The history of tip pooling for employers who do not utilize a tip credit has been a rocky one.  Past articles on this site have chronicled an employer’s ability to pool and distribute tips to all employees, including those in the back of the house. 

New Proposed Rule Allowing Tip Pooling Between Servers and Back of the House

New Restrictions on Tip Pooling

In an attempt to circumvent the legal arguments over tip pooling, in 2011, the Department of Labor (“DOL”) issued a regulation stating that tips are the property of the employee and could be pooled only among employees who customarily receive tips.  This left employees in the back of the house, such as cooks, unable to receive any portion of the customer’s tip.

Meanwhile, the tip pooling regulations have also been tested in the courts.  Currently there is a split of opinion between two federal circuit courts, the Ninth (Oregon Restaurant & Lodging Assn. v. Perez, 843 F.3d 355 (9^th Cir. 2016) (reh’g and reh’g en banc denied)). and the Tenth, (Marlow v. New Food Guy, Inc., 861 F.3d 1157 (10^th Cir. 2017) about whether the DOL’s 2011 ruling was valid.  Further, the Oregon Restaurant & Lodging Association has been waging a battle over the legality of including back-of-the-house employees in tip pools and currently has a writ of certiorari pending for review in the U.S. Supreme Court (Oregon Restaurant & Lodging Assn. v. Perez, 843 F.3d 355 (9^th Cir. 2016) (reh’g and reh’g en banc denied)).

To resolve some of this controversy, the new Republican DOL issued a Notice of Proposed Rulemaking to rescind the 2011 tip pooling regulations.  Unfortunately, the attempt was an awkward one because the DOL did not perform a cost-benefit analysis to support the rule, and further, because the rule did not prevent employers, managers and supervisors from retaining tips.  The new rule angered states’ attorneys general, workers’ rights advocates, Democratic politicians, and others, who then flooded the DOL comment page on the last day of comments for the proposed rule, causing the DOL to take a step back to perform additional analysis prior to continuing with the rule.

With all of this background, it seemed that the only resolution to the tip pooling controversy would be a congressional one.  On March 23, 2018, President Trump signed into law the Consolidated Appropriations Act (the “Act”) that included a provision amending 29 C.F.R. § 203(m) of the Fair Labor Standards Act (“FLSA”) to address the tip pooling controversy.  The new amendment prohibits employers (including supervisors and managers) from keeping tips received for their employees, regardless of whether the employer takes a tip credit under Section 203(m).  The Act also provided that portions of the DOL administrative rules enacted in 2011 that barred tip pooling in circumstances when employers were paying tipped employees at least the full FLSA minimum wage and do not receive a tip credit “shall have no further force or effect,” at least until the DOL takes further action to promulgate new rules. 

What does this mean for tip pooling?  With this new amendment to the FLSA, employers who pay the full FLSA minimum wage are no longer prohibited from pooling tips so that the tips are shared by front-of-the-house and back-of-the-house employees.  However, the new amendment also prohibits managers or supervisors from participating in tip pools, as it equates this with the employer retaining the tips. 

On April 6, 2018, the DOL Wage and Hour Division (“WHD”) published the Field Assistance Bulletin (“FAB”) No. 2018-3 (that announced this legal change, and that further clarified that the WHD will use the executive exemption duties test at 29 C.F.R. § 541.100(a)(2)((4) to determine whether an employee is a supervisor or manager for purposes of tip pooling.  That provision provides in part that an “executive employee” who is exempt from the FLSA is one:

1. Whose primary duty is management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof;
2. Who customarily and regularly directs the work of two or more other employees; and
3. Who has the authority to hire or fire other employees or whose suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees are given particular weight.

Therefore, employers who wish to have their employees pool their tips to share with the back should be very clear not to include managers, supervisors, or leads if they supervise two or more individuals and have input into hiring and firing decisions.  There is no indication in the FAB that the managers must meet the full executive exemption—that is, that they must actually be exempt by meeting both the salary and the duties portions of the FLSA.  Currently, the FAB refers only to the duties sections of the rule.

The FAB also makes it clear that the Act provides WHD with enforcement authority to recover all tips unlawfully kept by an employer, and to recover an equal amount in liquidated damages if an employer retains any portion of tips or allows managers or supervisors to participate in tip pools.  WHD also has discretion to impose civil money penalties not to exceed $1,100 when an employer unlawfully keeps an employee’s tips.

This has been an arduous road for restaurant owners who want to include back-of-the-house employees in tip pooling arrangements.  This new development provides certainty regarding the legal ability to ask employees to share tips equally.  Restaurant owners should expect to see additional WHD regulations to further clarify this new change in the law.