If your employees regularly receive tips, you may have considered or even implemented a tip pooling arrangement to collect and disperse tips among tipped employees. As Keith Goodwin and Greg Labate of Sheppard Mullin outline, employers should be aware of how new tip pooling guidelines may affect your business:
The recent passage of the Consolidated Appropriations Act of 2018 (“H.R. 1625”), an 878-page omnibus spending bill, significantly changes the rules for tip pooling under the Fair Labor Standards Act (the “FLSA”). While the conditions for taking a tip credit toward federal minimum wage obligations remain essentially unchanged, H.R. 1625 appears to permit the inclusion of a larger group of employees in tip pools when a tip credit is not taken. At the same time, H.R. 1625 still prohibits an employer from keeping any portion of the tips received by its employees and expands the scope of remedies and penalties available for violations of the tip rules.
The Previous Tip Pooling Rule
Section 203(m) of the FLSA permits employers to satisfy their federal minimum wage obligations to tipped employees (those who work in occupations where they customarily and regularly receive more than $30.00 per month in tips) by counting a limited amount of the tips actually received by such employees as a credit toward the federal minimum wage. This tip credit is only available to employers if:
- The employer informs affected employees of Section 203(m)’s provisions; and
- Tipped employees either (a) retain all tips they receive or (b) participate in a valid tip pool, whereby tips are shared among employees who customarily and regularly receive tips.
Federal courts and the U.S. Department of Labor (the “DOL”) have long permitted employers to require the pooling of tips. Since 2011, however, the DOL’s regulations have interpreted the FLSA to prohibit employers from pooling tips for anyone other than those employees who “customarily and regularly” receive tips, regardless of whether the employer utilizes the FLSA’s tip credit. Thus, employers have been permitted to mandate tip pooling among waiters, waitresses, bartenders, and bussers, but have been barred from including dishwashers, cooks, chefs, janitors, and other occupations not customarily and regularly receiving tips in the tip pool.
As this blog briefly noted in a 2016 post about tip pooling, the DOL’s rule was enacted in response to Ninth Circuit’s 2010 decision in Cumbie v. Woody Woo, Inc., which held that the FLSA only restricted the categories of employees who could be included in a tip pool if an employer intended to claim a tip credit.
New Tip Pooling Rules
By enacting H.R. 1625, Congress explicitly repealed portions of the DOL’s 2011 regulations restricting the group of employees whom an employer may include in a tip pool when not taking a tip credit, i.e., when paying a cash wage that is no less than the full federal minimum wage. Cutting short a controversial proposal by the Division’s current Acting Administrator, H.R. 1625 also specifically forbids an employer from keeping tips received by its employees for any purposes, including for distributing portions of the tips to managers or supervisors, regardless of whether a tip credit is taken.
By repealing portions of the DOL’s 2011 regulations, H.R. 1625 appears to permit employers who pay at least the full federal minimum wage to include employees in a tip pool even if they do not customarily and regularly receive tips. That is likely true in the Ninth Circuit, where the repeal of the 2011 regulations should make Cumbie good law once again. In most other circuits, the legality of including non-tipped employees in a tip pool not being utilized for a tip credit is hypothetically open to dispute. That said, a DOL press release characterized H.R. 1625 as ensuring that workers in the back of the house, i.e., cooks, bussers, dishwashers, can participate in tip pools in appropriate circumstances, which suggests that DOL may issue regulations adopting the Cumbie decision in the near future.
Keith and Greg shared further information on the new tip pooling guidelines, including penalties and possible implications on the Sheppard Mullin blog here.
This information is for educational purposes only and is not intended to provide legal counsel or serve as legal advice. If you have a legal matter, it is best to consult the advice of an attorney. You can get referred to an attorney for a free 30-minute consultation through the San Diego County Bar’s Lawyer Referral & Information Service at www.sdcba.org/ineedalawyer or by calling 1 (800) 464-1529.