Restaurant owners have been anxiously awaiting the Department of Labor’s (DOL) guidance regarding proper participation and operation of tip pools after the passage of the March 23, 2018, Consolidated Appropriations Act, which contained a little notice amendment to the Fair Labor Standards Act (FLSA). Tip pooling regulations have undergone a series of reversals recently as the DOL has worked to find a one-size-fits-all regulation to apply to varying restaurant concepts. In 2010, the Ninth Circuit, in Cumbie v. Woody Woo, Inc., provided a victory for employers that did not take a tip credit by allowing those restaurants to permit tipped and non-tipped employees to share in tips from customers. In response, in 2011, the DOL issued regulations disagreeing with the court’s decision and explicitly prohibiting employers from distributing tips through mandatory tip pools to employees who do not “customarily and regularly receive tips” from guests (effectively excluding traditional back of house employees and, in most cases, hostesses).

The 2018 Approporiations  Act amended the FLSA in several important ways, such as by (1) continuing to prohibit employers, managers, and supervisors from sharing in tip pools, even if they provide service to guests; (2) instituting new penalties for violations of tip pooling laws by expanding the current remedy of invalidating the tip credit by permitting recovery of the difference between the cash rate paid and the minimum wage, but also requiring disgorgement and recovery of improperly distributed tips; (3) permitting back of house employees to share in tip pools if the restaurant does not take a tip credit and instead pays all employees the full federal minimum wage; and (4) eliminating a series of regulations and proposed regulations, including the DOL’s December 2017 proposed rulethat sought to amend the 2011 Obama-era DOL regulation.

The DOL’s Field Assistance Bulletin

On April 6, 2018, the DOL issued Field Assistance Bulletin No. 2018-3 in an effort to clarify the tip pooling amendments in the Act. The DOL bulletin provides that employers that pay the full minimum wage under the FLSA ($7.25 per hour) are no longer prohibited from allowing employees who are not customarily and regularly tipped—such as cooks and dishwashers—to participate in tip pools. This presents good news for restaurants that have struggled to increase the wages of back of house employees while the income of front of the house employees has steadily increased because of the retention of tips. 

In addition, although the DOL confirmed that the FLSA still prohibits managers and supervisors from participating in tip pools, the bulletin stated that that it would use the FLSA duties test for the executive exemption to determine whether a restaurant employee is a manager or supervisor. The DOL’s use of the duties test is a further positive development for restaurant operators as it signals a higher standard and might allow for the inclusion of head waiters, service assistants, and floor captains in tip pools, as long as the employee’s primary duty is not management of all or a portion of the restaurant and he or she does not have the ability to hire or fire employees or make recommendations regarding such decisions, as required under the duties test.

Finally, the DOL’s bulletin covered the new penalties associated with the amendments in the Appropriations Act. The penalties include recovery of all tips unlawfully kept by the employer, an equal amount in liquidated damages, and potential civil money penalties not to exceed $1,100 when employers unlawfully keep employee tips.

Forthcoming Rulemaking

The DOL’s bulletin was followed by its announcement that it will proceed with rulemaking in the near future to address the 2018 FLSA amendments contained in the Act. It remains to be seen whether the DOL’s rulemaking will address the tip credit notice requirement that catches many employers by surprise with draconian results or the controversial 80/20 rule implemented by the Obama-era DOL that often causes confusion as to whether otherwise tip-eligible employees lose their tipped employee status. 

Key Takeaways

Given the fast-changing landscape, restaurant operators may want to review their current tip pooling policies.—. Restaurant owners may also want to keep in mind that despite the amendments in the Appropriations Act to the FLSA, the DOL’s favorable bulletin, and future rulemaking regarding these matters, many states and municipalities have their own laws that adhere in most respects to the 2011 Obama regulations. Consequently, although one may applaud the new FLSA amendments and the future actions by the DOL that will likely assist restaurant owners, employers will also want be aware of more restrictive requirements that exist in many states regarding the definition of management duties, tip credit and tip pooling policies.