Tips, tip credits and tip pools are staples in the restaurant industry. Restaurant employers utilize them daily. Earlier this month, the U.S. Department of Labor – the federal agency charged with enforcing the Fair Labor Standards Act (“FLSA”) – proposed a new Rule implementing certain provisions from recently enacted legislation amending the FLSA. This Rule could affect how employers utilize tip pools and employees who both traditionally earn and do not traditionally earn tips as part of their wages.
Employers have applied a “tip credit” against the minimum hourly wage paid to employees who earn at least $30 in tips per month for decades. These employees primarily include front-of-house staff, such as servers and bartenders. This long-standing law currently allows employers to credit $5.12 against the minimum hourly wage, reducing the pay rate to $2.13 per hour (higher in certain states), so long as the employee earns enough tips to meet the applicable minimum hourly wage. Application of the tip credit also is contingent upon employees retaining all of their tips, with the exception of tip pool situations. Those occur where workers who customarily and regularly earn tips share the aggregate tips earned among them.
The proposed Rule would see certain changes that could affect how restaurant employers deploy scheduling and pay practices. Some of the most notable changes include:
- Employers, managers and supervisors can no longer participate in any tip pool, regardless of whether the employer utilizes the tip credit.
The exclusion of “supervisors” from tip pools could influence scheduling, staffing and structure. While typical hierarchies delineate between manager and employee clearly, the “supervisor” title can be a bit murky for some establishments. In some restaurants, employees may hold the title of “supervisor” actively perform tipped duties and participate in a tip pooling arrangement. Whether practices such as these can remain for those employees will require careful analysis of the job duties of the “supervisor” and whether he or she meets certain exemptions under the FLSA.
- For employers that do not utilize the tip credit, they may pool tips among those whom they pay full minimum wage (federal rate of $7.25 per hour or higher in applicable states) and receive tips with those who earn just minimum wage but do not traditionally earn tips.
The Rule aligns with the recent amendment the FLSA that removes the ban of tip pooling to back-of-house staff. This, however, only applies to circumstances where a restaurant does not apply the tip credit to any employees. Meaning, if a restaurant utilizes the tip credit, only traditionally tipped employees can participate in a tip pool. Essentially, the status quo. If a restaurant does not utilize the tip credit, all employees earning minimum wage (including both those earning and not earning tips) can participate in the same tip pool. This could provide greater flexibility to how restaurants pay their employees. Whether restaurant employers adjust their pay practices requires an individualized analysis.
- Employers may apply the tip credit to employees in tipped occupations who perform related, non-tipped duties with tipped duties, contemporaneously or within a reasonable amount of time immediately before or after they perform their tipped duties.
Litigation abounds from employees seeking unpaid wages for time performing non-tipped duties. Restaurant employers’ ability to utilize the tip credit when tipped employees perform related, non-tipped duties with tipped duties brings relief and clarity to this heavily disputed arena. The new Rule should ease concerns of restaurants that require tipped workers to perform tasks that are not typically tip producing.
- The identification of the non-tipped duties related to tip producing occupations.
Likewise, the identification of tipped duties related to tip producing occupation provides needed transparency for restaurants employers to determine how their tipped workers spend their time in relation to their pay.
The Rule is open for comment from interested parties for 60 days. Restaurant owners should use this time to evaluate these changes, analyze their current pay practices, and make any needed preparations for the upcoming changes before finalization and the Department of Labor commences enforcement efforts.