DOL Announces New Final Rules For Tip Pooling and Tip Credits
Businesses with tipped employees will need to review their compensation policies and practices to ensure compliance with two new final rules regarding tip pooling and tip credits. Published by the U.S. Department of Labor (DOL) in September and October 2021, the rules modify and clarify how employers may treat and account for compensation received by employees who rely on tips for some or most of their income.
Managers, Supervisors, and Tip Pooling
The DOL announced a final rule on September 24, 2001 regarding tip regulations under the Fair Labor Standards Act (FLSA). Effective as of November 23, 2001, the rule addresses limits on the practice of tip pooling, specifically, when and how supervisors and managers may receive and retain employee tips.
Managers and supervisors have been prohibited from keeping employees’ tips since the passage of the Consolidated Appropriations Act (CAA) in 2018. The CAA made it illegal for employers to keep their employees' tips "for any purposes, including allowing managers and supervisors to keep any portion of employees' tips, regardless of whether or not the employer takes a tip credit."
The new final rule recognizes that there are some circumstances where managers and supervisors may directly receive tips in a way that does not run afoul of the CAA's prohibition against keeping employee tips. Specifically, the new rule provides that:
- Supervisors and managers may not receive any tips from mandatory tip pools or tip-sharing arrangements. However, they may contribute tips to eligible employees in mandatory tip pools or sharing arrangements.
- A supervisor or manager can keep tips only if those tips are based on a service the supervisor or manager directly and "solely" provides.
Under the new rule, employers may permit a manager or supervisor to keep tips for services they directly provide to customers. They can also require managers and supervisors who receive such allowable tips to share a portion of those tips with other eligible employees.
As defined in the final rule, a "supervisor" or "manager" is an employee:
- Whose primary duty is managing the establishment where they work.
- Who regularly and customarily directs the work of two or more other employees.
- Who has the authority to hire or fire other employees or whose suggestions and recommendations for hiring, firing, promotion, or advancement are given particular weight by their employer.
Tip Credits and "Dual Jobs”
Announced October 28, 2021 and effective as of December 28, 2021, the other new final rule addresses limits on an employer's ability to take a tip credit for the time a tipped employee spends performing non-tip-generating work. The FLSA defines “tipped employees” as those who customarily and regularly receive more than $30 per month in tips.
The FLSA requires covered employers to pay non-exempt employees a minimum wage of at least $7.25 per hour. For tipped employees, however, an employer may satisfy part of this obligation by taking a "tip credit." A "tip credit" refers to the practice of paying an employee less than the minimum wage so long as the amount of gratuities the employee receives makes up the difference between the wage they actually receive and the applicable minimum wage.
One common problem with tip credits is that many employees who receive tips for some tasks also spend a significant amount of time performing non-tip-producing tasks, such as setting tables, refilling condiments, preparing food, rolling silverware, or cleaning.
The new "Tips Dual Jobs" final rule limits the amount of tip credit an employer can take when a tipped worker isn't performing tip-generating tasks. The rule clarifies that an employer may take a tip credit only for the time an employee is performing tip-producing work or is engaged in work that directly supports tip-producing work for a limited amount of time.
Specifically, an employer may take a tip credit only for the time an employee spends performing tip-producing work or when:
- A tipped employee spends less than 20 percent of the hours worked during a workweek performing work that directly supports tip-producing work. The employer cannot take a tip credit for any time that exceeds 20 percent of the workweek.
- A tipped employee performs directly supporting work for not more than 30 minutes. Therefore, an employer cannot take a tip credit for any time that exceeds 30 minutes.
As noted, hospitality industry employers and others whose workers regularly receive tips need to evaluate and may need to modify their tip credit and pooling policies to comply with the new final rules. If you have questions or concerns about your company’s wage payment obligations under the new rules, please contact one of Latimer LeVay Fyock’s Labor and Employment attorneys today.