What to Expect for Tip Pooling Regulation for the Rest of 2018 and Beyond

Over the last year, the law relating to tip-pooling has been in a state of flux. Additional changes are expected throughout 2018.

It is important to understand the background of the tip rule changes to get a better grasp on the current state of the law and what the restaurant industry can expect moving forward.

Where Are We Now?

Tip-pooling arrangements are typically those where “front-of-house” staff (i.e., wait staff, bartenders) share their tips with “back-of-house” staff (i.e., chefs, line cooks and dish washers) who might not receive tips directly. In 2011, the Department of Labor announced regulations that curtailed tip-pooling by prohibiting the distribution of tips with back-of-house employees, even where the employer was not taking a tip credit.

 The DOL regulation provided that an employee may only be considered a tipped employee if he or she participated in the work that generated the tip. Thus, back-of-house staff, whose job duties do not include interacting with customers, are not considered tipped employees under the DOL regulation. 

The 2011 regulation engendered extensive litigation. Challengers argued that the DOL lacked statutory authority to prohibit tip pools where the employer does not take a tip credit—i.e., when an employer uses a portion of employees’ tips as a credit against minimum wage obligations. In 2017, the DOL, under the Trump administration, published a proposal to modify the 2011 regulation by explicitly permitting tip pooling arrangements that include back-of-house or those not typically considered “tipped employees,” but only if the employer does not utilize a tip credit.

Put simply, if employees are paid at least minimum wage independent of tips, the proposal would allow employers to implement a tip pooling arrangement. Any employer who uses a tip credit to satisfy minimum wage for tipped employees would still be precluded from a tip pooling arrangement that involves back-of-house staff. 

Opponents of this latest DOL proposal argue it would provide latitude to employers to “steal” tips from employees. In March, Congress acted quickly in response to the proposed rule and the criticism it provoked. Specifically, Congress amended the Fair Labor Standards Act to provide that an employer (including managers and supervisors) cannot keep tips for itself for any purpose, regardless of whether it takes a tip credit. However, this amendment also explicitly stated that the 2011 rule prohibiting tip pooling with back-of-house employees will have “no further force or effect” until any further action taken by the Wage and Hour Division of the DOL. The DOL also has taken the position before the Supreme Court in its brief in National Restaurant Association v. Department of Labor that the 2011 regulation was invalid and that the courts should not rely on it, as it was inconsistent with Section 3(m) of the FLSA.

The 2017 DOL proposal, in conjunction with Congress’s amendment to the FLSA, has left the tip pooling issue in a state of flux. Following the FLSA amendment, the DOL announced that it would revisit its rules regarding tip pooling. In June 2018, the U.S. Supreme Court decided not to hear challenges to the 2011 DOL regulation, likely due to the recent FLSA amendment and the DOL’s expected changes to its tip pooling regulations. 

What’s Next?

As it stands today, the DOL regulations, in conjunction with the FLSA, allow employers to implement a tip-pooling arrangement so long as the employer does not take a tip credit and the employer does not keep any tips for itself—including sharing of tips with those who could be characterized as “supervisors” or “managers.”

The DOL is expected to issue revised regulations related to tip rules any day. It likely will address two major issues: (1) whether the DOL will acknowledge the validity of tip-pooling arrangements that involve non-customarily tipped employees where no tip credit is taken; and (2) guidance as to who is deemed a “manager” or “supervisor” under the recent FLSA amendments.

Restaurant industry employers should continue to monitor future DOL regulations and any amendments to the FLSA. Employers can expect any new regulations to continue the trend toward greater latitude for employers to set tip-pooling policies, consistent with the legal environment pre-2011. As discussed, the proposed DOL rule would provide latitude for employers who pay their tipped employees minimum wage without consideration of any tip credit.

In states such as Alaska, California, Minnesota, Montana, Nevada, Oregon and Washington, where employers are required to pay their employees minimum wage without the use of any tip credit, the proposed rule would allow employers in those states to utilize tip pooling where tips are shared between front- and back-of-house employees. 

Additionally, employers should take care not to include employees who arguably could be deemed to be supervisors or managers in any tip pooling arrangement. The DOL’s forthcoming guidance as to the interpretation of “manager” and “supervisor” may help provide clarification and limit disputes and litigation over the issue of who is entitled to share in tips.

In the meantime, the DOL issued a “Field Assistance Bulletin,” which states the DOL will use the duties test of the executive exemption from overtime requirements to determine whether an employee is deemed a manager or supervisor under the tip rules. To qualify for the executive exemption under the overtime rule, the employee must manage the business or a recognized department of the business, must regularly direct the work of at least two other full-time employees and must have the authority to hire or fire other employees or make suggestions and recommendations that are given particular weight.

In the wake of the confusion and criticism over the DOL’s shifting positions on tip pooling regulation, it is hoped that the agency will avoid muddying the waters even further and instead issue clear guidance about the conditions under which tip pooling may occur. As we await this guidance, restauranteurs should ensure their current practices comply with Congress’s latest amendments to the FLSA.