Recent Amendment to Federal Wage and Hour Modifies Tip Pooling Guidelines for Hospitality Industry Businesses

Congress’s recent passage of the Consolidated Appropriations Act of 2018 (the “Act”) has significantly changed the rules for tip pooling under the Fair Labor Standards Act (“FLSA”). Although the circumstances for taking a tip credit toward federal minimum wage obligations remain essentially unchanged, the Act permits the inclusion of a larger group of workers in tip pools when a tip credit in not taken by an employer. In addition, the Act still forbids employers from retaining any portion of the tips received by its workers, and also expands the availability of remedies and costs for violations of the FLSA tip rules.

The tip pooling rules permit employers to satisfy their federal minimum wage obligations to tipped employees by counting a limited amount of the tips received by such workers as a credit toward the minimum wage. The credit is only available to employers if: 1) affected workers are informed of the tip credit rules; and, 2) tipped workers either (a) keep all tips they receive, or (b) participate in a valid tip pool (i.e. sharing of tips among employees who customarily and regularly receive tips). Since 2011, the Department of Labor has read the FLSA to prohibit employers from pooling tips for any worker other than those workers who “customarily and regularly” receive tips, disregarding whether the employer utilizes the FLSA’s tip credit. In essence, employers had been authorized to arrange tip pooling for waiters, bartenders and bussers, but were forbidden from including dishwashers, cooks, chefs, janitors (and other back-of-house staff) who do not customarily and regularly receive tips.

Now, by enacting the 2018 Act, Congress has directly repealed provisions of the Department of Labor’s regulations limiting the group of workers whom an employer may arrange in a tip pool when not taking a credit. The Act also explicitly prohibits employers from maintaining tips received by its employees for any purposes, inclusive of distribution of portions of the tips to managers or supervisors, regardless of whether a credit is taken.

Moreover, the Act increases the remedies available and costs imposed for any violation of the new tip rules. Employers who improperly keep any portion of a worker’s tips shall now be liable to injured employees for the total amount of tip credit taken and the amount of the tip unlawfully taken, plus an equal amount in liquidated damages. Further still, the Secretary of Labor is authorized to weigh a civil penalty of $1,100 per violation, in addition.

While the Act does not modify the basis for exercising the FLSA’s tip credit rules, it will provide employers that choose to pay workers at least the minimum wage with the opportunity to arrange tip pools with a greater number of employees than previously permitted. Undoubtedly, the Act will add an extra consideration for hospitality service businesses that contemplate implementing tip pools in states that individually support such practices, such as New York.

Michael A. D’Auria
May 2, 2018