New Tip-Sharing Rules for Tipped Employees

On March 27, 2018, President Donald Trump signed into law Congress’s $1.3 trillion, 2,232-page omnibus budget bill, the Consolidated Appropriations Act, 2018.  Notably, on page 2,025, Congress amended the Fair Labor Standards Act by addressing rules affecting tipped employees and tip ownership, and putting to rest a notice of proposed rule-making on the same subject.  The FLSA amendment left open many questions, some of which were answered on April 6th, when the Department of Labor issued Field Assistance Bulletin No. 2018-3.

In December 2017, the Department of Labor issued a proposed rule to rescind its position that employers must comply with tip-pooling requirements even when paying the full minimum wage.  This proposal sought to reverse the Department’s regulations promulgated in 2011, and would have allowed employers to require tipped employees paid at least the full minimum wage (without the tip credit) to share their tips with employees who are not otherwise customarily tipped, such as cooks, dishwashers, porters and maintenance staff. The proposal ignited strong feelings on both sides, spurring the introduction of a bill, the Tip Income Protection (TIP) Act of 2018 (HR 5180), providing that all tips are the property of the employees.

The Consolidated Appropriations Act attempts to address this controversy. Touted as a “compromise” measure, the law amends the FLSA by, among other things, adding the following:

“An employer may not keep tips received by its employees for any purposes, including allowing managers or supervisors to keep any portion of employees’ tips, regardless of whether or not the employer takes a tip credit.”

The remedy for violating this provision includes the loss of the tip credit and disgorgement of improperly kept tips, a remedy already provided by several states’ wage and hour laws for violations of tipping statutes and regulations.

The language of this FLSA amendment left many questions unanswered for employers, practitioners and courts. Helpfully, the DOL’s new field bulletin explains its position on many of these open issues.

The field bulletin clarifies that the FLSA amendment nullifies the 2011 regulations prohibiting tip sharing with non-tipped employees even when an employer did not take a tip credit (29 C.F.R.§§ 531.52, 531.54 and 531.59). However, uncertainty remains regarding whether the FLSA amendment also effectively rescinds other changes to the tip credit regulations adopted in 2011, such as the detailed notice requirements in 29 C.F.R. § 531.59. While Congress attempted to address this issue by explaining that only regulations “not addressed by section 3(m)” are rescinded, the vague language will likely require regulatory or judicial clarification.

The DOL also explains that it will define the terms “supervisor” and “manager” in the amendment by using the executive employee overtime exemption criteria set forth in 29 C.F.R. § 541.100(a)(2)-(4).  To meet the DOL’s definition, a supervisor or manager must meet the following criteria:

Article Continues Below
  • Primary duty is management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof;
  • Customarily and regularly directs the work of two or more other employees; and
  • Authority to hire or fire other employees or whose suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees are given particular weight.

This standard is certainly higher than one might expect for the phrase “supervisor” and signals the DOL’s likely approval of including employees in a tip pool that have dual functions, such as lead waiters, lead bartenders, or lead cooks.

The DOL further clarifies that the FLSA amendment does not affect the long-accepted permissible practice of allowing employers to deduct credit card processing fees associated with processing credit card tips, nor will the amendment prohibit an employer from administering an otherwise lawful tip pool.

Finally, the DOL confirms that the amendment to the civil money penalty provisions for unlawfully keeping an employee’s tips will still require a finding that the violation is repeated or willful, in keeping with the DOL’s normal procedures.

The DOL announced it will proceed with rulemaking in the near future to fully address the impact of the 2018 FLSA amendments.

This was originally published on Littler Mendelson’s website. © 2018 Littler Mendelson. All Rights Reserved. Littler®, Employment & Labor Law Solutions Worldwide® and ASAP® are registered trademarks of Littler Mendelson, P.C.

David B. Jordan is a shareholder in the Houston office of Littler Mendelson. Co-chair of the firm's Food and Beverage Industry Group, David focuses his practice on employment counseling and litigation, including all aspects of labor relations and employment law. He also handles disputes involving employment contracts, covenants not to compete, trade secrets and confidentiality agreements.

David is an active speaker on labor and employment law issues, appearing before trade organizations, human resource professionals and corporate legal departments. Most frequently, he works with clients in such industries as energy, retail, restaurant and hospitality, manufacturing, banking and healthcare.

From 2000-2001, David served as a clerk for the Hon. Sven Erik Holmes of the United States District Court, Northern District of Oklahoma. Prior to practicing law, David spent approximately 10 years in the hospitality industry, building and managing a variety of restaurant concepts.

Eli Freedberg is an experienced lawyer who has worked on cases on behalf of major corporations, mid-sized and small businesses, and individuals. Eli works to create workplace solutions for his clients across the hospitality (including hotels, restaurants, resorts, spas, country clubs, golf clubs, and fitness clubs), health care, retail, and financial industries.

He defends employers in litigation at both the federal and state levels, including matters related to the FLSA, ADA, Title VII, FMLA, and various state and local laws. Eli is an experienced litigator who has taken cases to arbitration and prevailed on motions for summary judgment. He also advises clients regarding the protection of trade secrets and the misappropriation of confidential or proprietary information, both defending employers and pursuing enforcement against former employees.​

Eli is a popular speaker and frequent contributor to publications regarding topics related to tip credit/tip pools/service charge compliance, wage and hour compliance, prevention of harassment and discrimination, and effective employment policies.

He is a shareholder in the New York City office of Littler Mendelson.

Topics