As bars and restaurants start to reopen their businesses to outside guests and rehire staff, these employers need to pay particular attention to the current status of the Department of Labor’s (DOL) tipped employee regulations. These regulations impact provisions of the FLSA addressing the tip credit or tip pooling arrangements, who may keep employee tips, and civil monetary penalties for violations.
This article provides a brief refresher on the FLSA’s tipped employee provisions, the DOL’s December 2020 Tipped Employee Final Rule, as well as a discussion of which portions of the Final Rule have been given the “red light” or the “green light” by the DOL under the Biden Administration.
A Short Refresher
Under the FLSA, an employer of “tipped employees” is permitted to satisfy its federal minimum wage obligations by paying tipped employees a lower hourly wage (no less than $2.13 per hour) and counting the employees’ tips as a credit to make up the difference between the lower hourly wage and federal minimum wage.1 This is referred to as the “tip credit.”
U.W. 2014, is a senior associate with DeWitt LLP in Madison, where she practices in management-side labor and employment counseling and litigation.
Tipped employees are those employees who “customarily and regularly” receive more than $30 per month in tips.2 The FLSA requires that the employer provide a notice to tipped employees, containing specific items of information, prior to taking a tip credit.3
The FLSA also regulates who may participate in tip pools. Tip pools are often used in restaurants to make sure that employees who assist servers in their duties share in the fruits of that labor (i.e., tips). The FLSA states that an employer who takes a tip credit may only include employees who “customarily and regularly” receive tips, such a servers and bartenders, in mandatory tip pools.4 Back-of-the-house staff, such as cooks and dishwashers, are not permitted to participate in mandatory tip pools when a tip credit is taken because those job classifications do not “customarily and regularly receive tips.”
In March 2018, the FLSA was amended by the Consolidated Appropriations Act (CAA). The CAA amended the FLSA to state that employers, including managers and supervisors, are prohibited from keeping any portions of tips received by their employees, regardless of whether the employer takes a tip credit.5
Additionally, the CAA overturned longstanding regulatory restrictions related to tip pooling when an employer does not take a tip credit.6
Pursuant to the CAA, employers who pay their employees full minimum wage and who do not take a tip credit are permitted to implement mandatory “nontraditional” tip pools, which may include employees who do not “customarily and regularly” receive tips, such as cooks, dishwashers, and janitors. The CAA anticipated further notice and comment rulemaking to ensure that FLSA regulations matched the revisions to the text of the FLSA.
The December 2020 Final Rule
On Dec. 20, 2020, the Trump Administration’s DOL finalized new tipped employee regulations that were set to take effect in March 2021.7 The Final Rule largely endeavored to conform the FLSA regulations to the CAA’s amendments.
The Final Rule provided, in pertinent part:
An employer can mandate a nontraditional tip pool, including tipped employees and non-tipped employees so long as: (1) the tip pool does not include the employer, managers, or supervisors; and (2) the employer does not take a tip credit for the tipped employees, and instead pays those employees full minimum wage.
The 80/20 rule previously used by the DOL was eliminated. Instead, when an employee performs tipped job duties (e.g., serving customers) and non-tipped job duties (e.g., refilling salt and pepper shakers or rolling silverware), the employer can take a tip credit for non-tipped duties performed so long as those duties are: (1) related to the tipped job duties; and (2) performed within a reasonable time immediately before or after the tipped job duties or contemporaneously with the tipped job duties.
Employers are required to keep additional records related to which employees receive tips and the amount of tips received by each employee on a monthly or weekly basis.
The Final Rule also provided for certain civil monetary penalties for employers who retain employee tips in violation of the FLSA as amended by the CAA.
Final Rule Provisions Given the Green Light
After taking office, President Biden put the brakes on the Final Rule so that his administration could do some further evaluation.8 Recently, the Biden Administration gave the green light to certain portions of the Final Rule that took effect April 30, 2021, while other portions are still sitting at the red light, pending review by Biden’s DOL.
Several portions of the Final Rule took effect on April 30, 2021, including, most significantly:
The restriction on employers, managers, or supervisors keeping employee tips, regardless of whether a tip credit is taken.9
The ability of employers who do not take a tip credit to include tipped and non-tipped employees in a mandatory tip pool.10
Additional recordkeeping requirements related to employees who receive tips pursuant to a tip pooling or tip sharing arrangement, but for whom a tip credit is not taken.11
Stalled Final Rule Provisions
On March 25, 2021, Biden’s DOL issued two new proposed rules related to the Tipped Employee Final Rule for notice and comment.12 The provisions from the December 2020 Final Rule that are being reevaluated by the DOL, as set forth in the two new proposed rules, include:
Civil monetary penalties for violating the prohibition on keeping employee tips and what constitutes a “willful” violation.
The definition of “managers or supervisors” under Section 203(m) of the FLSA.
The application of the tip credit to employees performing both tipped and non-tipped work.
The DOL extended the effective date of these items until Dec. 31, 2021.
Key Takeaways for Employers
Employers who use a tip credit or tip pooling arrangement should review their policies and procedures to make sure they are consistent with the FLSA and the Final Rule’s partial implementation on April 30, 2021.
This will include a review of all financial recordkeeping practices, as well as tip credit and tip pooling arrangements. Employers will also want to keep track of the delayed Final Rule provisions and any updates to the Final Rule brought about by the recent proposed rules.
Employers should consider conducting periodic audits of their tip credit and tip pooling practices to ensure compliance. The FLSA’s liquidated damages provision means that employers who get it wrong could be on the hook for substantial amounts.
In most cases, employers are better off addressing these issues proactively, rather than waiting to address tip credit or tip pool issues during a lawsuit or DOL investigation when the stakes are much higher.
This article was originally published on the State Bar of Wisconsin’s Labor & Employment Law Section Blog. Visit the State Bar sections or the Labor & Employment Law Section webpages to learn more about the benefits of section membership.
1 See 29 U.S.C. §203(m)(2)(A). Certain states have higher minimum wage rates, including for tipped employees. The DOL maintains a chart related to minimum hourly wages for tipped employees by state. See DOL’s Table of Minimum Hourly Wages for Tipped Employees by State.
2 See 29 U.S.C. §203(t).
3 See 29 U.S.C. §203(m)(2)(A).
4 See 29 U.S.C. §203(m)(2)(A).
5 See 29 U.S.C. §203(m)(2)(B).
6 See DOL’s Field Assistance Bulletin No. 2018-3, April 6, 2018.
7 See DOL’s Final Rule: Tip Regulations Under The Fair Labor Standards Act, 85 Fed. Reg. 86756-86792.
8 See Tip Regulations Under the FLSA: Delay of Effective Date, 86 Fed. Reg. 11632-11634.
9 See 29 C.F.R. §531.54(a)-(c).
10 See 29 C.F.R. §531.54(d).
11 See 29 C.F.R. §516.28(b).
12 See Tip Regulations Under the FLSA; Delay of Effective Date, 86 Fed. Reg. 15811-15817; see also Tip Regulations Under the FLSA; Partial Withdrawal, 86 Fed. Reg. 15817-15828. On April 29, 2021, the DOL issued a Final Rule delaying the effective date of certain portions of the December 2020 Final Rule. See Tip Regulations Under the FLSA; Delay of Effective Date, 86 Fed. Reg. 22597-22610.