Final Rule Affirms U.S. Department of Labor’s Power to Fine Businesses That Engage in Tip Theft

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The U.S. Department of Labor published a final rule on September 23, 2021 clarifying several amendments to section 3(m) of the Fair Labor Standards Act (FLSA) that concern tip pooling. The final rule reestablishes the DOL’s right to assess civil monetary penalties (CMPs), in an amount up to $1,100 per violation, against employers that unlawfully retain employees’ tips. The final rule reverses the position taken by the DOL during President Trump’s administration, which limited the DOL’s ability to assess CMPs to situations in which tip theft is deemed “repeated or willful.” Pursuant to the final rule, the DOL is not limited to assessing CMPs to “repeated” or “willful” violators of FLSA tipping provisions and regulations; instead, the penalty language subjects employers that engage in tip theft to CMPs “as the Secretary determines appropriate.”

The final rule also restores regulatory definitions regarding the meaning of “willfulness” by reinserting text regarding “reckless disregard” into the FLSA regulations at 29 CFR §§ 578.3(c)(3) and 579.2.  According to the final rule, “[a]n employer is in reckless disregard of the FLSA when, among other situations, the [DOL] determines based on all of the facts and circumstances that the employer should have inquired into whether its conduct was lawful but failed to do so adequately.”

Finally, the DOL modified 29 CFR §§ 531.54(c)(3) and (d), which currently provide that an employer may not “include” managers and supervisors in tip pools or sharing arrangements.  The final rule clarifies that while managers and supervisors may not receive tips from mandatory tip pooling/sharing arrangements, managers or supervisors are not prohibited from contributing tips to eligible employees in mandatory tip pooling/sharing arrangements. Further, the modified language in the DOL’s tipping regulations makes clear that a manager or supervisor may keep tips only when the tip is based on service the manager or supervisor “directly” and “solely” provides.  The final rule also confirms that employers that do not apply a tip credit towards employees’ wages may allow non-managerial and non-supervisory back-of-house employees to participate in a tip pool.   

This final rule is effective November 23, 2021.

Implications

The final rule reflects the reality that some managers or supervisors perform work for which they receive tips directly from customers.  However, it is important to understand that the final rule’s language may have some unintended consequences that will force hospitality establishments to change long-standing practices.

Specifically, it is not uncommon for managers to receive handshake tips directly from guests. The final rule now provides that it may be unlawful for a hospitality employer to permit the manager to keep the handshake tip unless the manager was the exclusive provider of service to that guest who paid the tip.  In most hospitality situations, a manager is rarely the exclusive service provider.  For example, a manager may greet or reserve a table for the guest.  After the guest arrives at the restaurant, however, a host seats the guest, a bartender makes a drink, a server introduces the guest to the menu and takes the guest’s order, a food runner runs the food, and a busser clears the table. In this situation, the manager was not the exclusive person involved in the chain of service (whether in a full-service setting or a takeout setting).  The final rule implies that, unless there is clear proof that the handshake tip was intended exclusively for the manager separate and apart from the tip left for others involved in the guest service, the manager cannot keep any portion of the handshake tip and must relinquish the entire tip in accordance with the tip pooling/sharing arrangement of the business.

In sum, the final rule serves as another example that the DOL takes FLSA violations very seriously, is determined to prosecute them aggressively, and is particularly focused on the hospitality industry and its hundreds of thousands of workers in the United States.

We strongly recommend that hospitality businesses review their tip pooling/sharing arrangements to ensure compliance with the final rule as well as other related wage-and-hour regulations.

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