DOL Issues Final Rule on Employee Tip Sharing

[Editor's note: President Joe Biden's administration asked federal agencies to freeze proposed and pending regulations to give new leaders time to review pending rules.]

The U.S. Department of Labor (DOL) recently announced a final rule allowing "back-of-the-house" restaurant workers—such as cooks and dishwashers—and other nontipped hospitality workers to share in gratuities under the Fair Labor Standards Act (FLSA).

Eligible employers must pay participants in the tip pool the full minimum wage instead of taking a so-called tip credit, which allows employers that meet certain criteria to pay servers, bartenders and other tipped workers less than minimum wage, as long as their tips make up the difference.

The final rule prohibits management from keeping any portion of employees' tips regardless of whether the employer takes a tip credit. The rule also codifies DOL guidance on how the tip credit applies to employees who perform a mix of tipped and nontipped duties.

Employers should note that the final rule does not change state wage and hour laws, which may be more generous to workers than federal law. Some states, such as California and Nevada, do not allow employers to take a tip credit.

We've rounded up articles from trusted outlets on the final rule regarding FLSA tip regulations.

'Clarity and Flexibility for Employers'

The final rule addresses changes to the FLSA's tip-credit regulations that were made under the Consolidated Appropriations Act (CAA) of 2018.

"This final rule provides clarity and flexibility for employers and could increase pay for back-of-the-house workers, like cooks and dishwashers, who have been excluded from participating in tip pools in the past," said DOL Wage and Hour Administrator Cheryl Stanton. "Newly allowed tip sharing may incentivize the inclusion of these previously excluded workers and reduce wage disparities among all workers who contribute to customers' experience."

The DOL's final rule will:

• Allow employers that don't take a tip credit (meaning that they pay at least the standard minimum wage) to mandate "nontraditional" tip pools that include employees who do not customarily and regularly receive tips.
• Prohibit all employers—regardless of whether they take a tip credit—as well as managers and supervisors from keeping employees' tips for any reason.
• Require employers that collect tips under a mandatory tip-pool policy to fully redistribute the tips to employees at least as often as they pay wages.
  
• Incorporate the CAA's monetary penalties for violations.
  
• Incorporate a new record-keeping requirement for employers that pay the full minimum wage and mandate tip pooling.
  
• Allow employers to take a tip credit for the time that tipped employees perform related nontipped duties "either contemporaneously with or for a reasonable time immediately before or after performing tipped duties."

The rule is scheduled to take effect on March 1.

(U.S. Department of Labor)

Employer Options

Under the final rule, employers can still choose between taking a tip credit and mandating a nontraditional tip pool. The final rule just gives employers that pay the full minimum wage more leeway on how to structure their compensation policies. If an employer does take a tip credit, the tip pool can only include waiters, bussers and other employees who customarily receive tips.

(Ballard Spahr)

Controversial Rule

Many restaurateurs and business groups supported the rule, but some worker-advocacy groups have said that the rule would let employers cut base compensation for back-of-the-house workers. The DOL issued FAQs about the new regulations acknowledging that "some employers could potentially offset some of the increase in total compensation received by back-of-the-house workers by reducing the direct wage that they pay those workers." President-elect Joe Biden's administration could delay implementation or create new tip rules.

(Forbes)

Notifying Employees of the Tip Credit

Under the FLSA, employers can pay tipped workers as little as $2.13 an hour if those workers earn at least the standard minimum wage of $7.25 an hour once their tips are added in. The final rule clarifies that prior to taking a tip credit, the employer must notify tipped employees about the wages they will receive, the tip credit that the employer will take and their right to retain all tips except those that are contributed to a tip pool. Employees also must be told that the employer will pay the difference if their combined tips and wages are less than the minimum wage. Although the final rule doesn't require employers to provide this information in writing, employers should consider doing so in case they must show evidence that employees were provided the appropriate information.

(Fox Rothschild)

Eliminating the 80/20 Rule

The final rule codifies DOL guidance eliminating the 80/20 rule, which only allowed employers to take a tip credit for workers who spent no more than 20 percent of their time on nontipped duties. The new rule more broadly allows employers to take a tip credit when tipped employees perform related side jobs (such as rolling silverware) either during, just before or a reasonable time after tipped duties.

(Jackson Lewis)