On December 5, 2017, the Federal Department of Labor (“DOL”) proposed new rules regarding wages for tipped employees. Under the current law, the minimum Federal wage is $7.25 per hour.  Currently, an employer of tipped employees can meet this requirement by paying a lower base wage and include a limited amount of received tips to reach the $7.25 hourly wage requirement.  This procedure is available only if the employer notifies employees of its intention and all tips are retained by the employee. Tips received and pooled among employees (such as is commonly done in the casino industry by dealers) are considered to be retained by the employee.  The rules also bar all employers from sharing tips with employees who do not customarily and regularly receive tips—regardless of whether the employer takes advantage of the tip credit provision.

Over the past 5 years, there has been increasing litigation regarding tip pooling and tip retention by employers who do not take advantage of the tip credit. There also has been litigation challenging the DOL’s authority to promulgate the rule and apply it to employers who do not take advantage of the tip credit provisions.  The recent trend in state legislatures has been to pass legislation requiring employers to pay employees a direct cash wage of at least the minimum Federal Wage (essentially precluding those employers from utilizing the tip credit provision).

In response to these trends, the DOL has promulgated proposed new rules.  According to the published Federal Register, this is because the DOL: “is concerned about the scope of its current tip regulations as applied to employers that pay the full Federal minimum wage to their tipped employees. The Department is also seriously concerned that it incorrectly construed the statute in promulgating the tip credit regulations that apply to such employers. Additionally, the Department seeks to consider whether it is unnecessary to prohibit the sharing of tips with employees who do not customarily receive tips, including restaurant cooks, dishwashers, and other traditionally lower-wage job classifications, when their employer does not take a tip credit under FLSA section 3(m) and its employees are paid at least the full Federal minimum wage.”

The new rules propose rescinding the parts of the tip regulations that bar tip-sharing agreements for employees of employers who pay the full Federal minimum wage and do not take a tip credit.  The tip-sharing agreements would still be barred for employers who do take advantage of the tip credit.  The new rules will allow employers to agree with their employees to provide for tip-sharing among a larger pool of tip employees (i.e., to potentially include dishwashers, cooks and other lower-wage job classifications).  It could also result in back-office employees potentially sharing in the tip pooling.  In other words, the regulation proposes that all tip-sharing arrangements for employers who do not take advantage of the tip credit would no longer be subject to DOL regulation and would simply be a matter of agreement between the employer and its employees.

In general, employers favorably view the proposed rulemaking action  who may choose to use the tip-pooling arrangements to narrow wage difference between different classifications of employees.  In contrast, most tipped employees such as casino dealers are concerned about the proposed rule, fearful that their income will go down as tips are shared among a greater number of employees than before.  Written comments to the proposed rule-making were originally scheduled to end January 4, 2018, but the DOL subsequently extended the deadline to February 5, 2018.

 

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