have not been prohibited from maintaining tip-sharing pools among traditionally tipped employees such as servers and bartenders. However, the regulations have prohibited other employees like cooks and dishwashers from being included in and receiving pay from these tip pools.

Increased Litigation Over the Application and Validity of the Tip Sharing Regulations Raised "Serious Concerns" at the DOL About the Blanket Application of the 2011 Final Rule to All Employers.

The 2011 regulations faced almost immediate scrutiny from employers throughout the hospitality industry. These employers challenged the DOL's authority to promulgate the 2011 Final Rule, asserting that the rule was contrary to the FLSA's clear statutory language in Section 3(m) that placed restrictions on an employer's use of tips only when the employer used the tip credit to meet its minimum wage obligations. Accordingly, there was an increase in litigation addressing the validity and implementation of the 2011 Final Rule, resulting in a split between the Ninth Circuit and the Tenth and Fourth Circuits.

The Ninth Circuit, in ORLA v. Perez, 816 F.3d 1080 (9th Cir. 2016), granted the DOL's appeal of the district court's decision that the regulations were contrary to the clear intent of Congress, and upheld the validity of the tip regulations. The Ninth Circuit consolidated the case with Cesarz v. Wynn Las Vegas, 2014 WL 117579 (D. Nev. 2014), a private FLSA action in which the plaintiffs-employees relied on the 2011 regulations to assert that the employer violated the FLSA when it required its casino dealers to share their tips with other employees who did not receive tips. Having found that the FLSA was silent with respect to employers that do not take a tip credit, the Ninth Circuit concluded that the tip regulations were a reasonable application of the agency's authority to fill gaps left in the text of the FLSA. Notably, a dissent opinion joined by 10 judges asserted that the agency did exceed its authority because the DOL "has not been delegated authority to ban tip pooling by employers who forgo the tip credit...." Both parties in the ORLA matter filed a petition for certiorari with the Supreme Court that is still pending.

While ORLA was pending, the Fourth Circuit heard Trejo v. Ryman Hospitality Properties, Inc., 795 F.3d 442 (4th Cir. 2015), a private FLSA action brought by restaurant and hotel servers who were required to share their tips with bartenders, server assistants, busboys, and food runners. The DOL submitted a brief as amicus curiae arguing that the 2011 regulations were valid and entitled to deference. Disagreeing, the Fourth Circuit concluded that Section 3(m) "simply does not contemplate a claim for wages other than minimum wage or overtime wages." Trejo, 795 F.3d at 448.

Likewise, the Tenth Circuit ruled in Marlow v. The New Food Guy, 861 F.3d 1157 (10th Cir. 2017) that the 2011 tip regulations were invalid to the extent they barred and employer from sharing tips with employees who did not customarily or regularly receive tips when the employer paid wages that satisfied the minimum wage laws without claiming a Section 3(m) tip credit.

According to the DOL, the Marlow decision and the dissent in ORLA raised "serious concerns" over whether or not it had correctly construed the statute when promulgating its 2011 regulations on tip sharing.

The DOL also noted that the high volume of litigation involving the 2011 tip regulations had been further exacerbated by the fact that after 2011 a number of states, including as Arizona Colorado, Minnesota, and New York, amended their wage laws to increase the amount of wages an employer must pay tipped employees without utilizing a tip credit. As a result, the number of employers utilizing Section 3(m)'s tip credit to satisfy its minimum wage obligations has decreased significantly over the past five years.

The DOL's New Rule Is Limited Only to Those Employers That Pay Employees the Full Minimum Wage Without a Tip Credit.

Although the DOL ceased enforcing the 2011 tip sharing regulations in July of this year, it is now seeking to formally rescind certain parts of its prohibition against the sharing of tips with employees who do not customarily receive tips. The DOL made clear, however, that the proposed rule would only apply to employers that pay employees wages of at least the federal minimum wage and do not take a tip credit. The new rule would not apply to employers that pay less than the federal minimum wage and still take advantage of Rule 3(m)'s tip credit provision. "The purpose of section 3(m)'s tip credit provision is to allow an employer to subsidize a portion of its Federal minimum wage obligation by crediting the tips customers give to employees. If an employer takes a credit against its wage obligations, section 3(m) applies, along with its attendant protections that restrict the employer's use of tips received by its employees."

The DOL Expects the New Rule Will Have Positive Effects on Employers and Employees Alike.

Touting "greater flexibility" in establishing pay practices for tipped and non-tipped workers, the DOL surmises that this new proposed rule could result in a number of benefits in the workplace such as:

  • A reduction in wage disparities between employees who traditionally have received tips and those employees who are in lower-wage job classifications and do not typically receive tips;
  • An increased incentive among all employees to improve service quality and customer's experience regardless of their position or role;
  • Increased interaction and cooperation between coworkers;
  • An increase in employee productivity;
  • A decrease in employee turnover;
  • Employers in other industries (e.g. casinos) could adopt similar tip pooling arrangements; and
  • Clarity and consistent application of Rule 3(m)'s tip-sharing requirements across the country.

Nevertheless, the DOL acknowledged that the extent of these potential benefits and the effect of the proposed rule on traditionally nontipped employees is entirely dependent on a number of unmeasurable market forces.

Public Comments Sought on Employer Tip-Sharing Procedures and Potential Responses to the Implementation of the Rule

Because it is unable to quantify the effect the regulation may have on employer, employee and even consumer behaviors, the DOL is seeking public feedback on the proposed regulation and the potential effect its implementation would have on employer tipping procedures and consumer tipping practices. Specifically, the DOL has requested public comments and information on the following issues:

  • For those employers that pay their tipped employees wages equal or greater to the minimum wage and do not utilize the tip credit, what portion of those employers reallocate tips among other employees, and what portion of the total tips do they retain and reallocate?
  • 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 will be 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?
  • Do tipped employees who are required to participate in a mandatory tip pool 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?
  • If this proposed rule were adopted, what types or categories of employees would employers choose to include in mandatory tip pools?
  • What effect would the proposed rule have on customers' tipping practices?
  • If the rule were adopted, would employers expand tip pools and reallocate tips to nontipped employees and, if so, what effect would this have on the disparity between the take-home earnings of tipped and nontipped employees in the service industry?
  • If this rule were adopted as proposed, what nonregulatory limitations would employers and employees face when deciding whether and how to design a tip-pooling arrangement?
  • What market norms or other behavioral or cultural reasons cause certain types of tip pooling to be 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 originally requested that all comments be received on or before January 4, 2018. However, the DOL has now indicated on its website that it will be extending this comment period by an extra 30 days. BakerHostetler's Employment Group is available to assist in the preparation and drafting of any comments for submission to the DOL on this matter.

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.

Similar Articles
Relevancy Powered by MondaqAI
Ogletree, Deakins, Nash, Smoak & Stewart
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Ogletree, Deakins, Nash, Smoak & Stewart
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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