New Department of Labor Regulations Clarify Federal Law on “Tip-Pooling”

New Department of Labor Regulations Clarify Federal Law on “Tip-Pooling”

The Department of Labor has published new rules that bring the Department’s regulations on “tip-pooling” up to date with the Fair Labor Standards Act as amended by the 2018 Consolidated Appropriations Act (“CAA”).

As a default rule, federal labor law requires all employers pay at least $7.25/hour to their employees. There has been an exception on the books for many years that permits employers to take a “tip credit,” which allows them to pay as little as $2.13/hour to workers who earn tips, such as table servers in restaurants, as long as the workers’ tips make up the difference between the $2.13/hour wage and the federal minimum wage. Under federal law, the employer may only take the “tip credit” and offset wages if the tipped employees are allowed to retain all their tips.

Prior to the 2018 CAA, employers were allowed to both take a tip credit and implement mandatory “tip pooling” between traditionally tipped employees. The law was less clear as to whether employers could implement mandatory tip pooling between traditionally tipped employees (such as servers, bartenders, and other front-of-house workers), and employees who did not traditionally receive tips (such as cooks, dishwashers, and other back-of-house workers). The 2018 CAA attempted to clarify the law, and the Department’s new regulations make it explicit.

Under the new regulations, employers who take a “tip credit” may still only pool tips between employees who work in “traditional” tip-earning roles. E.g., if a restaurant takes the tip credit, it could only pool tips between servers, bartenders, and other tip-earning workers; while any back-of-house employees could not be included in the tip pool.

If, however, the employer pays federal minimum wage for allemployees and does not take a tip credit, then the employer can lawfully implement a mandatory tip pool that includes employees who would not have “traditionally” earned tips. Thus, a hypothetical restaurant could pool tips and distribute them to the front- and back-of-house employees if it pays at least minimum wage to all employees, including servers, for all hours worked.

In either scenario, the CAA and the new regulations prohibit businesses, managers, and supervisors from “keeping,” any tips, which excludes them from participating in any tip pools. The new regulations offer guidance on which employees count as “managers” or “supervisors,” but, unlike the rules on tip-pooling and the tip credit, they do not offer a bright line test.

The potential effects of this new set of rules are uncertain, and the Department of Labor acknowledges as much. On the one hand, the Department theorizes mandatory tip-pooling may foster greater cooperation between workers, which will in turn create a more efficient and profitable workplace for everyone. On the other hand, the Department’s analysis acknowledges a countervailing viewpoint, which is that employers in many states may use mandatory tip pooling to pay lower overall wages to traditionally non-tipped workers, which could result in a $109,000,000 “transfer” of wages from employees to employers every year. Time will tell which theory prevails. Regardless, the new rules will give consistency to tip-pooling practices under federal law.

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If you believe your employer is unlawfully pooling tips, reach out to Haeggquist & Eck, LLP for assistance.

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