The past few years have been tumultuous for tip pooling regulations, leaving restaurants with some confusion and unresolved questions. Nearly 300,000 businesses across the United States employ tipped workers.
In 2011, the Department of Labor under the Obama Administration passed regulations on tip pooling. These regulations specified that tips were considered the property of the service-facing employee (such as waiters, bartenders, and others who directly interact with customers in the chain of service), and employers could not require service-facing employees to share their tips with back of the house employees (i.e. kitchen staff who would not interact with customers directly in the chain of service) who would not traditionally receive tips.
Additionally, the regulations required employers to notify tipped employees of any required tip pool contribution amount, limit their tip credit for the amount of tips each tipped employee ultimately receives, and prevented employers from retaining any of the employees' tips for any other purpose.
In December 2017, the Department of Labor announced that it planned to change existing regulations to give employers greater control over tips paid to employees. The proposed rule was a rollback of the 2011 rules. Under the proposed rule, employers would be able to take some or all of the money in the tip pool. Additionally, employers would have the discretion to set up mandatory tip pools.
As a result of public scrutiny and opposition to the proposed rule, support built for congressional intervention at the end of 2017 and beginning of 2018.
On March 6, 2018, the Tip Income Protection Act of 2018 was introduced in the House of Representatives. The act generated bipartisan support, and it was included as a provision in the House amendments to the 2018 omnibus appropriations bill.
On March 23, 2018, the Consolidated Appropriations Act was signed into law. The Appropriations Act includes a section on tipped employees that mirrors the proposed Tip Income Protection Act.
This section amends Section 3(m) of the Fair Labor Standards Act (“FLSA”) to add the following language: “[a]n employer may not keep tips received by its employees for any purposes, including allowing managers and supervisors to keep any portion of employee's tips, regardless of whether or not the employer takes a tip credit.”
The section also creates a penalty provision for employers who take tips from employees. Employers who violate Section 3(m)(2)(B) “shall be liable to the employee or employees affected in the amount of the sum of any tip credit taken by the employer and all such tips unlawfully kept by the employer, and in an additional equal amount as liquidated damages.” These employers are also subject to a civil penalty of $1,100 for each violation.
Previously, the FLSA’s jurisdiction over tips was limited to regulating tips only where employers took a tip credit against their minimum wage obligations. The FLSA would only provide tipped employees a remedy if they were not paid minimum wage. Employees did not have a federal protection for the full amount of the tips retained. After the new law was passed, the FLSA’s tipping provisions now go beyond ensuring that tipped employees are properly notified of any tip credits and paid minimum wage to guaranteeing that employees are paid the tips they receive in full.
The section also rolls back the 2011 regulations. The law states that the Department of Labor’s final rule shall “have no further force or effect until any future action taken by the Wage and Hour Division of the Department of Labor.” This invalidates the 2011 final rule on tip pooling, leaving more flexibility for employers to create tip pools and distribute tips between service-facing and back of the house employees.
Unfortunately for restaurants employing tipped workers, the wording of the new law is unclear on some important questions. For example, the section does not define managers and supervisors. This leaves open the questions about whether service-facing employees who have a leadership role would be barred from participating in tip pools. Additionally, tip pools that are created between service-facing and back-of-the-house employees are likely to be challenged until the Department of Labor clarifies its position.