On December 5, 2017, the US Department of Labor (“DOL”) issued a Notice of Proposed Rulemaking and requested comments by Monday February 5, 2018, regarding its proposal to rescind portions of its tip pooling regulations that limited the tip pooling practices of employers who paid full minimum wage and did not take a tip credit.  The effect of DOL’s prior regulation was that employers could not pool their employees’ tips to distribute them among all employees, including those who do not customarily earn tips, such as the kitchen staff.  The DOL rule still allowed tip pooling among employees who customarily receive tips.  

Just before the deadline to comment on the proposed rule was up, Bloomberg Law issued a report indicating that the DOL failed to publish an economic analysis of the effect of the rule, which would cost employees “billions” of dollars in tips.  This angered states attorneys’ general, workers’ rights advocates, Democratic politicians and others, who flooded the DOL comment page to protest the change in the regulation.  Bloomberg law reported that the heightened scrutiny over the rule has the DOL now promising to publish “’an informed cost benefit analysis as part of any final rule.’”

What is this all about?  

A tip credit is a practice allowed under the Fair Labor Standards Act (“FLSA”) where the employer can utilize some or all of the employee’s tips to assist in providing the employee with a minimum wage payment.  In order for an employer to take advantage of the tip credit, the regulation requires that the employee retain tips (i.e., the employer does not take possession of the tips), and the employer inform the tipped employee that the employer is going to use a tip credit in order to pay the employee.

The same regulation that allowed for a tip credit also provided that it was legal to have a “tip pooling” arrangement among employees who customarily and regularly receive tips.  This regulation did not mention including employees, who do not customarily receive tips in a tip pooling arrangement.

In 2010, the Ninth Circuit Court of Appeals ruled in Cumbie v. Woodie Woo, 596 F.3d 577 (9th Cir. 2010) that the FLSA tip pooling regulation that allowed tip pooling only among employees who customarily received tips applied only to employers who took tip credits.  The Court found that an employer who paid the full minimum wage without taking a tip credit could therefore pool the tips of its employees and distribute them to all employees, tip earning and non-tip earning.

In 2011, DOL took issue with the Cumbie decision and promulgated a new rule to clarify that tips earned by an employee are the property of the employee.  The 2011 rule provides:

Tips are the property of the employee whether or not the employer has taken a tip credit under [the FLSA].  The employer is prohibited from using an employee’s tips, whether or not it has taken a tip credit, for any reason other than that which is statutorily permitted under [the FLSA]: As a credit against its minimum wage obligations to the employee, or in furtherance of a valid tip pool.  29 C.F.R. § 531.52 (emphasis added).

The result of this rule was that, whether or not an employer paid its employee the full minimum wage, or took a tip credit, employers could not require that its employees pool their tips so that all employees responsible for the customer’s experience were able to share in the customer’s tips.  This rule was hotly contested by restaurant owners, and restaurant associations, such as the Oregon Restaurant & Lodging Association that mounted a direct challenge to the rule in Oregon Restaurant and Lodging v. Perez.  See our discussion of this challenge here.  

With the comment period now closed for the proposed rule, and the two sides digging in on their positions about tip pooling, it will be interesting to see what the DOL comes up with in terms of a final rule.  Regardless of the barbs being thrown at the proposed rule, if the DOL finds that the 2011 rule misinterpreted the FLSA, then we should expect to see the rule changed.  Ultimately, it may take a clarification by the legislature to sort out the legality of tip pooling.

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