U.S. DOL Announces Intent to Repeal Rule Restricting an Employer’s Use of Tips Where No Tip Credit is Taken

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July 20, 2017

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On July 20, 2017, the Wage and Hour Division (“WHD”) of the U.S. Department of Labor (“DOL”) announced its intention to repeal a 2011 rule stating that customer tips are always the property of an employee, regardless of whether or not the employer takes a tip credit, and that employers were prohibited from using tip pooling to subsidize the hourly wages of untipped employees. Further, a DOL spokesperson reportedly told Bloomberg BNA that DOL investigators are forbidden from enforcing the 2011 regulation ahead of the proposed rule.  Once the rule is rescinded, employers who do not apply a tip credit against a tipped employees’ wages will be able to keep or distribute gratuities in any way the employer sees fit.

A “tip credit” is the practice of paying tipped employees below minimum wage and instead allowing the employee to keep customer gratuities to make up the difference.  Previously, courts stated that employers were prohibited from sharing tips with non-tipped employees, such as kitchen staff, to meet minimum wage requirements under the Fair Labor Standards Act (“FLSA”). In 2010, the Ninth Circuit changed the legal landscape in Cumbie v. Woody Woo, Inc., stating that the FLSA does not prevent employers from managing customer gratuities, including sharing a tip pool among employees who do not typically receive a tip, so long as the employees are paid at least the full minimum wage. The 2011 regulation was promulgated by the DOL in response to Cumbie. Since then, a number of circuit courts—including the Fourth and recently the Tenth—have stated that the DOL exceeded its authority in issuing the 2011 regulation. Conversely, in 2016, the Ninth Circuit reversed its prior position and stated that employers must comply with the 2011 regulation; that case is currently on appeal to the U.S. Supreme Court.

Although the DOL will be proposing a new rule and will not be enforcing the old one, employers must tread carefully before making any immediate changes to tipping practices.  Some states, such as California, Connecticut, and New York, have implemented more stringent regulations on customer gratuities, tip pooling, and tip credits, and the repeal of the DOL’s 2011 guidance may not affect how employee wages and customer gratuities are handled in those states.  Additionally, existing case law, such as the recent Ninth Circuit ruling upholding the 2011 regulation, may still be enforceable by employees in some states until a new regulation is adopted by the DOL.  Employers should also keep in mind that the rulemaking process is lengthy and the adoption of a final rule may not come for many months.

Action Items

  1. Review tip pooling requirements for your state(s) of operation with legal counsel to determine if your organization can take advantage of this DOL announcement.
  2. Subscribers can call our HR On-Call Hotline at (888) 378-2456 for further assistance.

Disclaimer: This document is designed to provide general information and guidance concerning employment-related issues. It is presented with the understanding that ManagEase is not engaged in rendering any legal opinions. If a legal opinion is needed, please contact the services of your own legal adviser.

© 2017 ManagEase, Incorporated.

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