FLSA Amendment Revises Tip Pooling Rules

By: Jessica Jackler

FLSA Amendment Revises Tip Pooling Rules

In late March 2018, President Trump signed into law Congress’s omnibus budget bill, the Consolidated Appropriations Act, 2018, which in part amended the Fair Labor Standards Act (FLSA) by providing that an employer “may not keep tips received by its employees for any purposes, including allowing managers or supervisors to keep any portion of employees’ tips, regardless of whether or not the employer takes a tip credit.”

FLSA Amendment

The amendment states that employers may not “retain” employee tips regardless of whether a tip credit is taken. The amendment prohibits “managers” and “supervisors” from retaining tips, although it fails to define those terms.

The amendment further provides that a violation of this provision subjects the employer to a civil penalty of up to $1,100 for each such violation, as well as liability to the affected employee(s) for the unlawfully retained tips and an equal amount in liquidated damages. Moreover, if the employer retains tips and takes a tip credit, the penalty also includes loss of the tip credit in addition to disgorgement of the unlawfully retained tips.

DOL Clarification

Because the FLSA amendment left open many questions, the Department of Labor (DOL) issued Field Assistance Bulletin No. 2018-3 (FAB).

The FAB explains that the amendment prohibits employers from keeping tips received by their employees, regardless whether the employer takes a tip credit. The amendment also provides that certain regulations codified at 29 C.F.R. §§ 531.52, 531.54, and 531.59 that barred tip pooling when employers pay tipped employees at least the full FLSA minimum wage and do not claim a tip credit shall have no further force or effect.

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 amendment prohibits managers and supervisors from participating in tip pools, and because those terms are not defined in the amendment, the FAB clarified that the DOL will use the duties test at 29 C.F.R. § 541.100(a)(2)-(4) (i.e. an individual who performs the duties of an exempt manager under the FLSA’s “executive” exemption) to determine whether an employee is a manager or supervisor. To satisfy the DOL’s definition, a supervisor or manager must meet the following criteria:

  1. Primary duty is management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof;
  2. Customarily and regularly directs the work of two or more other employees; and
  3. Authority to hire or fire other employees or whose suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees are given particular weight.

Whether an employee is paid on a salary basis is not relevant to whether they can participate in sharing tips according to the FAB. Accordingly, if a manager or supervisor satisfies the criteria above but is not paid on a salary basis (and may be otherwise classified as a non-exempt employee for that reason), the employee is still barred from sharing tips.

The amendment does not impact the practice of allowing employers to deduct credit card processing fees associated with processing credit card tips.

The DOL further clarified that violations of section 3(m) may only be cited if they occurred after March 23, 2018 and will still require a finding that the violation is repeated or willful.

The DOL expects to proceed with rulemaking in the near future to fully address the impact of the 2018 amendments.

Practice Tip: We will continue to monitor developments related to the new tip-pooling law. Employers should review their tip-pooling policies to ensure they comply with the new amendment. Because the amendment does not directly address differing state law provisions, we can expect to see litigation arise regarding state law provisions that conflict with the amendment. Employers should review state-law requirements and their interaction with the FLSA. 

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