Litigation over wages in the restaurant industry is not new. However, since 2011, there has been a significant increase in litigation involving the tip pooling and tip retention practices of employers that pay a direct cash wage of at least the federal minimum wage and do not claim a tip credit under the Fair Labor Standards Act (FLSA). There has also been litigation directly challenging the U.S. Department of Labor’s (DOL) authority to promulgate the provisions of the 2011 regulations that restrict sharing of tips.
In July 2013, the DOL’s Wage & Hour Division issued Fact Sheet #15, in which it outlined the 2011 tip-pooling and retention laws:
- Retention of Tips: A tip is the sole property of the tipped employee regardless of whether the employer takes a tip credit. The FLSA prohibits any arrangement between the employer and the tipped employee whereby any part of the tip received becomes the property of the employer. For example, even where a tipped employee receives at least $7.25 per hour in wages directly from the employer, the employee may not be required to turn over his or her tips to the employer.
- Tip Pooling: As noted above, the requirement that an employee must retain all tips does not preclude a valid tip pooling or sharing arrangement among employees who customarily and regularly receive tips. The FLSA does not impose a maximum contribution amount or percentage on valid mandatory tip pools. The employer, however, must notify tipped employees of any required tip pool contribution amount, may only take a tip credit for the amount of tips each tipped employee ultimately receives, and may not retain any of the employees’ tips for any other purpose.
In December 2017, the DOL announced a proposed – and very controversial – rule giving employers the freedom to allow sharing of tips among more employees. The proposed rule would allow “back-of-the-house” restaurant workers (i.e., cooks and dishwashers), management employees, and even the house itself, to share in servers’ tips. The proposed rule – which can be reviewed here – is still winding its way through the rule-making process but is expected to take effect in the first half of 2018.
The stated purpose of the rule is to help decrease wage disparities between tipped and non-tipped workers – an option that is currently restricted by the 2011 rule. Critics of the rule claim that employers could do whatever they want with the tips, including keeping a portion for restaurant improvements or sharing them with salaried managers.
The DOL’s proposed rule would only apply where employers pay a full minimum wage and do not take a tip credit and allow sharing tips through a tip pool with employees who do not traditionally receive direct tips. The proposed rule would not affect current rules applicable to employers that claim a tip credit under the FLSA.