Buried in the recently passed Consolidated Appropriations Act of 2018 (the “Act”) is a change in the rules for tip pooling. Tip pooling is where all tips received are combined and then distributed among the participating employees. Although the Fair Labor Standards Act (“FLSA”) permits employers to require tipped employees to participate in a tip pooling arrangement, since 2011, the Department of Labor ("DOL") has interpreted the FLSA to prohibit employers from requiring tipped employees to share tips with anyone other than those employees who “customarily and regularly” receive tips. In other words, employers have been permitted to mandate tip pooling among waiters, bartenders, and bussers, but have been barred from including “back of the house” staff, such as dishwashers and cooks, from participating in the tip pool, regardless of whether the employer was claiming a tip credit.
The Act explicitly repeals portions of the 2011 DOL regulations relating to who can be in a tip pool arrangement when the tipped employees are paid the minimum wage. As a result, employers who pay the full FLSA minimum wage to their tipped employees are no longer prohibited from allowing employees who are not “customarily and regularly” tipped to participate in tip pooling arrangements. On the other hand, those employers who take a tip credit against their minimum wage obligations (i.e., those who directly pay their tipped employees less than the federal minimum wage) must still abide by the rule limiting tip pools to those employees who “customarily and regularly” receive tips.
Employers, managers, and supervisors, however, are expressly prohibited from participating in any tip pooling arrangement, even if the employer is paying the full minimum wage. The Act provides, “[a]n 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.” The law does not define “manager” or “supervisor,” but the DOL has advised it will use the “duties test” for exempt executive employees to determine whether an employee is the type of manager or supervisor prohibited from keeping tips. This high bar may allow employers to include lower level supervisors or leads in a tip pool arrangement. The DOL also explained that “administering a tip pool does not constitute either unlawful retention of tips or unlawful tip pool participation” by employers, managers, or supervisors.
The remedies available and penalties imposed for violations of the FLSA’s tip rules also changed under the Act. Previously, employees injured by the tip pooling rules were able to recover the unpaid balance of wages and an additional equal amount as liquidated damages. Under the new law, injured employees will be able to recover the amount of the unlawfully taken tip plus the amount of tip credit taken by the employer, and an additional equal amount as liquidated damages. Additionally, the Act authorizes civil penalties of $1,100 per violation in addition to damages.
Tip pooling arrangements also can be governed by state law. For example, Arizona law allows employers taking a tip credit for purposes of the Arizona minimum wage laws to require tipped employees to participate in a tip pool arrangement with employees who do not “customarily and regularly” receive tips as long as the employer does not attempt to apply the tip credit to the non-“customarily and regularly” tipped employees. Thus, Arizona employers paying their tipped employees at least the state minimum, after credit, of $7.50 per hour may require tipped employees to participate in a tip pool arrangement with non-management employees who do not “customarily and regularly” receive tips so long as the latter employees are paid the Arizona minimum wage of $10.50 per hour or more. This would not run afoul of federal law because the employees receiving the Arizona tip credit are being paid the full federal minimum wage ($7.25 per hour).
Similarly, in Nevada, where employers are prohibited from taking a tip credit in order to meet the state minimum wage, employers paying their tipped employees the state minimum wage of $8.25 will be in compliance with both federal and state law if a tip pooling arrangement includes non-management employees who do not “customarily and regularly” receive tips.
In Colorado, however, any tip pooling arrangement that includes employees who do not customarily and regularly receive tips, such as dishwashers and food preparers, will nullify any allowable tip credit toward the Colorado minimum wage. In Colorado, then, employers wanting to include such employees in a tip pooling arrangement must pay their tipped employees the state minimum wage of $10.20 per hour in order to comply with both federal and state law.
In light of these new changes, employers with tipped employees will want to review any tip pooling arrangements currently in place to ensure that owners, managers, and supervisors are not receiving tip distributions. Employers not currently utilizing tip pooling arrangements may want to consider whether a tip pool would be beneficial for their business. Many employers see tip pooling as a way to improve customer service because everyone, not just the wait staff, has an incentive to treat customers well and work as a team. Employers are encouraged to contact any of the Labor and Employment Attorneys at Fennemore Craig for assistance.