In recent years, one significant issue that has plagued industries employing tipped employees is whether the employers must ensure that tipped employees retain all of their tips even if the company is not using the employee’s tips to satisfy part of the minimum wage pursuant to the FLSA’s “tip credit” provision, 29 U.S.C. § 203(m). The provisions of Section 203(m) of the FLSA require, among other things, that tipped employees paid a tip credit rate retain all of their tips except for permissible tip pools.

In 2011, the DOL issued a regulation stating that, even if employers are not taking the tip credit with respect to tipped employees, those employers nevertheless must ensure that the tipped employees retain all of their tips. This interpretation prohibits, for example, the sharing of tips between front of the house employees and back of the house employees. The Ninth Circuit Court of Appeals upheld the DOL’s new regulation as consistent with Section 3(m) in Oregon Rest. and Lodging Ass’n v. Perez. Other courts across the country, however, had rejected the DOL’s 2011 regulation and held that employers do not have an obligation to ensure tipped employees retain all of their tips if the company is not taking a tip credit.  A circuit split ensued, and a petition for writ of certiorari is currently pending with the U.S. Supreme Court.

Earlier this year, the DOL announced that it planned to change course and rescind the 2011 regulation.  DOL took the first step this week. On October 24, 2017, DOL sent a proposed rule to to the Office of Management and Budget for review prior to issuing a formal proposed rule.  This regulation likely will now permit tip sharing between back of the house and front of the house employees, so long as a tip credit is not taken under Section 203(m). If a tip credit is taken, of course, then sharing of tips between tipped and non-tipped employees would still be prohibited.

A summary contained on the OMB website contained few details, stating only that the DOL’s current 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)” and indicating that the DOL’s proposed rules “will propose to rescind the current restrictions on tip pooling by employers that pay tipped employees the full minimum wage directly.”

Keep in mind that, even if this regulation is adopted such that federal law would permit sharing of tips when the tip credit is not taken, state law could still nevertheless prohibit tip sharing even if a tip credit is not taken. Thus, it remains important, as always, to confirm compliance with state law before implementing any wage-and-hour practice, whether relating to tipped workers or otherwise. The law governing tip practices under the FLSA (as well as numerous state laws regulating gratuities) continues to develop, and employers of tipped workers in any industry permitting tipping must inform their business and employment practices by reference to current law in their jurisdictions.