United States: Why Tip-Pooling Could Be Making A Comeback

Last Updated: May 21 2018
Article by John Mavros and David Rashé

Under the direction of Labor Secretary Alex Acosta, the Department of Labor proposed a rule change regarding tip-pooling. The proposed change would partially rescind the DOL's 2011 regulations on tip-pooling which prohibited restaurants from allowing customer-facing employees (i.e. wait staff and bartenders) to share their tip pool with back-of-the-house employees (i.e., chefs, line cooks, callers and dishwashers).

The proposed rule is intended to distribute tips to all employees who contribute to the customer experience. The DOL's change is expected to give restaurants discretion on how to compensate their employees, decrease wage disparities between front-of-the-house and back-of-the-house employees, and incentivize all restaurant employees to strive to improve the customer experience. Restaurant and hospitality employers are likely to receive this change with open arms.

Tip Credits

The Fair Labor Standards Act permits employers to use a portion of employees' tips as a credit against their minimum wage obligations. This limited portion of an employee's tips is known as a tip credit. The current tip credit is set at $5.12 under federal law. This means that an employer may pay an employee $2.13 per hour toward the federal hourly minimum wage of $7.25 provided that the employee earns at least $5.12 per hour in tips.

Restaurants in certain states are prohibited from taking tip credits against an employee's minimum wage by state law. These states include Alaska, California, Montana, Nevada, Oregon, Washington and Minnesota. Thus, restaurants operating in these states must pay employees cash wages equal to or above minimum wage regardless of tips received. Other states do allow tip credits, but require the minimum cash wage paid to employees to be higher than the minimum cash wage allowed under the FLSA.

Tip-Pooling and the DOL's Restrictive 2011 Regulations

Tip-pooling arrangements involve front-of-the-house staff sharing total tips received with back-of-the-house staff. Section 3(m) of the FLSA permits tip-pooling between employees "who customarily and regularly receive tips."

However, in 2011, the DOL promulgated regulations that significantly curtailed the practice of tip-pooling by prohibiting the distribution of tips among back-of-the-house employees. The regulations interpreted what constituted a "tip" and who actually receives tips. The DOL took the position that whether a sum is a tip and who may receive that tip is determined by the customer. The DOL also determined that an employee may be determined a tipped employee only if that employee actually participated in receiving the tip. In other words, servers or bartenders receive tips and so may be considered tipped employees for purposes of tip-pooling under the FLSA. However, back-of-the-house staff who are not interacting with customers do not actually receive tips and therefore is not considered a tipped employee.

The DOL's 2011 regulations generated a number of lawsuits questioning the DOL's authority to promulgate it and prompted changes in state law to prohibit tip credits. Both the uptick in litigation and the increase in the number of employers unable to take tip credits under the FLSA caught the attention of the Trump Administration's DOL.

The DOL's 2017 Proposed Rule Adds Flexibility

The DOL proposed its rule change on December 5, 2017. As stated above, this rule change would partially rescind the previous 2011 regulations on the subject of tip-pooling and once again allow the practice of tip-pooling among servers and cooks alike.

Significantly, this proposed rule would only apply to those restaurants paying full minimum wage and not taking tip credits against this amount. Thus, the proposed rule would allow restaurants to use a tip-pooling arrangement so long as they pay at least the applicable minimum wage to those employees and don't take tip credits.

For restaurants that do take tip credits, the rules currently applicable on the subject of tip-pooling will not be affected. This means that if an employer wishes to continue using tip credits, then it will be not be permitted to use a tip pooling arrangement inclusive of back-of-the house employees.

Some states have their own laws prohibiting employers from "taking" an employee's tips. For example, California forbids such practice by an employer or an employer's "agent" (i.e., someone with the authority to hire, fire, supervise, direct or control the actions of employees). However, courts in California have routinely ruled that employer mandated tip-pooling arrangements do not run afoul of this prohibition. But, employers can get into trouble by allowing supervisors or managers possessing the authority described above to share in tip-pools where their participation dilutes the tips received through the pool by subordinates. This is a tricky area of the law which varies by state. Consult your labor counsel for guidance.

Where Do We Currently Stand?

The rule-making process requires proposed rules to be open to public comment for a specified period of time. The DOL opened this new rule to a 30-day public comment period originally set end on January 4, 2018. In mid-December, this comment period was extended for an additional 30 days. The current deadline for submitting public comments is February 5, 2018.

Conclusion

It remains to be seen whether the practice of tip-pooling will be returned to its pre-2011 state of affairs. Doing so would distribute tips more evenly across a restaurant's staff, which may help boost employee morale. Restaurants in states disallowing tip credits will want to follow this rulemaking process closely because they stand to be affected most significantly. However, if the proposed regulation is successfully navigated through the rulemaking process, restaurants in states that do allow employers to take tip credits may want to reconsider that practice and pursue broader tip-pooling arrangements under the FLSA according to their business needs.

Originally published in FSR Magazine

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.

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