DOL Provides Clarification on FLSA Tip Pooling Amendments

By Fiona W. Ong - Shawe Rosenthal LLP

April 10, 2018

On April 9, 2018, the Department of Labor announced the issuance of a Field Assistance Bulletin clarifying the recent amendments to the tip pooling provisions of the Fair Labor Standards Act, which were incorporated in the omnibus budget bill that was passed by Congress on March 21, 2018. Additionally (but without fanfare), the DOL revised its Fact Sheet #15: “Tipped Employees Under the Fair Labor Standards Act (FLSA).” The Bulletin clarifies that employers who pay the full minimum wage to tipped employees may require their participation in tip pools that include workers who are not “customarily and regularly” tipped – an issue that had been subject to significant controversy.

The FLSA provides that an employer may partially fulfill its minimum wage obligation to tipped employees with a “tip credit” based on tips received by the employees. The employer may also require tipped employees to participate in tip pools, by which the tips are shared among the participants. In order for the employer to take the tip credit, however, the tip pool must consist only of employees who are “customarily and regularly tipped.” If the employer does not take a tip credit, the FLSA was silent on whether the tip pool may also include employees who do not customarily receive tips.

In 2011, the Department of Labor issued a rule that expanded the tipped workers-only restriction for tip pools to all employers, whether or not they took a tip credit. The DOL’s regulation was the subject of considerable litigation, with federal appellate courts split on whether the DOL had the authority to issue the rule. The DOL then announced a proposed rescission of the rule, which would have allowed employers not taking the tip credit (1) to create tip pools that included non-tipped workers and (2) to come to “agreement” with tipped employees about the disposition and treatment of the tips (which really means that the employer would end up keeping some or all of the tips). But this announcement came under fire when it was discovered that the agency withheld an unfavorable economic analysis in its proposed rulemaking.

Reportedly in a deal with Secretary of Labor Acosta, Congress (in the context of the budget bill) amended the FLSA to state:

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 FLSA’s penalty provisions were also amended accordingly. The actual parameters of this amendment, however, were unclear – until now.

According to the Field Assistance Bulletin, “employers who pay the full FLSA minimum wage are no longer prohibited from allowing employees who are not customarily and regularly tipped—such as cooks and dishwashers—to participate in tip pools.” The Bulletin specifies that managers and supervisors may not participate in such tip pools, however. And just to be clear, the DOL explains, in a footnote, that requiring tipped employees’ participation in a tip pool does not constitute the unlawful retention of tips by the employer, managers or supervisors.

The DOL’s Bulletin is quite helpful because the Fact Sheet actually does not address this situation, and its language seems to suggest the opposite. The Fact Sheet reiterates that tips are the property of the employee and may not be retained by the employer. The Fact Sheet also provides that tipped employees may be required to participate in a valid tip pooling arrangement that includes those who customarily and regularly receive tips, but not those who do not (such as dishwashers, cooks, chefs, and janitors). And then, in a new section on “Typical Problems” (or should that be “Tip-ical Problems”?), the DOL states:

Where a tipped employee is required to contribute to a tip pool that includes employees who do not customarily and regularly receive tips, the employee is owed the full $7.25 minimum wage and reimbursement of the amount of tips that were improperly utilized by the employer.

But since the Fact Sheet doesn’t address the type of tip pool that is the subject of the Field Assistance Bulletin, this statement is rather confusing. After all, it would seem that if a valid tip pool cannot include these non-tipped employees, isn’t that an improper utilization of tips by the employer? Fortunately, the Field Assistance Bulletin makes it clear that it’s not.

The DOL further states that it will be issuing new regulations in the future to incorporate these changes. Stay tuned.