October 14, 2019

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Congress and the DOL Wade Into the Tip Pool, Reverse Obama-Era Regulations

Restaurant owners have been anxiously awaiting the Department of Labor’s (DOL) guidance regarding proper participation and operation of tip pools after the passage of the March 23, 2018, Consolidated Appropriations Act, which contained a little notice amendment to the Fair Labor Standards Act (FLSA). Tip pooling regulations have undergone a series of reversals recently as the DOL has worked to find a one-size-fits-all regulation to apply to varying restaurant concepts. In 2010, the Ninth Circuit, in Cumbie v. Woody Woo, Inc., provided a victory for employers that did not take a tip credit by allowing those restaurants to permit tipped and non-tipped employees to share in tips from customers. In response, in 2011, the DOL issued regulations disagreeing with the court’s decision and explicitly prohibiting employers from distributing tips through mandatory tip pools to employees who do not “customarily and regularly receive tips” from guests (effectively excluding traditional back of house employees and, in most cases, hostesses).

The 2018 Approporiations  Act amended the FLSA in several important ways, such as by (1) continuing to prohibit employers, managers, and supervisors from sharing in tip pools, even if they provide service to guests; (2) instituting new penalties for violations of tip pooling laws by expanding the current remedy of invalidating the tip credit by permitting recovery of the difference between the cash rate paid and the minimum wage, but also requiring disgorgement and recovery of improperly distributed tips; (3) permitting back of house employees to share in tip pools if the restaurant does not take a tip credit and instead pays all employees the full federal minimum wage; and (4) eliminating a series of regulations and proposed regulations, including the DOL’s December 2017 proposed rulethat sought to amend the 2011 Obama-era DOL regulation.

The DOL’s Field Assistance Bulletin

On April 6, 2018, the DOL issued Field Assistance Bulletin No. 2018-3 in an effort to clarify the tip pooling amendments in the Act. The DOL bulletin provides that employers that pay the full minimum wage under the FLSA ($7.25 per hour) are no longer prohibited from allowing employees who are not customarily and regularly tipped—such as cooks and dishwashers—to participate in tip pools. This presents good news for restaurants that have struggled to increase the wages of back of house employees while the income of front of the house employees has steadily increased because of the retention of tips. 

In addition, although the DOL confirmed that the FLSA still prohibits managers and supervisors from participating in tip pools, the bulletin stated that that it would use the FLSA duties test for the executive exemption to determine whether a restaurant employee is a manager or supervisor. The DOL’s use of the duties test is a further positive development for restaurant operators as it signals a higher standard and might allow for the inclusion of head waiters, service assistants, and floor captains in tip pools, as long as the employee’s primary duty is not management of all or a portion of the restaurant and he or she does not have the ability to hire or fire employees or make recommendations regarding such decisions, as required under the duties test.

Finally, the DOL’s bulletin covered the new penalties associated with the amendments in the Appropriations Act. The penalties include recovery of all tips unlawfully kept by the employer, an equal amount in liquidated damages, and potential civil money penalties not to exceed $1,100 when employers unlawfully keep employee tips.

Forthcoming Rulemaking

The DOL’s bulletin was followed by its announcement that it will proceed with rulemaking in the near future to address the 2018 FLSA amendments contained in the Act. It remains to be seen whether the DOL’s rulemaking will address the tip credit notice requirement that catches many employers by surprise with draconian results or the controversial 80/20 rule implemented by the Obama-era DOL that often causes confusion as to whether otherwise tip-eligible employees lose their tipped employee status. 

Key Takeaways

Given the fast-changing landscape, restaurant operators may want to review their current tip pooling policies.—. Restaurant owners may also want to keep in mind that despite the amendments in the Appropriations Act to the FLSA, the DOL’s favorable bulletin, and future rulemaking regarding these matters, many states and municipalities have their own laws that adhere in most respects to the 2011 Obama regulations. Consequently, although one may applaud the new FLSA amendments and the future actions by the DOL that will likely assist restaurant owners, employers will also want be aware of more restrictive requirements that exist in many states regarding the definition of management duties, tip credit and tip pooling policies.

© 2019, Ogletree, Deakins, Nash, Smoak & Stewart, P.C., All Rights Reserved.

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About this Author

Jonathan Wilson, Labor Lawyer, Employment, Ogletree Deakins Law Firm, Dallas, Texas
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Jonathan Wilson is a nationally recognized labor and employment lawyer. He has defended employers in wage-hour class and collective action cases, union organizing campaigns, collective bargaining negotiations, unfair labor practice charges, and in numerous federal and state courts involving a broad range of employment matters.  He is Board Certified in Labor and Employment Law by the Texas Board of Legal Specialization and has been recognized by Best Lawyers in America and Chambers USA in labor and employment law and in 2011 was inducted as a Fellow in...

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McBride, Associate, Texas, Ogletree, Employment Law
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James T. McBride advises and represents companies in a broad range of labor and employment matters including wage and hour class and collective cases, discrimination, harassment, and leave of absence and accommodation matters.  James has appeared before courts in wage and hour matters, discrimination and harassment cases, as well as non-competition and breach of fiduciary disputes and before the Equal Employment Opportunity Commission (EEOC) in a wide variety of matters, including discrimination, retaliation and additional issues under the American with Disabilities Act (ADA) and Age Discrimination in Employment Act (ADEA) matters.  James has also defended employers in cases before the National Labor Relations Board related to unfair labor practice charges and union election matters.

James’ experience spans multiple industries with a particular focus on the hospitality industry, private equity firms, and manufacturing companies.  James has defended clients in wage and hour class and collective action lawsuits and in DOL investigations and provides day-to-day advice and counsel on designing and implementing proactive policies to assist national employers in minimizing their risk of liability under all facets of labor and employment laws.   

Prior to attending law school, James spent several years working for a Big Four accounting and professional services firm as a management consultant in their IT advisory practice as well as for two Fortune 500 companies in risk management roles where James was responsible for identifying business risks and providing guidance to proactively reduce the companies’ risks.  These experiences make James a trusted business partner to his clients and allow him to understand the issues unique to each client’s business. 

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