Tag Archives: tip credit

New Rules for Tipped Employees to Take Effect in February 2021

Contributed by Suzanne Newcomb, December 28, 2020

On December 22 the Federal Department of Labor (DOL) published a Final Rule changing the FLSA regulations for tipped employees. The Final Rule takes effect 60 days after publication. A caveat before we dig into the Final Rule; the change affects only federal law. As with all things wage-and-hour-related, many states, and some local governments, enforce more stringent requirements. Some jurisdictions prohibit tip credits entirely. This post focuses on the federal standard only. Employers must adhere to the requirements applicable to their particular business in each location in which they operate.

The FLSA has long allowed a “tip credit” to cover a portion of the minimum wage an employer would otherwise be required to pay certain employees who regularly receive gratuities. One requirement is that the tipped employees retain all of their tips with the exception of a qualified tip pool. The regulations surrounding tip pools have changed over the years due to a range of court rulings, legislative action, and agency rule making. The Final Rule is the latest iteration of regulations surrounding the “tip credit provision” [29 USC § 203(m)(2)(A) often referred to as simply “section 3(m)”].

Under the newly published Final Rule:

  • Employers may continue to enforce mandatory tip pooling arrangements;
  • If the tip credit is taken, the employer may not include employees who do not routinely receive tips (i.e. kitchen staff) in a mandatory tip pool;
  • Employers that do not take the tip credit (i.e. those that pay tipped employees a set hourly wage that is at or above the applicable minimum wage for non-tipped employees) may include employees who do not routinely receive tips in mandatory tip pools;
  • Managers and supervisors (as determined based on the duties portion of the test for the FLSA’s executive exemption) are prohibited from participating in tip pools (regardless of whether a tip credit is taken);
  • Tip pool funds must be paid out at least as frequently as the employer pays out base hourly wages; and
  • Finally, employers may take a tip credit for time spent performing tasks that do not generate tips (i.e. cleaning, stocking, rolling silverware, etc.) as long as the non-tip generating duties relate to the tipped occupation and are performed contemporaneously with, or immediately before or after, the duties for which the employee does receive tips. The Rule expressly rejects the 80/20 rule referenced in some opinion letters and court decisions. 

A final reminder that is particularly relevant in light of the massive sustained blow the service industry has taken of late; the tip credit cannot exceed the amount of tips the employee actually receives. Also, if an employee’s base hourly rate, plus the tips actually received, adds up to less than the applicable minimum wage for any particular shift, the employer must make up the difference.

A Tip on Tips – the DOL’s Tip Credit Rule is Upheld by a Federal Court

Contributed by Brandon Anderson

On May 29, 2012, a federal district court in Washington, D.C. upheld the Department of Labor’s (DOL) final rule on the Fair Labor Standards Act (FLSA) “tip credit.” 

The FLSA tip credit permits employers to take a tip credit toward its minimum wage obligation for tipped employees (those who customarily and regularly receive more than $30 a month in tips) equal to the difference between the required hourly cash wage (which must be at least $2.13) and the minimum wage (the current federal minimum wage is $7.25). In order for an employer to take advantage of the tip credit, however, the FLSA requires that employees be informed by the employer of certain tip credit provisions.

The DOL, who is charged with enforcing the FLSA, is authorized to develop rules (federal regulations) to explain and enforce the FLSA through the “notice-and-comment rulemaking process.”  As its name suggests, notice-and-comment rulemaking involves a governmental agency publishing a proposed rule, allowing the public to comment on the rule, and then publishing a “final rule” after considering the public’s comments. 

Through that process, the DOL created a regulation that explained and expanded on the requirement that employers notify tipped employees about the tip credit.  An issue arose when the final rule was published and, at least in the opinion of some, the final rule was substantially different in terms of detail than the proposed rule. 

The National Restaurant Association, along with two other trade associations, challenged the “final rule” and argued that the final rule was so drastically different that the DOL did not give the public adequate notice of the proposed change.  The federal district court disagreed. The judge held that the proposed rule met the notice requirement because the final rule was a “logical outgrowth” of the proposed rule. 

As a result of the court’s holding, tipped employees must be notified of the following:

  • The amount of the cash wage that is to be paid to the tipped employee by the employer;
  • The additional amount by which the wages of the tipped employee are increased on account of the tip credit claimed by the employer, which amount may not exceed the value of the tips actually received by the employee;
  • That all tips received by the tipped employee must be retained by the employee except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips; and
  • That the tip credit shall not apply to any employee who has not been informed of these requirements in this section.

It is always a good practice to provide these types of required notices in writing and require the employee to acknowledge receipt of the notice.  This type of “best-practice” can help employers avoid lengthy and costly litigation down the road.  If you have any questions about the tip credit or any other employment matters, it is also always a “best practice” to reach out to your labor and employment attorney.