FLSA Amendments: Congress Extends Tip Sharing to Back of the House Employees

On March 23, 2018, Congress amended the Fair Labor Standards Act (FLSA) to remove the prohibition on tip pooling, subject to certain circumstances. Under the FLSA, an employer is permitted to pay a reduced hourly wage to tipped employees, provided the employees receive enough tips to bring hourly wages to the federal minimum wage. Employers may claim credit for tips the employees have received both directly and as a distribution from a tip pool.

The amendment to the FLSA details that “An employer may not keep tips received by its employees for any purposes, including allowing managers or supervisors to keep any portion of employees’ tips, regardless of whether or not the employer takes a tip credit.” Notably, the amendment now permits tip sharing between tipped and non-tipped employees (excluding managers and supervisors), as long as the employer pays full minimum wage rather than the tipped minimum wage to its employees and does not take a tip credit. Previously prohibited, this practice resulted in a wage disparity between traditionally tipped employees (like servers) and other staff such as cooks and dishwashers. As the U.S. Department of Labor (DOL) noted, despite the contribution by these back of the house employees to the overall customer experience, many may receive less overall compensation – stated in its December 2017 release. (See Share Tips Between Traditionally Tipped and Non-Tipped Workers, released 12/4/2017, https://www.dol.gov/newsroom/releases/whd/whd20171204).

Following the amendment, the DOL issued a bulletin stating that a prior policy promulgated on or about July 20, 2017, of non-enforcement for retention of tips by tipped employees paid the full FLSA minimum wage would not apply to new investigations beginning after March 23, the effective date of the amendment. Restaurant owners should take care to adopt the change, but remain aware that prior tip sharing practices may still be subject to investigation.

Assuming you pay the full minimum wage, employees who are not regularly tipped – such as chefs, cooks and dishwashers – are now permitted to be incorporated in tip pools. Tip pooling remains prohibited for subminimum wage, and tip pooling for employers, managers or supervisors is prohibited no matter what.

The Amendment provides enforcement authority by allowing employees to recover all tips unlawfully kept by the employer, in addition to an equal amount in liquidated damages. The DOL’s Wage and Hour division is also permitted to impose civil penalties, not to exceed $1,100 when employers unlawfully retain employee tips.

Employers with tipped employees should end any practice of collecting and retaining or redistributing tips. As long as employees are paid federal minimum wage and the employer does not take a tip credit, tipped employees may split tips with non-supervisory, non-tipped employees. However, if employees are paid the tipped wage ($2.13/hour) and the employer takes a tip credit ($5.12/hour), tip splitting is not permitted.

Restaurants should consult with legal counsel to determine the best measures to maximize payment for employees while reducing operating costs.