The Fair Labor Standards Act (FLSA) has a tip credit provision that allows employers to pay a reduced hourly wage or subminimum wage to tipped employees, provided the tipped employees receive enough tips to bring their hourly rate to the prevailing minimum wage. Under section 3(m) of the FLSA, which defines the term “wage,” an employer of tipped employees can satisfy its obligation to pay those employees the Federal minimum wage by paying a lower direct cash wage (at least $2.13 per hour) and counting a limited amount of its employees’ tips as a partial credit to satisfy the difference between the direct cash wage paid and the Federal minimum wage (known as a “tip credit”) if it follows certain requirements.
An employer may take a tip credit under section 3(m) only if, among other things, its tipped employees retain all of their tips. The employer taking a tip credit is allowed, however, to implement a tip pool in which tips are shared only among those employees who “customarily and regularly receive tips.” The FLSA contains no such express restrictions for employers that do not claim a tip credit. But in 2011, the Department of Labor revised its tip regulations to apply the statutory condition in section 3(m) of the FLSA that tipped employees retain all of their tips (except for those tips distributed through a tip pool limited to customarily and regularly tipped employees) to all employers, regardless of whether they claim a tip credit or not.
Since 2011, there has been a significant amount of 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 FLSA tip credit. There has also been litigation directly challenging the Department of Labor’s authority to promulgate the provisions of the 2011 regulations that restrict an employer’s use of tips received by its employees when the employer pays a direct cash wage of at least the Federal minimum wage and does not take a tip credit. Moreover, in the past several years, several states have changed their laws to require employers to pay tipped employees a direct cash wage that is at least the Federal minimum wage. This means that fewer employers can take the FLSA tip credit.
In December 2017, the Department of Labor announced that it would scale back regulations prohibiting tip pooling, or the distribution of tips to anyone other than the front-of-house staff who earned them. On March 23, 2018, President Trump signed into law as part of the $1.3 trillion, 2,200 page, omnibus spending bill, a few paragraphs that modify the FLSA tip pooling and tip credit regulations. Now, employers who pay the full FLSA minimum wage are no longer prohibited from allowing employees who are not customarily and regularly tipped—such as cooks and dishwashers—to participate in tip pools. The new regulations clarify that owners, managers and supervisors are prohibited from participating in tip pools. FLSA sections 16(b) and 16(c) provide enforcement authority to recover all tips unlawfully kept by the employer, in addition to an equal amount in liquidated damages. The FLSA further provides discretion to impose civil money penalties not to exceed $1,100 when employers unlawfully keep employee tips.