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Tip Pooling: Recent Amendment to FLSA and DOL Clarification

In its budget reconciliation bill, Congress amended the Fair Labor Standards Act to address tip pooling restrictions when employers pay employees at least the full federal minimum wage. If you have employees who receive customer gratuities, this article is a must-read.
  • As part of its budget reconciliation bill, Congress amended the Fair Labor Standards Act (FLSA) to address tip pooling restrictions when employers pay employees at least the full federal minimum wage.
  • The U.S. Department of Labor (DOL) released an internal Field Assistance Bulletin to provide clarification around how it will enforce the amendment.
  • States and cities may continue to impose their own standards around tip pooling arrangements and tip credits.

There has been much activity in recent months around tip pooling arrangements. In December 2017, the U.S. DOL issued a Notice of Proposed Rulemaking (NPRM) seeking to rescind portions of the 2011 Obama-era tip regulations that prohibited restaurants, bars, and other service-industry employers from creating tip pools that include both tipped employees and employees who do not customarily receive tips, such as cooks and dishwashers. The proposal sought to rescind the restriction on mandatory tip pools for those employers who pay employees at least the federal minimum wage and do not take a tip credit. The proposal sparked controversy, although consistent with several recent court cases.

Amendment addresses rules around tip ownership

In advance of any final rule from the DOL, Congress addressed tip pooling restrictions in its recent budget reconciliation bill. As part of the Consolidated Appropriations Act signed into law March 23, 2018, Congress amended the Fair Labor Standards Act (FLSA) to prohibit employers from requiring employees to share tips with the employer, including managers or supervisors, regardless of whether the employer takes a tip credit.

Field Assistance Bulletin offers guidance around enforcement of tip credit rules

Further clarification regarding how the U.S. DOL intends to implement the amendment to the FLSA was provided by the agency in the release of Field Assistance Bulletin issued on April 6, 2018. In it, the DOL stated that:

  • Employers that pay the full FLSA minimum wage are no longer prohibited from allowing employees who are not customarily or regularly tipped, such as back-of-the-house employees like cooks and dishwashers, to participate in tip pooling arrangements.
  • The terms “manager” and “supervisor” are defined using all but the salary requirements for the executive employee overtime exemption criteria as defined under the FLSA.
  • The WHD will begin enforcing these rules, including recovering tips unlawfully kept by employers and imposing civil monetary penalties of up to $1,100 per violation.

Next steps for employers with tipped employees

Employers with employees who receive customer gratuities may want to visit the WHD website as well as applicable state and local wage and hour enforcement agency websites for more information, applicable guidance, and further clarifications around tip pooling. The recent FLSA amendment does not prohibit states or cities from imposing their own standards regarding tip pools and tip credits. Employers considering a tip pooling arrangement may also want to consult with legal counsel as well as an HR professional before implementing a policy.

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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