Tipping can be a landmine. Just ask Mario Batali, Daniel Boulud or Jessica Biel. They’ve all been sued by their employees for allegedly pocketing tips in what is rapidly becoming one of today’s most heavily litigated areas of law. The law is confusing and, up until a few weeks ago, was silent on a key issue that spurred an interpretation dispute between the Department of Labor (DOL) and federal courts that spanned almost a decade. But on March 23rd, the cobwebs were officially cleared. Tucked deep within the new congressional spending bill is a provision that both clarifies and significantly changes how tips can be allocated. Let’s break down what you need to know to prevent violations and the $1,100 fines they now come with.
First, the back story: The Fair Labor Standards Act (FLSA) sets the rules for paying minimum wage and overtime. It allows employers to take a tip credit against its minimum wage obligations if certain conditions are met. One of those conditions is that tipped employees must be allowed to retain all of their tips. There is one exception to this – that employers can require employees to participate in a valid tip pooling arrangement. There are various requirements for a tip pool to be valid but most importantly, the tips can only be shared with people who customarily and regularly receive tips. Typically, these jobs are in the front of the house.
The FLSA is silent as to whether these same restrictions apply to employers who don’t take a tip credit and instead just pay a full minimum wage. In 2010, the Ninth Circuit ruled that they don’t apply if you don’t take the tip credit. In 2011, the DOL issued regulations saying that they apply whether you take the tip credit or not.
In 2017, the Trump Administration proposed a rule that would clarify this issue. The rule sought to allow employers who pay a full minimum wage to include back of house workers in a tip pool. But the rule as proposed left open a potential loophole – that in giving employers control over the tips (under the expectation that they would use them to pay back of house workers) that the rule would have also allowed employers to pocket the tips if they wanted to. This prompted an enormous uproar and ultimately the administration scaled back; the law would be revised to make clear that employers cannot under any circumstances keep any portion of their employees’ tips.
So, what does this look like as a practical matter for restaurant owners? Well, primarily it depends on how you pay your staff. If you take a tip credit, the same rules as always still apply. You can pay them as low as $2.13 per hour in direct wages and let the customers make up the difference in tips. If the subsidies don’t shake out to equal at least the federal minimum wage per every hour worked, you have to make up the difference. Keep in mind also that some states have a higher direct wage requirement and some states prohibit the tip credit altogether. And if you require your employees to participate in a tip pool, the arrangement still has to be valid; tips can only be shared with people who customarily and regularly receive them.
But if you pay your employees a full minimum wage, you now have more latitude in mandating how they pool their tips. Just as with the tip credit, minimum wage employees must be allowed to maintain their tips except to the extent that they are required to participate in a tip pool. But unlike the tip credit, pools for minimum wage employees caninclude non-traditionally tipped workers like employees in the back of house. Remember though that under no circumstances – whether you take the tip credit or pay minimum wage – can you ever share in any of your employees’ tips. The new law took a hard line, even ratcheting up the penalties. Employers who keep tips for any purpose – including for distribution to managers or supervisors - will be liable for the amount of tips taken, plus liquidated damages and a penalty of up to $1,100 for each violation.