U.S. Department of Labor Issues Rule About Tip Pooling

Introduction

On Tuesday, December 22, 2020, the United States Department of Labor (“DOL”) issued a final rule addressing important issues for the restaurant industry. The rule provides guidance on when employers may require employees to pool (or share) tips and the extent to which employers may use the “tip credit” when employees perform traditionally non-tipped duties, such as preparing tables for guests and making coffee. The new rule will take effect on February 20, 2021.

The Final Rule

Pooling Tips and the Tip Credit

The Fair Labor Standards Act (“FLSA”) generally requires covered employers to pay employees at least the federal minimum wage, which is currently $7.25 per hour. The FLSA allows an employer that satisfies certain requirements to count a limited amount of tips received by “tipped employees” (such as servers) as a credit toward its federal minimum wage obligation. This allows employers to pay servers less than the hourly minimum wage if after servers’ tips are included in daily wages; they are paid at least the minimum wage.

An employer may take a tip credit only for tipped employees and only if, among other things, the tipped employees retain all of their tips. Further, in order for an employer to utilize this “tip credit” the employer is only permitted to pool tips received among employees who “customarily and regularly receive tips.” This requirement therefore excludes “back of house” employees such as cooks and dishwashers.

The DOL’s final rule did not alter an employer’s obligation to restrict a tip pool to only those who customarily and regularly receive such tips – if the employer is utilizing the “tip credit.” If, however, the employer is not utilizing the tip credit, and instead pays employees a direct cash wage of at least the full federal minimum wage – the employer, pursuant to the new rule – may mandate that tips be shared in a pool that includes back of house employees.

Prohibition on Managers and Supervisors Receiving Tips

Regardless of whether or not an employer elects to participate in the “tip credit” program, employers may not keep employees’ tips and may not allow managers or supervisors to do so. This means that supervisors and managers may not participate in any tip pooling arrangement. The one – limited – exception to this rule is where a manager or supervisor directly receives a tip from a customer based on the service that the manager directly and solely provides. This means that supervisors and managers must be careful to keep tips only if they were the only employee who provided relevant services.

The Elimination of the 80/20 Test

Until now, Employers who utilize the “tip credit” have been required to pay employees the full minimum wage (i.e. not take a tip credit) if they spend more than 20% of work time performing “non-tipped” duties. This regulation led to confusion as to what constituted a “non-tipped” duty and how to track employees’ time accurately. The new rule does away with the 80/20 test and advises, “an employer may take a tip credit for any amount of time that an employee in a tipped occupation performs related, non-tipped duties contemporaneously with, or within a reasonable time before or after, his tipped duties.”

The new rule clarifies that a duty will be deemed “related” to a tipped duty if the duty is listed on the Occupational Information Network (O*Net). The O*NET is a comprehensive database of worker attributes and job characteristics available at www.onetonline.org. Examples of “related” duties include: “cleaning and setting tables, toasting bread, making coffee, and occasionally washing dishes or glasses.”

Takeaways for Employers

The new rule provides employers with flexibility to include traditionally non-tipped employees in a tip pool – but only if the employer does not take the “tip credit.” This may allow employers to more effectively recruit and retain traditionally non-tipped employees (such as dishwashers and cooks) as these employees will now be able to potentially receive greater wages. Additionally, the new rule provides employers with further guidance on what “related” tasks an employee may perform without disqualifying employers’ utilization of the “tip credit.”

Two important points of caution remain for employers. First, wage and hour requirements are a product of both federal and state legislation. State laws and rules may be more restrictive than federal laws and rules. Therefore, despite the DOL’s final rule it is imperative that employers ensure that all payment practices are lawful under applicable state law. Secondly, with the upcoming change in leadership at the federal level – from a Trump administration to a Biden administration – it is likely that wage and hour regulations will be amended. Employers should remain vigilant of any changes.

Companies in the restaurant or hospitality business who are unsure how this change in law could affect their business should consult Joseph Hofmann, Brandon Shemtob or the Stevens & Lee attorney with whom you regularly work.

This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.

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