The DOL’s Tipped Employee Final Rule: What Is Taking Effect and What Is Not

By Fiona W. Ong - Shawe Rosenthal LLP

March 24, 2021

With the change in administration, the Department of Labor’s recently-issued Final Rule governing the treatment of tipped employees under the Fair Labor Standards Act was thrown into doubt. Following a formal delay of the Final Rule’s effective date of March 30, 2021, the Biden DOL has now announced that parts of the Final Rule will take effect on April 30, 2021, while other parts will be further delayed and revised, subject to public comment.

Background of the Final Rule. Under the FLSA, an employer of tipped employees can satisfy its obligation to pay those employees the federal minimum wage of $7.25/hour by paying those employees a lower direct cash wage (no less than $2.13/hour) and counting the employees’ tips as a credit to satisfy the difference between the direct cash wage and the minimum wage. (Employers should be aware, however, that many states have enacted higher minimum wage rates, including for tipped employees). This credit is known as the “tip credit.” Tipped employees are those who customarily and regularly receive more than $30 per month in tips. Tips do not include service charges, such as minimum gratuity amounts for large groups of customers, which are considered revenue to the employer.

The FLSA provides that an employer who takes a tip credit may include only employees who customarily and regularly receive tips, such as restaurant servers and bartenders, in mandatory “tip pools” (i.e., the practice of requiring employees to contribute a certain amount of tips into a collective pool that is divided among employees). The DOL issued regulations in 2011 that applied this restriction on mandatory tip pools to all employers, whether or not those employers made use of the tip credit.

In March of 2018, however, as part of a budget compromise, Congress passed the Consolidated Appropriations Act of 2018 (the “CAA”). The CAA amended the FLSA by reversing the DOL’s restriction on tip pooling practices of employers that did not utilize the tip credit. It also provided that, regardless of whether the employer takes the tip credit, the law prohibits employers, managers and supervisors from receiving any share of the tips.

What the December 22, 2020 Final Rule Did. The Final Rule conformed the FLSA regulations to the CAA’s tip pooling and sharing provisions. Thus, if the employer does not take the tip credit, tips may be split with other employees who do not customarily and regularly receive tips, such as dishwashers, cooks, chefs and janitors. The Final Rule imposed new recordkeeping requirements under such circumstances.

In addition, the Final Rule provided that an employer who unlawfully keeps tips earned by employees would be subject to a civil monetary penalty of up to $1,100 for each violation, pursuant to 29 U.S.C. § 16(e)(2). The Final Rule made clear that an employer must distribute any tips collected as part of a mandatory tip pool at least as often as it pays wages in order to avoid “keeping” the tips.

In addition to the tip sharing provisions, the Final Rule also reflected the Trump DOL’s guidance that an employer may take a tip credit for any amount of time an employee in a tipped occupation performs “dual jobs,” meaning related non-tipped duties contemporaneously with their tipped duties, or for a reasonable time immediately before or after performing the tipped duties. Previously, the Department’s position was that an employer may not take a tip credit for time an employee spends on non-tip producing duties if the time spent on non-tip producing duties exceeded 20% of the employee’s workweek. This rule, known as the 80/20 rule, was difficult to administer for many employers because they lacked guidance to determine whether a non-tipped duty is “related” to the tip-producing occupation.

What Is Going Into Effect. The following provisions of the Final Rule will take effect on April 30, 2021:
•    If the employer does not take a tip credit, it may allow workers such as cooks or dishwashers, to share in a mandatory tip pool.
•    Under those circumstances, new recordkeeping obligations apply. In addition to the normal payroll information and data already required of employers, they must also retain the following:
  o    A symbol, letter, or other notation placed on the pay records identifying each employee who receive tips.
  o    Weekly or monthly amount reported by the employee, to the employer, of tips received (this may consist of reports made by the employees to the employer on IRS Form 4070).
•    Employers, managers, and supervisors are explicitly prohibited from keeping tips received by employees.

What Is Being Proposed for Delay. The DOL has issued two proposed rules impacting the Final Rule. The first proposes to delay the effective dates of three provisions of the Final Rule until December 31, 2021, and solicits comments on both the proposed delay and on the substance of those provisions. The provisions in question address the following:

•    The establishment of civil money penalties for violating the prohibition on keeping an employee’s tips.
•    The determination of when a violation is “willful” for purposes of assessing the civil money penalties.
•    The application of the tip credit to employees performing dual jobs of both tipped and non-tipped work.

The purpose of the delay is to allow the DOL to withdraw and repropose the civil money penalty provisions, as set forth in the second proposed rule, and to consider whether to withdraw and repropose the dual jobs provision.

Specifically, the second proposed rule asserts that the Final Rule improperly restricted the imposition of civil money penalties to “repeated” or “willful” violations. The proposed revision would adopt the CAA’s language that such penalties may be imposed “as the Secretary [of Labor] deems appropriate.” The second proposed rule also seeks to align the Final Rule with Supreme Court and federal appellate court decisions regarding when an employer has shown reckless disregard of the law for purposes of establishing a willful violation warranting the imposition of civil money penalties.

The second proposed rule further seeks comment on whether to revise the Final Rule’s provision addressing the statutory term “managers or supervisors,” to acknowledge the fact that some managers and supervisors perform substantial amounts of tipped work. The DOL solicits responses to specific questions regarding situations where managers and supervisors receive tips directly from customers for their service, as well as whether they may be required to contribute tips to a pool, as long as they do not receive tips from any other employees.

Additionally, the second proposed rule notes that the new Final Rule does not require that employers account for all tips that are contributed to a mandatory tip pool or tip sharing arrangement, and therefore it may be difficult for employees and the DOL to know if the employer is unlawfully keeping tips. The DOL sets forth a list of detailed questions on how it might improve the Final Rule’s recordkeeping requirements in a future rulemaking.

Finally, the DOL sets forth several general questions about tip pooling that it believes may be helpful to its future considerations of enforcement of the tip provisions:

1.    What kind of employees typically participate in mandatory tip pooling arrangements and in what industries are these arrangements most common?
2.    Are mandatory tip pooling or voluntary “tip out” arrangements more commonly used?

What’s Next. Comments on the first proposed rule regarding the delay of the three provisions may be submitted from March 25 through April 14, 2021, while comments on the second proposed rule may be submitted from March 25 through May 24, 2021. To submit comments, visit https://www.regulations.gov/.