How Tip-Sharing Rules May Change

The Department of Labor may revise its regulations, but good policies remain essential

By Stephen Miller, CEBS Feb 22, 2018

As the Department of Labor (DOL) considers rescinding portions of a 2011 rule that restricted business owners from requiring employees to share tips, restaurant and hospitality businesses are seeking clarity about tipping policies. While the DOL's proposed changes will simplify some issues—and reduce some litigation risks—good tip-sharing policies are and will still be essential.

The DOL's proposal, announced Dec. 4, amends the earlier regulation to allow more workers to share in gratuities under the Fair Labor Standards Act (FLSA). The public comment period closed on the proposed rule Feb. 5 and a decision from the DOL is expected following consideration of the public feedback.

Currently, restaurateurs can require "front-of-the-house" staff who customarily receive tips—such as servers, bartenders and bussers—to pool their tips. But whether those gratuities can be shared with "back-of-the-house" staff such as cooks and dishwashers has been the source of heated litigation. The proposed changes would make it clear that tipped workers can share tips with employees who don't traditionally receive gratuities so long as the employer pays workers the full minimum wage instead of taking a tip credit.

"Restaurants and other food service providers should welcome these proposed changes," said Kathleen Anderson, an attorney with Barnes & Thornburg in Fort Wayne, Ind., and Columbus, Ohio. "The restaurant experience is created by the combined efforts of the front and back of the house. Tip sharing allows those in the back of the house to be rewarded for good service."

Labor groups and Democrats in Congress, however, have strongly condemned the proposal, calling it wage theft by employers.

The DOL's proposed tip-sharing rule would not apply to employers that take a tip credit—meaning that they pay tipped workers a rate below the federal minimum wage and workers make up the difference in tips. Employers have long been allowed to take a tip credit, said Brett Coburn, an Atlanta-based partner in law firm Alston & Bird's labor and employment group. "There has, however, been a tremendous amount of litigation over tip credits and tip pooling, even before the relatively recent changes and proposed changes to the tip credit interpretations and regulations."

[SHRM members-only toolkit: Complying with U.S. Wage and Hour Laws and Wage Payment Laws]

Minimizing Risks

Implementing and managing a legally compliant tip pool is not simple. Under the current and proposed rules, "You have to make sure you are dealing with 'tips' and not, for example, service charges, and you need to make sure the employees in the tip pool 'customarily and regularly' receive more than $30 in tips per month in their job," noted Charles Morgan, a partner in the same group at Alston & Bird.

"Employers can't take the tip wage credit without specific notice to the employees about how the tip credit and tip pool works, and the Wage and Hour Division indicates that its own poster does not satisfy this notice requirement," Coburn added.

One challenging aspect for employers is the concept of "dual jobs"—when a tipped employee also works in a position in which he or she does not "customarily and regularly" receive tips, Morgan observed. "The Wage and Hour Division's current regulation spells this out with a relatively bright line test. Where a maintenance employee is also employed waiting tables, the employee is working in 'two occupations' and a tip credit can only be taken for the wait job," Morgan said.

The Ninth Circuit Court of Appeals recently held that the Department of Labor had blurred this bright line test and rejected its interpretations, holding that a tipped employee who has related and unrelated nontipped duties interspersed and intermingled with his or her tipped job did not have dual jobs. This decision, however, is now being reviewed by the full Ninth Circuit and could be reversed, Morgan noted.

On the horizon, the new DOL proposal distinguishes the "two occupations" test from a situation where wait staff spend part of their time "cleaning and setting tables" and notes that these are related duties to an occupation that is a tipped occupation, Morgan said.

Good Policies

State laws also vary on this issue, and employers seeking to implement a valid tip policy need to do so carefully—and invest the time and energy needed to audit their practices to make sure the policy is being followed, Coburn said. A Wage and Hour Division fact sheet is a good source of information on complying with the current rules.

Employers seeking to take a tip credit or establish a tip pool, whether under the current rules or amended regulations, can protect themselves from litigation by taking the following steps, Morgan and Coburn advised:

  • Carefully consider who are actually "tipped employees"—those who customarily and regularly receive more than $30 per month in tips.
  • Ensure participants in a tip pool are qualified to actually be in the pool.
  • Ensure you are dealing with true gratuities, and not service charges.
  • Ensure that a specific notice of the tip credit or pooling arrangement is given in writing and signed by the employee.
  • Watch out for dual jobs or claims of nontipped duties—not all courts accept the "bright line" test adopted by the Ninth Circuit.

When an employer takes a tip credit, "if the employee does not make enough in tips to meet minimum wage, make sure you make up the difference," Morgan said.

Tips can only be part of the employee's compensation, and the employee can't be compensated on tips alone.

Lisa Nagele-Piazza, SHRM-SCP, J.D., contributed to this article.

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