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A Tipping Point? DOL Reconsiders Stance on Tip Pooling

On December 4, 2017, the U.S. Department of Labor (“DOL”) announced proposed changes that could have a large impact on many businesses that employ tipped workers. Citing changes in state laws and significant litigation involving tip pooling, the DOL is considering rescinding certain restrictions on tip pooling for employers who do not claim a tip credit against the federal minimum wage. A Notice of Proposed Rulemaking regarding these potential changes was published on December 5, 2017 for public comment.

The Tip Credit

The Fair Labor Standards Act (“FLSA”) requires employers to pay employees at least the federal minimum wage of $7.25 an hour. Under current regulations, employees who receive tips can receive a lower direct cash wage of $2.13 an hour, and employers meeting other regulatory requirements can count a portion of the tips employees receive, up to $5.12 per hour, to satisfy the difference between the direct cash wage paid and the federal minimum wage (known as a “tip credit”). However, the employer may only take this credit if the tips are retained by the directly tipped employee or shared only among those employees who “customarily and regularly receive tips.”

While some employers choose to use this tip credit, others elect or are required by applicable state law to pay the full minimum wage to their tipped employees. For example, states such as Alaska, California, Minnesota, Oregon, and Washington require employers to pay tipped employees the full state minimum wage before tips. These developments and litigation surrounding tip pooling have led the DOL to reconsider its position on employers who elect not to use the tip credit. In particular, the DOL is proposing to lift some of the restrictions on who may participate in a tip pool in cases where the employer does not take a tip credit.

The Notice of Proposed Rulemaking

Under the current regulations, employers who pay the full federal minimum wage to tipped workers without the tip credit cannot share tip pools with customarily non-tipped workers. This can lead to wage disparities among employees who all contribute to a customer’s experience, particularly back-of-the-house staff such as cooks and dish washers.

The proposed rule would rescind this prohibition for employers who pay the full federal minimum wage to tipped workers. If implemented, these changes would permit tip pools to include traditionally non-tipped workers, which “would likely increase the earnings of those employees who are newly added to the tip pool and further incentivize them to provide good customer service” according to the DOL.

The proposed rule is subject to comment by the public from December 5, 2017 until January 4, 2018. Honigman will continue to provide updates on the DOL’s actions relating to tip pooling and the proposed rulemaking.

  • Jennifer L. Muse

    Jenn Muse is an employment law attorney who provides proactive counsel to businesses on practical strategies, steps, and policies to address human resources and relations concerns. She focuses her practice on employment ...

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