DOL Issues New Rule for Employee Tip Pools

28 December 2020 Labor & Employment Law Perspectives Blog

On December 22, 2020, the U.S. Department of Labor (DOL) gave an early holiday gift to employers in the restaurant and hospitality industry.  Namely, the agency announced its long-awaited final rule, which allows employers who do not take a tip credit to require employees to pool and distribute employee tips among “back-of-the-house workers,” who do not traditionally receive direct tips.  The rule codifies earlier subregulatory guidance from the DOL on tip pooling, and also addresses amendments made to the Fair Labor Standards Act (FLSA) by the Consolidated Appropriations Act of 2018 (CAA).

Previously, regardless of whether or not an employer took a tip credit (and therefore paid employees a lower, “tipped” minimum wage, mandatory tip pooling was only permitted among servers and others who traditionally receive tips from customers.  Under the new rule, however, an employer that does not take a tip credit on employee wages may now pool together the tips that employees earn and distribute from the tip pool among a wide variety of nonsupervisory employees, including, for example, cooks and dishwashers.

Crucially, the DOL confirmed that a tip pool still may not include managers or supervisors, and tips earned by employees cannot be shared with supervisors or managers. Managers and supervisors include any employee (1) whose primary duty is managing the enterprise or a customarily recognized department or subdivision of the enterprise; (2) who customarily and regularly directs the work of at least two or more other full-time employees or their equivalent; and (3) who has the authority to hire or fire other employees, or whose suggestions and recommendations as to hiring or firing are given particular weight. The definition also includes as managers or supervisors any individuals who own at least a bona fide 20 percent equity interest in the enterprise in which they are employed and who are actively engaged in its management.

The final rule also clarifies that employers may not, under any circumstances, “keep” tips that are given to employees and become part of a tip pool.  Employers must use caution to only exercise permissible forms of control over a tip pool to avoid the appearance that the employer is “keeping” employee tips.  An employer may control an employee tip pool in order to: (1) promptly distribute tips to the employee or employees who received them; (2) require employees to share tips with other eligible employees; or (3) where the employer facilitates tip pooling by collecting and redistributing employees’ tips, promptly distribute tips to eligible employees in a tip pool. To avoid “keeping” tips, employers must also redistribute tips from the tip pool at least as often as they pay wages to employees.

The final rule also clarifies that employers may take a tip credit for any time that a tipped employee spends performing related nontipped duties, either at the same time as or for a reasonable time immediately before or after performing tipped duties (a list of examples of such related duties is included in the text of the rule). This guidance effectively does away with the prior, more stringent “80/20 rule,” which only permitted employers to take a tip credit if 20% or less of a tipped employee’s time was spent on such related duties.

While mostly favorable for employers, the new rule does impose one additional record-keeping burden on those with a tipped workforce.  In the past, only employers who claimed a tip credit were required to maintain records of the weekly or monthly amount of tips received by each employee for whom the employer takes a tip credit. The DOL’s new rule imposes the same record-keeping requirements for employers who implement a tip pool but do not claim a tipped credit.

The final rule will go into effect 60 days after its publication in the Federal Register.

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