U.S. Department of Labor regulations currently prohibit employers from setting up tip-pooling arrangements for employees who are not customarily tipped, such as back-of-the-house staff. But that could change.
If you have a restaurant at your hotel property, you are likely quite aware of the ongoing controversies regarding “tip pooling,” a common practice in many eating and drinking establishments in which tips are pooled and split among employees.
Under federal law, mandatory tip pools are permitted. However, if an employer is taking advantage of the “tip credit,” tips can only be redistributed to other employees who work in an occupation that customarily and regularly receives tips. According to the regulations, such positions would include other servers, bartenders, service bartenders, counter personnel and bus persons.
Federal law also prohibits back-of-the-house staff from being included in tip pools. It is among the reasons some operators are eliminating tipping altogether, in favor of service charges that are distributed among all staff. Sure, that might create greater comradery between the kitchen and dining room; however, a service charge is not a tip. A tip may be distributed to staff at the end of the shift, and taxed as income. A service charge is accounted and taxed as sales. There is no “tip out” at the end of the shift.
The National Restaurant Association has challenged the Department of Labor’s prohibition of employers from setting up tip-pooling arrangements that include employees who are not customarily tipped, such as back-of-the-house staff. More to the point, the DOL is reconsidering its stance, announcing that restaurants that meet certain requirements may be able to include back-of-house employees in tip pools in the near future.
Last July, the DOL announced that it will repeal the 2011 regulations implemented by the Obama administration that prohibited restaurants that paid tipped employees at least the federal minimum wage from including back-of-house employees in a tip pool. The DOL announced that while it works toward repealing the regulations, its investigators are barred from enforcing the 2011 regulations.
Under the Fair Labor Standards Act, an employer is allowed to pay a tipped employee (e.g., servers and bartenders) a sub-minimum wage of $2.13 per hour and take a “tip credit” for the difference between the sub-minimum wage and the federal minimum wage (currently $7.25 per hour).
The FLSA prohibits an employer that takes a tip credit, and as a result pays its tipped employees a sub-minimum wage, from including employees who are not regularly tipped in the tip pool. This prohibition has not changed. Restaurants that take a tip credit for their tipped employees and pay them a sub-minimum wage still may not include employees who are not regularly tipped in a tip pool.
However, prior to the Obama administration’s promulgation of the 2011 regulations, some courts had held that as long as an employer paid its employees at least the federal minimum wage, and did not utilize the tip credit, the employer could include employees who are not regularly tipped in the tip pool.
In 2011, the Obama-era regulations, however, prohibited this practice. The 2011 regulations stated that tips are the property of the employee and, therefore, an employer cannot require that tips be shared with other employees even if the employee receives the full federal minimum wage. The DOL has now reversed its position and has indicated that back-of-house employees should be allowed to participate in tip pools when all employees are paid at least the federal minimum wage.
According to employment and labor attorney Alisa Cleek, a partner with the Atlanta firm Taylor English, “restaurants should not start including back-of-house employees in their tip pools just yet. While the DOL has announced that its investigators will not enforce the 2011 regulations, it is still the current law until repealed. Employees may still bring private rights of action based on the regulations until they are effectively repealed.”
New regulations are not expected to be finalized until 2018. Employers must also be mindful of state laws that may continue to restrict which employees may participate in tip pools even when employers do not utilize the tip credit.
Barry Shuster, JD, MBA, MS, CHE, CHIA is interim chair of the Hospitality & Tourism Administration program at North Carolina Central University School of Business, and a visiting associate professor of business and hospitality law and hospitality finance and cost control.
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