In response to significant pressure from the hospitality industry—specifically, the restaurant industry—as well as increasing litigation and changes to reduce or eliminate the use of tip credits at the state level, the U.S. Department of Labor (DOL) published a notice of proposed rulemaking (NPRM) in the December 5, 2017, edition of the FederalRegister, in which it proposes to rescind its 2011 regulations concerning tip pooling.

The 2011 regulations at issue prohibit certain hospitality employers from entering into tip-sharing agreements with back-of-the-house employees who are not customarily and regularly tipped. The proposed regulations would apply, subject to state law, to situations in which an employer does not take a tip credit and pays employees a direct cash wage of at least the federal minimum wage rate. In short, provided the above conditions are met, the NPRM proposes to allow an employer and its employees to agree amongst themselves to establish a tip pool that includes employees, such as cooks and dishwashers, who do not customarily receive tips.

This proposed rule reflects significant changes occurring within the restaurant industry, whereby customers are increasingly considering high-quality food to be on a par with high-quality service. It is also consistent with a shift among customers in the entire hospitality industry towards recognition of all employees within the chain of service. For employers in tight labor markets in which it is difficult to attract and maintain high-quality staff, the NPRM is particularly welcome news.

Background

In 2011, the DOL’s Wage and Hour Division finalized a rulemaking that it began in 2008. The rule interpreted Section 3(m) of the Fair Labor Standards Act as requiring that tipped employees retain all their tips, except those tips distributed pursuant to a valid tip-pooling arrangement. Such valid tip pools were limited to “customarily and regularly tipped employees,” regardless of whether the affected employees worked for an employer that takes a tip credit. 

Between the time that the DOL proposed its 2008 NPRM and finalized its rule in 2011, the Ninth Circuit Court of Appeals, in Cumbie v. Woody Woo, Inc., ruled that the restrictions on tip pooling only apply when an employer takes a tip credit as allowed under Section 3(m). Accordingly, after Woody Woo, employers in the Ninth Circuit who did not take advantage of tip credits could utilize tip pools that included back-of-the-house employees. 

The DOL, which participated as amicus curiae in the Woody Woo case and respectfully disagreed with the Ninth Circuit’s decision, used the 2011 final rulemaking to “correct” the court’s conclusion. The 2011 regulations thus prohibited employers from sharing tips with employees who are not customarily and regularly tipped employees—even if an employer does not take a tip credit.

Since the 2011 rulemaking, there has been extensive litigation over the tip-pooling and tip-retention practices of employers that do not take a tip credit, as well as over the DOL’s authority to issue the 2011 final rule. Two examples of such litigation are Oregon Restaurant and Lodging Association v. Perez and Cesarz v. Wynn Las Vegas, which the Ninth Circuit consolidated. In its 2016 decision, the Ninth Circuit found that Section 3(m) of the Fair Labor Standards Act (FLSA) did not restrict the tip-pooling arrangements that an employer could institute if it did not take a tip credit. The court read Woody Woo as ruling that the FLSA does not prohibit employers that do not take a tip credit from entering into invalid tip-pooling arrangements. The Ninth Circuit further upheld the DOL’s 2011 rulemaking as a reasonable exercise of its authority to interpret the statute and to prohibit invalid tip-pooling arrangements by employers that do not take a tip credit and pay their employees a cash wage of at least federal minimum wage.

This litigation culminated in the filing of two petitions for certiorari with the Supreme Court of the United States in Oregon Restaurant and Lodging Association, Sup Ct. No 16-920 (cert. petition filed Jan. 19, 2017) and Cesarz v. Wynn Las Vegas, Sup Ct. No 16-920 (cert. petition filed Aug. 1, 2016). Both appeals are challenging the appellate court’s decision in the consolidated cases. In a November 3, 2017, order, the Supreme Court extended, yet again, the briefing schedule in the Oregon Restaurant and Lodging Association case until February 8, 2018. This raises the question of whether the Court extended the schedule to give the DOL an opportunity to address the tip-pooling regulations via a rulemaking—which would ultimately obviate any need for further litigation in these appeals.

2017 Proposed Rule

In addition to the extensive litigation spawned by its 2011 final rule and changes in state tip pooling laws, the DOL expressed reservations about its then-interpretation of the statute as well as policy concerns with the 2011 regulations. Thus, in this NPRM, the DOL proposes to rescind all parts of the current tip regulations that apply to employers that do not take a tip credit and pay cash wages of at least the federal minimum wage (which is currently $7.25 per hour). This proposal would eliminate the prohibition against sharing tips with employees who do not regularly and customarily receive tips, such as cooks and dishwashers, for such employers.

In addition, the NPRM solicits data from commenters on a number of questions, including

• what portion of employers that meet the criteria required by the NPRM reallocate such tip and with whom;
• the prevalence of employer-required tip pools and what factors go into deciding whether to implement tip-pooling arrangements;
• whether tip-pooling arrangements distribute monies based upon a fixed percentage or a fixed dollar amount;
• whether customers’ tipping practices might change if the NPRM was adopted; and
• whether employers would include non-tipped employees in future tip-pooling arrangements if the proposal became final.     

Nonenforcement Policy

On July 20, 2017, the DOL issued a nonenforcement policy concerning the 2011 regulations.  Under this policy, the DOL instructed its agents to refrain from enforcing its regulations concerning tip pools involving employees who are paid at least the minimum wage and whose employers do not utilize tip credits. That nonenforcement policy remains in effect for 18 months or until the completion of the rulemaking process. 

Key Takeaways

Although the DOL has issued a nonenforcement policy, this NPRM holds out the distinct prospect that employers may be able to institute legitimate tip-pooling arrangements with non-tipped employees in the future. However, until the DOL completes its rulemaking and issues a final rule along the lines of its proposed rule, hospitality and other employers may want to take caution prior to establishing a tip-pooling policy that includes back-of-the-house employees. Ultimately, such policies may help employers increase morale and productivity while decreasing employee turnover.

As an indication of the DOL’s commitment to complete this rulemaking as quickly as possible, it has allowed only 30 days for a comment period, ending on January 4, 2018. Employers are encouraged to submit comments and respond to the DOL’s aforementioned questions, which are included within the economic analysis section of the NPRM. The NPRM provides guidance on how to submit comments either electronically or via mail.