On September 23, 2021, the U.S. Department of Labor (DOL) issued its latest rule related to tip pooling. The rule modifies and clarifies aspects of a rule previously issued by the Trump administration. Several portions of the Trump administration’s final rule went into effect April 30, 2021.
An employer that pays its tipped employees the full minimum wage and does not take a tip credit may impose a tip pooling arrangement that includes dishwashers, cooks, or other employees who are not employed in an occupation in which employees customarily and regularly receive tips. An employer may not receive tips from such a tip pool and may not allow supervisors and managers to receive tips from the tip pool.
Employers are prohibited, regardless of whether they take a tip credit, from keeping tips received by employees, including allowing managers or supervisors to keep any portion of employees’ tips.
A manager or supervisor is an individual who meets the “executive” employee duties test for overtime exemption, which is any employee (1) whose primary duty is managing the enterprise or a customarily recognized department or subdivision of the enterprise; (2) who customarily and regularly directs the work of at least two or more full-time employees or their equivalent; and (3) who has the authority to hire or fire other employees, or whose suggestions and recommendations as to the hiring or firing are given particular weight. The definition also includes as managers or supervisors any individuals who own at least a bona fide 20 percent equity interest in the enterprise in which they are employed and who are actively engaged in its management.
The following provisions were modified or clarified by the new rule and are effective November 23, 2021.
An employer does not violate the law when a manager or supervisor keeps tips that he or she receives directly from customers based on service that he or she directly and solely provides.
An employer may not allow a manager or supervisor to receive tips from employer-mandated tip pools or tip-sharing arrangements, but may require a manager or supervisor to contribute tips to such an arrangement.
Under the new rule, employers face penalties of up to $1,162 each time an employer retains employee tips, regardless of whether the violation is repeated or willful.
A penalty of up to $2,074 per violation may be assessed against any person who repeatedly or willfully violates Section 6 (minimum wage) or Section 7 (overtime) of the FLSA. A violation is deemed willful when an employer knew that its conduct was prohibited by the FLSA or showed reckless disregard for the requirements of the FLSA. Reckless disregard means, among other situations, that an employer should have inquired further whether its conduct was in compliance with the FLSA and failed to make adequate further inquiry. All the facts and circumstances surrounding the violation shall be taken into account in determining whether a violation was willful.
Employers’ Bottom Line
Employers should carefully consider the individuals they permit to share tips. A manager or supervisor may not receive tips from a tip pool. A manager or supervisor may only keep tips he or she receives directly from customers based on service that he or she directly and solely provides. Regardless of whether the violation is repeated or willful, employers are subject to penalties for a violation. Employers must also check applicable state law requirements. Some state laws do not permit tip sharing between tipped and non-tipped employees.
