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Congress Takes a Dip in the Tip Pool

June 1, 2018
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by Erica Townes

President Trump recently signed into law Congress’ $1.3 trillion, 2,232-page omnibus budget bill.  Notably, tucked away on page 2,025 of the bill, Congress amended the Fair Labor Standards Act to address rules affecting tipped employees.  These rules have been a hot topic lately and there is a lot of misinformation floating around.  Here is what you need to know:

To recap, the FLSA requires employers to pay employees the minimum wage, currently $7.25 per hour for most employees.  In the restaurant industry, however, employers are allowed to count up to $5.12 per hour of employees’ tips against their total minimum wage obligation.  In other words, restaurants can pay tipped employees such as servers, bartenders, bussers, and runners as little as $2.13/hour plus customer tips.  The Department of Labor’s rules make it clear that employers cannot take this “tip credit” if the employer uses a tip pooling arrangement where any portion of tips are kept by the house, or if the restaurant requires employees to share tips with managers or employees who do not “customarily and regularly” receive at least $30 per month in tips (e.g., “back of the house” personnel such as cooks, dishwashers, etc.).  These basic rules are still in place.

What was not clear, until now, was whether the FLSA imposes any restrictions on tip pooling arrangements for employers who do not take the tip credit (i.e., pay their employees at least the minimum wage).  In 2011, the Obama Administration said yes, tips could never be shared with managers or kitchen staff even if the restaurant paid the servers the full minimum wage and did not take advantage of the tip credit.  In 2017, the Trump Administration, and several federal courts, said no, restaurants paying the full minimum wage could do whatever it wanted with customer tips.  The Trump Administration’s 2017 proposed regulation started a process aimed at reversing the Obama Administration’s 2011 regulation.

The 2018 Omnibus Budget Bill settles the tug of war.  Buried deep in the law is an easy-to-overlook provision relating to “Tipped Employees.”  The Tipped Employees provision establishes a compromise and permits tip splitting among and with non-supervisory, non-service employees (such as cooks and dishwashers) where no tip credit is taken. Otherwise, the amendment specifically prohibits employers from requiring employees to share their tips with the employer, including any managers or supervisors, whether or not the employer takes a tip credit. This is significant because it means that an employer can now violate the FLSA through an improper tip pooling arrangement even if it is paying employees the full minimum wage.

Employers who unlawfully keep any portion of an employee’s tips may now be liable to injured employees for the amount of tip credit taken and the amount of the tip unlawfully taken, plus an additional, equal amount as liquidated damages. Furthermore, the amendment authorizes the Secretary of Labor to assess a civil penalty of $1,100 per violation.

Ultimately, Congress’ new amendment means that, for now, employees who are paid at least the minimum wage in cash can be required to share tips with cooks, dishwashers, and other non-management, non-supervisory “back of the house” employees.  When deciding the right tipping strategy, restauranteurs should consult with legal counsel.  Particularly, tip pooling policies should be carefully reviewed with counsel before implementation to ensure compliance with all applicable federal and state requirements.

Please feel free to contact any member of the McNees Wallace & Nurick Labor and Employment Practice Group for assistance with labor and employment law issues and/or if you have any questions regarding this article.


© 2018 McNees Wallace & Nurick LLC
McNees Food & Beverage Client Alert is presented with the understanding that the publisher does not render specific legal, accounting or other professional service to the reader. Due to the rapidly changing nature of the law, information contained in this publication may become outdated. Anyone using this material must always research original sources of authority and update this information to ensure accuracy and applicability to specific legal matters. In no event will the authors, the reviewers or the publisher be liable for any damage, whether direct, indirect or consequential, claimed to result from the use of this material.

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