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U.S. DOL Seeking to Rescind Portions of Obama-Era Tip Regulations

Proposed changes regarding tip pools could impact restaurants and other businesses with employees who rely on customer gratuities. Learn the details about this proposal.
tip pool restrictions
  • The U.S. DOL has issued a Notice of Proposed Rulemaking (NPRM) to expand federal regulations related to tip sharing.
  • If adopted, portions of current regulations would be rescinded to allow tip pooling arrangements that include back-of-house workers for certain employers.
  • Public comment period on proposed rules open through February 5, 2018.

The U.S. Department of Labor (DOL) released an NPRM on Dec. 4, 2017, proposing new regulations that would rescind parts of an Obama-era regulation, which currently restricts tip pooling arrangement used by restaurants and other businesses with employees who rely on customer gratuities. The 2011 rule prohibits restaurants, bars, and other service-industry employers from creating tip pools, which include both tipped employees such as servers and employees who do not customarily and regularly receive tips, such as cooks and dishwashers.

The newly proposed regulations would rescind the restriction on mandatory tip pools, but only for employers who both pay employees at least the federal minimum wage and do not utilize a tip credit provision. This proposed rule does not change the Fair Labor Standards Act’s (FLSA) restrictions on the use of an employee’s tips when an employer does take a tip credit under the FLSA.

The DOL indicates the reason for issuing the NPRM is derived in part due to recent litigation. A number of courts have challenged the existing Obama-era rule as being unfair to employees who don't customarily receive tips. Since 2011, the courts have seen a significant amount of litigation specifically involving tip pooling and tip retention practices of employers that pay a direct cash wage of at least the federal minimum wage, and do not claim a tip credit. In fact, the current rule has been held to be invalid in the Fourth, Tenth, and Eleventh Circuit Courts. Additionally, in the past several years, several states have changed their laws to require employers to pay tipped employees a direct cash wage that is at least the federal minimum wage. This means that fewer employers can take the FLSA tip credit.

Under the NRPM published by the DOL, eligible employers would have the freedom to mandate tip sharing among more employees, offering flexibility in pay practices that the DOL believes could help decrease wage disparities between tipped and non-tipped workers, and incentivize more workers to improve the customers’ experience.

The NPRM seeks public comments until February 5 and asks for responses on several specific questions related to tip pooling, including:

  • How prevalent are employer-required, or mandatory, tip pools?
  • Do tipped employees receiving money from a mandatory tip pool typically receive a fixed dollar amount, or a fixed percentage of the pool?
  • Are there any market norms or other behavioral reasons why some types of tip pooling are more prevalent than others?

Employers are encouraged to visit the U.S. DOL website at dol.gov and their state website for more information and applicable guidance on the use of tip pools and tip credits, and to monitor further developments related to this most recent notice of proposed rulemaking.

Paychex will continue to monitor activity by the Department of Labor related to the Notice of Proposed Rulemaking (NPRM): Tip Regulations under the Fair Labor Standards Act (FLSA) and provide updates as necessary.

Tammy Tyler

Tammy Tyler is an employment law compliance manager at Paychex, Inc., a leading provider of integrated solutions for payroll, HR, retirement, and insurance services.

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