When a customer leaves a tip for a server, who receives the full amount of the tip at the end of the day?  According to a 2011 Department of Labor (DOL) regulation, the tip always belongs to the server, even if the employer pays the server minimum wage.  However, a recent DOL announcement in late July has put this issue back on the table and may resolve a conflict between courts across the country as to tip practices within the hospitality industry.  The 2011 regulation states that tips are the property of the employee regardless of whether the employer pays the employee minimum wage and claims a tip credit.  Now, DOL is rescinding this regulation, which will allow employers more flexibility in their tip pooling practices. 

Tip Credit Background

By way of background, the Fair Labor Standards Act (FLSA) is the federal statute that requires employers to pay a minimum wage of $7.25 per hour, among other things.  Section 3(m) of the FLSA allows an employer to meet the minimum wage requirement by claiming a “tip credit” on wages paid to a tipped employee, if the employee customarily and regularly receives more than $30 per month in tips.  Specifically, an employer can pay a tipped employee a lower hourly rate (e.g., the minimum required cash wage of $2.13) and claim a maximum of $5.12 per hour as a “credit” toward the minimum wage calculation, because of the tips the employee receives.  So, the lower base hourly rate payment, plus the tip credit, equates to paying the employee the current minimum wage of $7.25 per hour. 

In 2011, DOL issued regulation 29 C.F.R. § 531.52, which specifically stated that tips under the FLSA are the property of the employee, regardless of whether the employer takes a tip credit. So even if the employer paid a tipped employee minimum wage and the employer was not claiming a tip credit, the agency determined the tips still belonged to the employee.  This meant that employers were prohibited from pooling and distributing an employee’s tips, regardless of whether the employer were taking a tip credit, except in furtherance of a valid tip pool.  For example, a restaurant employer, under this regulation, could not include busboys and dishwashers – who  do not customarily and regularly receive tips – in a tip pool with tipped employees even if all of the employees were paid minimum wage and the employer was not claiming a tip credit.

The Fourth Circuit, which covers North and South Carolina as well as Maryland, Virginia and West Virginia, has not addressed the validity of the 2011 DOL regulation. But in a 2015 decision, the court did rule that an employee who earns minimum wage cannot bring a private cause of action under the FLSA to recover tips contributed to a tip pool, as the FLSA does not contemplate a claim for wages other than minimum wages or overtime wages.

In Trejo v. Ryman, Hospitality Properties, Inc., two servers alleged that their employer violated the FLSA by not paying all of their earned tips by forcing them to join a tip pool.  The servers were paid a full minimum wage, absent tips, and limited their requested relief to “the amount of tip wages” taken by their employer.  Specifically, the employees argued that they were never informed of the FLSA’s tip-credit provision and that the tip pool included employees who did not regularly receive tips, such as busboys, and therefore their employer was in violation of the FLSA.  The court dismissed the complaint, finding that Section 203(m) of the FLSA, “does not apply to employees, like plaintiffs, who are seeking only the recovery of the tips unrelated to a minimum wage or overtime claim.” 

Notably, the majority opinion in Trejo did not address the 2011 DOL regulation, as the plaintiffs argued that they were pursuing a claim only under the FLSA and that the regulations were “not an issue.” The concurring opinion cautioned against the majority’s interpretation of Section 203(m) without addressing the 2011 DOL regulation, and, specifically, was concerned that the majority’s analysis of Section 203(m) might be understood as reaching an opinion on the validity of the 2011 regulation.  However, the concurrence noted that the plaintiffs failed to rely on the DOL regulation, no party mounted a defense to the regulation, and therefore the court “should take special care not to enter, even a little, into a debate that all agree is not properly before [the Court].” 

Circuit Split

The debate in question is a circuit split over the validity of the 2011 DOL regulations.  The Ninth Circuit, which covers California, Nevada, Washington, Arizona, Oregon, Idaho, Montana, Hawaii and Alaska, has shown strong support for the 2011 regulations since their enactment. On the other hand, the Tenth Circuit, which covers Colorado, Kansas, Oklahoma, Utah, Wyoming and New Mexico, has ruled as recently as June 30, 2017, that the DOL regulation was invalid, as the tip credit provision does not have any effect where the employer pays employees minimum wages and therefore the employer may retain the tips.  Additionally, the Tenth Circuit has ruled that the regulation is beyond DOL’s authority. Although federal agencies can promulgate rules to fill ambiguities or gaps in statutes, the Tenth Circuit has ruled that Section 203(m) is not ambiguous and clearly applies only when the employer uses tips received by the employee as credit against the employee’s minimum wage. District courts in the State of New York have also followed the Tenth Circuit’s lead and found the regulations invalid.  This past June, the Eleventh Circuit, following the Fourth Circuit’s decision in Trejo, held that a plaintiff cannot bring a cause of action under the FLSA if he or she is not asserting a claim for unpaid minimum wages or overtime pay.  Two petitions for certiorari regarding the validity of the 2011 regulation are currently before the United States Supreme Court. 

However, this circuit split may be ending fairly soon.  In July 2017, DOL announced that it would rescind the current restrictions on tip pooling by employers that pay tipped employees the full minimum wage.  The department notes that its regulations “limit an employer’s ability to use an employee’s tips regardless of whether the employer takes a tip credit under Section 3(m) or instead pays the full FLSA minimum wage directly to the employee.” The announcement stated that the rescission would go into effect sometime in August 2017; however, as of the date of publication, the DOL has not released its rescission.  

Conclusion

DOL’s pending rescission will not only resolve this circuit split and lead to the Supreme Court appeals being rendered moot, but also will allow hospitality industry employers more flexibility in their tip pooling practices.  While state laws may have different implications, employers generally will be able to include non-tipped employees in their tip pools, such as busboys, chefs and dishwashers, as long as all employees are paid minimum wage and the employer is not claiming a tip credit on their wages.  The rescission will not affect tipped employees who earn less than minimum wage and whose employers are claiming a tip credit. However, the rescission will take time to go into effect, and employers should take this opportunity now to audit their tipping practices to ensure full compliance with all state and federal laws.