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Legal Updates

Tips On Tips: Recent And Proposed Changes To Federal Requirements

The U.S. Department of Labor recently announced a proposed rule regarding tips and tip pools. The proposed rule would implement new federal statutory requirements prohibiting employers from keeping tips received by their employees, regardless of whether an employer takes a “tip credit” under the Fair Labor Standards Act (“FLSA”), and prohibiting managers and supervisors from keeping employees’ tips or participating in tip pools.

In addition to implementing these new requirements, the proposed rule sets forth slightly different rules for tip pools for employers that take a “tip credit” and those that do not.

Employers with tipped employees should carefully review these changes in federal wage-and-hour law regarding tips, as well as their obligations under any applicable state and local tip laws, which are often more restrictive for employers.

Background: Federal Wage And Hour Requirements For Tipped Employees

In general, federal law requires that employers pay employees at least the federal minimum wage (currently set at $7.25 per hour). Under the FLSA provision regarding tips, however, employers may pay employees a lower hourly cash wage (currently set at a minimum of $2.13 per hour) and credit some tips that an employee receives toward their federal minimum wage obligations. In other words, employers can count a limited amount of employees’ tips as a “credit” to satisfy the difference between the employee’s hourly cash wage and the federal minimum wage. This is known as taking a “tip credit.”

Employers may have tipped employees without taking a tip credit. For example, if waiters at a restaurant are paid $7.25 per hour, in addition to any tips received, then that restaurant is not taking a tip credit for purposes of federal law, even though it has tipped employees.

What’s New? Recent And Proposed Changes To Federal Tips Law

The 2018 Consolidated Appropriations Act (“CAA”) included a number of new requirements addressing the treatment of tipped employees under the FLSA, and the proposed rule would codify some of these new requirements.

Specifically, the CAA (1) prohibits employers from keeping any tips received by employees, regardless of whether an employer takes a tip credit under the FLSA; (2) prohibits managers and supervisors from keeping employees’ tips or participating in a tip pool; (3) suspends current regulations governing an employer’s use of employees’ tips when an employer does not take a tip credit; and (4) imposes new civil monetary penalties for employers that unlawfully keep employees’ tips.

The DOL’s proposed rule includes provisions implementing the CAA’s requirements and codifying existing Wage and Hour Division guidance regarding tips and tip pools. In particular, while the proposed rule maintains existing restrictions on the use of tip pools for employers that take tip credits – limiting those tip pools to only traditionally tipped employees – it loosens current restrictions on tip pools for employers that do not take a tip credit. If the proposed rule is finalized, employers that do not take a tip credit will be permitted, under federal law, to establish mandatory tip pools including a broader group of workers, such as dishwashers and cooks who do not traditionally receive tips, in addition to traditionally tipped employees. (However, some states – including Massachusetts – have stricter tip laws that do not permit such broader tip pools.)

In addition, in light of the CAA’s prohibition on managers and supervisors receiving tips, the proposed rule would require employers to look to the “executive employee” exemption under the FLSA to determine if an employee is a manager or supervisor. Further, under the proposed rule, an employee who owns at least a twenty percent equity interest in the enterprise and is actively engaged in its management would be considered a manager or supervisor and, therefore, would be barred from receiving tips.

The proposed rule, if finalized, would also amend existing regulations to establish that an employer may take a tip credit for any amount of time that an employee in a tipped occupation performs related non-tipped duties at the same time or immediately before or after performing tipped duties. For example, if a server cleans glassware, sets tables, or makes coffee during lulls in or at the beginning or end of her shift waiting tables, the employer would be permitted to take a tip credit for those time periods, even though the employee was performing non-tipped duties. Prior to the DOL’s 2018 guidance, which would be codified in the proposed rule, employers were prohibited from taking a tip credit if an employee spent more than twenty percent of her time on related, non-tipped duties.

Other proposed changes include requirements that (i) proceeds of mandatory tip pools be paid out to employees at least as frequently as an employer pays regular wages, and (ii) employers that do not take a tip credit and collect tips for a mandatory tip pool keep records of employees receiving tips and the tip amounts received.

Federal Or State Law: Which Controls?

Employers must follow applicable federal, state, and local laws governing employee wages and tips, which means that employers need to make sure they are in compliance with whichever law is the most restrictive.

In Massachusetts, for example, the minimum hourly and “service” wages – currently set at $12.00 per hour and $4.35 per hour, respectively – are significantly higher than the federal minimums. As under federal law, Massachusetts employers have the option of paying tipped employees the minimum service wage and taking a tip credit to make up for the difference between a tipped employee’s hourly wage and the state minimum hourly non-service wage.

In contrast to federal law, however, the Massachusetts Tips Act places restrictions on tip pools regardless of whether the employer takes a tip credit. Most importantly, tip pools that include “wait staff employees,” “service employees,” or “service bartenders” must be restricted to only those categories of employees, and employees holding any managerial duties whatsoever – no matter how minor, and even if those employees also serve customers – must be excluded from those tip pools.

As a result, Massachusetts employers may not receive all of the benefits of the new proposed federal rule. For example, under the new proposed federal rule, some employers would be permitted to establish a mandatory tip pool including wait staff and dishwashers. This tip pool, however, would not be compliant with Massachusetts law, which prohibits employees such as dishwashers from participating in a tip pool with wait staff.

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Federal and state tip laws overlap in many respects, but there are also important differences. If you have any questions about the tip laws applicable to your organization, or if we can otherwise assist you with any wage-and-hour issues, please do not hesitate to contact one of our experienced employment attorneys.