Starting on November 23rd, a new rule issued by the Department of Labor changes the legal landscape and empowers tipped employees, who tend to be women, immigrants, and people of color, to keep more of their hard-earned tips.
Here are the top five things that everyone in a tipped industry should know about the rules.
1. What is a tip credit?
Under a U.S. federal law known as the Fair Labor Standards Act or the FLSA (fuh-LIS-uh), employers in the restaurant and certain hospitality industries can take a tip credit against tipped employees’ wages.
This means that the employer may pay tipped employees less than minimum wage (which is currently $7.25 per hour) if their tips are enough to cover the difference. The only caveat is that the employer must pay at least the “minimum cash wage” which is currently $2.13 per hour. Yes, you read right. It is legal in the United States in 2021 to pay tipped employees $2.13 per hour so long as their tips bring them up to the minimum wage.
2. What is a tip pool?
A tip pool is a creature of federal law that applies in tipped industries. Tip pooling is when tipped employees put all their tips together into a collective pool that is then shared with non-tipped employees such as dishwashers, chefs, or hosts.
Tip pools allow every employee to share in the tips that are received by servers and bartenders, and they can create more equity in the workplace. The underlying assumption in tip pooling arrangements is that everyone - not just servers and bartenders - contributes to the customers’ experience. Therefore, everyone should be allowed to benefit from the tips that are received as a result.
Until now, the FLSA allowed employers to implement a tip pool if they paid their workers at least the full $7.25/hour minimum wage and did not take a tip credit. Employers who chose to pay subminimum wage and took a tip credit, could not legally implement a tip pool.
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3. Can Managers and supervisors receive or share tips under the current rule?
Until now, managers and supervisors were prohibited from receiving other employees’ tips by participating in a tip pool or otherwise, regardless of whether the employer took a tip credit. The idea is that lower-paid rank and file staff should not be required to share tips with management who are generally more highly compensated.
Under the current rule, managers and supervisors are allowed to retain tips they receive directly from the customers, but the rule does not address whether managers and supervisors may share those tips with other employees in a tip pool.
4. What are the new rules for managers and supervisors in tipped industries?
The new Final Rule, which takes effect on November 23, 2021, provides much-needed guidance around when managers and supervisors can keep tips and share them with other non-management employees.
Under the new Final Rule, managers and supervisors may keep tips they receive for services that they “directly and solely” provide. This means that if a supervisor works a shift as a bartender, they may retain the tips they receive for bartending. However, if a supervisor simply assists a server by bussing some of the servers’ tables, or taking some orders, the supervisor is not allowed to receive any portion of the tips given to the server.
The new rule also allows managers and supervisors to share their tips with other non-management employees. They are allowed to contribute a portion of the tips they directly receive from customers (in cases when the manager/supervisor is directly and solely providing the services) to a tip pool shared with non-management.
Even though tip-pooling requirements are now more clear under the new Final Rule, and definitely more beneficial to employees, it is critical for employers to remember that there are also state laws that may apply to them and these state laws may be different from federal law. Notably, some state laws specifically ban tip sharing between tipped and non-tipped employees under any circumstances.
Of course, employers should always consult with their legal counsel around how to navigate conflicting state and federal requirements.
5. The New Rule makes it easier for the DOL to assess penalties for violations.
There have always been hefty penalties for violating federal labor laws. The civil monetary penalty (or CMP) for violating the FLSA is up to $1,100 per violation.
Interestingly, the Department of Labor generally must find that the violation was “repeated or willful” to assess penalties for FLSA violations. However, under the new Final Rule, this is not the case. The “repeated or willful” standard does not apply to the rules that ban employers (including managers and supervisors) from keeping employee tips, including as part of a tip pool.
In these cases, the DOL can assess penalties at its discretion. Practically speaking, this means the DOL will most likely assess civil monetary penalties more often when managers and supervisors, or the employers, take all or a portion of employee tips in violation of the rules discussed above.
The takeaway:
The DOL’s new Final Rule clarifies tip pooling rules, including when managers can and cannot receive and share tips — or take tips from non-management employees. It also makes it easier for the DOL to assess monetary penalties against employers who violate these rules. Tipped employees should now be able to rest a bit easier, empowered by the DOL’s updated stance on tip pooling.
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