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  • August 25, 2021

    U.S. Department of Labor Proposes Further Rulemaking for Tip Regulations

    In a recent Notice of Proposed Rulemaking, the U.S. Department of Labor proposed further changes to for tip regulations, an area that has been in flux for years. Justin Brewer provides an update on what’s going on with the 2020 Final Tip Rule.

    Justin Brewer

    tip jar

    This article was originally posted on the Kramer Elkins & Watts LLC Blog, and is published here with permission of the author and firm.

    In a recent Notice of Proposed Rulemaking, the U.S. Department of Labor (DOL) proposed further changes to for tip regulations, an area that has been in flux for years. The DOL delayed some previously-drafted regulations from taking effect until December 2021, while others were permitted to take effect on April 30, 2021.

    The Fair Labor Standards Act (FLSA) allows an employer to count a limited amount of tips received by its tipped employees as a credit toward the employer’s federal minimum wage obligations. This is called a “tip credit,” and employers may only claim it if their tipped employees retain all the tips they receive. Employers may however implement traditional tip pools, where tips are shared among all employees who regularly and customarily receive tips, without losing the ability to take the tip credit.

    In 2020, the Department of Labor issued the Tip Regulations Under the Fair Labor Standards Act (2020 Final Tip Rule), which clarified and created stricter regulations on tip credits and tip pools. These include prohibitions on employers keeping tips, increased record keeping requirements, and allowances for non-traditional tip pool structures.

    On Feb. 26, 2021, the Department of Labor published a final rule delaying the effective date of the 2020 Final Tip Rule until April 30, 2021. On March 23, 2021, the department issued two Notices of Proposed Rule Making (NPRMs), which further delay rules for select provisions of the 2020 Final Tip Rule until December 2021, while allowing other provisions to take effect on April 30, 2021.

    What Changes Occurred April 30, 2021?

    The main changes from the 2020 Final Tip Rule that took effect on 2020 include:

    • Employers are absolutely prohibited from keeping tips received by workers, regardless of whether the employer takes a tip credit under the FLSA. This includes prohibiting managers and supervisors from keeping tips received by other employees.

    • Employers who do not take a tip credit under the FLSA may include non-tipped workers, such as a cooks and dishwashers, in non-traditional tip sharing agreements, and by doing so, ensure their earnings.

    • Employers that collect tips to facilitate mandatory tip pools must fully redistribute the tips no less often than when they pay wages to avoid “keeping” the tips in violation of FLSA section 3(m)(2)(B).

    • If Employers collect employee tips to operate a mandatory tip pool, and they do not take a tip credit, they will still have to keep records of their tip-collection.

    What Do The Notices Of Proposed Rule Making Delay?

    The first NPRM will delay the effective date of three provisions under the 2020 Final Tip Rule until Dec. 31, 2021, to give the department time to complete more rulemaking. Two of the three provisions are civil monetary penalty provisions (CMPs), and the third is a provision of the rule that addresses the applicability of the FLSA tip credit to tipped employees who perform both tipped and non-tipped duties. This provision may be re-proposed in the coming months.

    Justin Brewer Justin Brewer, U.W. Class of 2022, is a law clerk with Kramer, Elkins & Watt in Madison. He is interested in pursuing business and trusts and estates law.

    The second NPRM will withdraw and re-propose the CMPs under the FLSA tip regulations. These provisions establish monetary penalties for violations of the tip regulations. This NPRM seeks to modify the language of the CMP provision to better describe “willful” violations. The new provision will clearly state that an employer’s receipt of advice from WHD that its conduct is unlawful, and its failure to inquire further about the legality of its conduct, are not the only relevant facts that can help make the determination, among other considerations. Ultimately, the department, and the courts, will account for all of the facts and circumstances surrounding a violation, to determine if it was willful.

    How Does This Affect Employers?

    The biggest takeaway is that as of April 30, 2021, FLSA fully prohibits any employer from keeping tips received by workers, regardless of their use of tip credits. If an employer keeps these tips, they will be subject to civil monetary penalties, up to $1,100 for each willful violation. The department will be modifying the language to better describe that all the facts and circumstances surrounding violations will be taken into account, including but not limited to interactions with the department.

    The new rules allow employers to implement mandatory “non-traditional” tip pools. This means that employers can now create mandatory tip pool systems that include non-tipped workers such as dishwashers or cooks. However, employers may only do this if they do not take a tip credit. Further, an employer may not withhold from the salary of a non-tipped worker if they do receive tips from such a sharing scheme.

    Finally, December 2021 may bring further clarification on whether employees who perform both tipped, and non-tipped work are covered by the FLSA tip credit. For now, the department does not know what direction it will take, but be aware of any potential changes coming later this year.

    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.

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    Labor & Employment Law Section Blog is published by the State Bar of Wisconsin; blog posts are written by section members. To contribute to this blog, contact Andrea Farrell and review Author Submission Guidelines. Learn more about the Labor & Employment Law Section or become a member.

    Disclaimer: Views presented in blog posts are those of the blog post authors, not necessarily those of the Section or the State Bar of Wisconsin. Due to the rapidly changing nature of law and our reliance on information provided by outside sources, the State Bar of Wisconsin makes no warranty or guarantee concerning the accuracy or completeness of this content.

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