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The DOL Proposes to Cut Tip-Pooling Restrictions

The U.S. Department of Labor (DOL) is proposing new rules that would provide some employers with more flexibility to count tips toward the federal minimum wage—particularly important for hospitality industry businesses such as restaurants and hotels that rely on large groups of tipped employees.

The DOL has announced a Notice of Proposed Rulemaking regarding tip regulations under the Fair Labor Standards Act (FLSA). The proposal would remove rules in effect since 2011 that have frustrated employers that do not take a "tip credit"—counting tips toward the minimum wage—by significantly limiting their ability to share tips with employees who are not ordinarily tipped. The proposal would allow these employers to include customarily non-tipped employees—such as cooks and dishwashers—in tip pools, providing increased flexibility in compensating workers.

Employers can pay their employees the required federal minimum wage of $7.25 per hour in two ways: with a direct cash wage of the full amount or with a minimum of $2.13 per hour wage plus counting a limited amount of an employee's tips, up to $5.12 per hour, to satisfy the remainder. An employer may take this tip credit under section 3(m) of the FLSA if the employer's tipped employees are allowed to retain all of their tips. Employers are allowed to create a tip pool for employees to share tips, but only employees who "customarily and regularly receive tips." In 2011, the DOL expanded this tip pooling restriction to all employers—even those who pay employees the full federal wage up front and do not take a tip credit.

Recent trends—such as state laws requiring higher up-front wages and conflicting litigation rulings—have cast doubt on whether such broad tip pooling restrictions are viable or desirable. For example, state laws in California, Montana, Nevada, Oregon, and Washington require covered employers to pay tipped employees a direct cash wage at least equivalent to the federal minimum wage. The result has been burdensome restrictions on employers who would otherwise more broadly pool employee tips to increase employee earnings.

The DOL's Notice of Proposed Rulemaking solicits input regarding whether the agency should rescind portions of the 2011 tip regulations under 29 C.F.R. §§ 531.52, 531.54, and 531.59. Again, this proposed rule would only lift the tip-pooling restrictions on employers who do not claim tip credits. The public comment period is open until January 5, 2018.

Copyright © by Ballard Spahr LLPNational Law Review, Volume VII, Number 340

About this Author

Patricia Smith, Ballard Spahr Law Firm, New Jersey, Labor and Employment Litigation Attorney

Patricia A. Smith represents management in all areas of employment and labor law and litigation. She has experience in a variety of industries, including health care, transportation, refining, manufacturing, construction, and commercial lending. Ms. Smith regularly provides advice and counseling to employers concerning the implementation of reductions in force and other difficult employment decisions. She also practices traditional labor law and regularly handles labor arbitrations, union organizing campaigns, collective bargaining negotiations, and unfair labor practice...

Anu Thomas, Ballard Spahr Law Firm, Philadelphia, Labor and Employment Litigation Attorney

Anu Susan Thomas is an associate in the Litigation Department and a member of the firm’s Labor and Employment Group. While in law school, Ms. Thomas was a summer associate at Ballard Spahr, and a Philadelphia Diversity Law Group summer associate in the Office of University Counsel at Temple University, where she conducted legal research and drafted documents that addressed employee, faculty, and general university issues. She also served as an education and community outreach field officer and project manager at the Profugo Organization in South India, where she...