Under Proposed DOL Rule, Employees May Have to Give Up Their Tips

Thanks to a new regulation that’s in the works, the tip you leave for your waiter may soon be shared with dishwashers and busboys, or even used to spiff up the restaurant’s decor. On December 4, 2017, the U.S. Department of Labor (“DOL”) announced a proposed change to tip regulations under the Fair Labor Standards Act (“FLSA”). The proposed rule would change current regulations in a way that would allow some employers to take employees’ tips and share them among tipped and non-tipped employees, which is currently prohibited, or use the tips to benefit the business.

How Does the FLSA Impact Businesses?

Under the FLSA, businesses with employees who receive tips can either pay the employees the federal minimum wage of $7.25 per hour, or pay the “tipped minimum wage.” The tipped minimum wage allows employers to count a tip credit of $5.12 per hour towards a tipped employee’s pay, reducing the required cash wage the employer pays to a mere $3.12 per hour. Whether or not the employer pays the standard minimum wage or the tipped minimum wage, it can pool employees’ tips so that they are equally shared among regularly and customarily tipped employees. Under current law, the employer cannot distribute tips collected in a tip pool to employees who do not typically receive tips, such as dishwashers, cooks, etc. The DOL clarified this position in a regulation promulgated in 2011 under the Obama administration.

How Does This Act Compare to Existing State Laws?

The 2011 regulation has been the subject of extensive litigation across the country and has contributed to some sates increasing the direct cash wage an employer must pay its tipped employees under state law. Six states (Alaska, California, Montana, Nevada, Oregon and Washington) have traditionally prohibited employers from using tips received by employees as a credit against state minimum wages. Since 2011, Minnesota, Hawaii, New York, Arizona, and Colorado have passed or considered passing legislation increasing direct wages.

The DOL contends that the proposed regulation, which will apply only to employers who pay employees the full minimum wage and do not take a tip credit, would decrease litigation and mirror the recent trajectory of state law. Opponents of the proposed change argue that it will allow employers to steal tips which should be the property of its employees. They point to a section of the DOL proposal with states as follows:

To the extent employers may otherwise make an arrangement to allocate any customer tips to make capital improvements to their establishments (e.g., enlarging the dining area to accommodate more customers), lower restaurant menu prices, provide new benefits to workers (e.g., paid time off), increase work hours, or hire additional workers, there are also potential benefits to employees and the overall economy that may result under the proposed rule.

Here, the DOL contemplates that under the new rule employers who pay the regular minimum wage will be able to retain employee’s tips and use them to advance the business instead of distributing them among workers. To the rule’s opponents, this is wage theft. However, advocates of the new rule, including the DOL, argue that the benefits of allowing businesses to retain tips will “trickle down” to benefit employees.

We Can Answer Your Questions About the New DOL Regulation

The proposed rule is available for public comment until January 4, 2018. If you have questions about your business’ employment contracts or practices under the current regulations and the proposed rule, contact us to schedule a consultation.