Amendments to the FLSA ban employers, managers, and supervisors from retaining tips, but may remove a separate restriction on tip sharing with non-supervisory employees when no tip credit is taken.

Many restaurant owners and managers know that the Fair Labor Standards Act (FLSA) requires employers to pay non-exempt employees minimum wage, but allows employers under certain circumstances to credit tips received by employees toward a portion of the minimum wage obligation (known as the “tip credit”). Employers taking the tip credit must allow tipped employees to retain all tips they receive, unless the employers implement a valid tip pool. A valid tip pool, when a tip credit is taken, can only include “employees who customarily and regularly receive tips.”

Over the past several years, there has been a lot of uncertainty and litigation about what employers can do with employees’ tips when they do not take a tip credit (in other words, when they pay tipped employees the full minimum wage). Recent amendments to the FLSA address that issue.

On March 23rd, the FLSA was amended to make it clear that employers, managers and supervisors—even if they do not take a tip credit—cannot keep any portion of employees’ tips. In other words, even if tipped employees are paid the full minimum wage, employers, managers and supervisors cannot retain any part of the employees’ tips.  The amendment provides that those violating the restriction will be liable to employees for the tips unlawfully retained and any tip credit taken, plus an equal amount as liquidated damages. Violators will also be subject to a civil penalty of up to $1,100 for each violation.

The amendment to the FLSA does not define “managers” or “supervisors,” but the Department of Labor (DOL), in a Field Assistance Bulletin issued on April 6th, stated that it considers workers with the following duties to be “managers” or “supervisors” for purposes of the above prohibition on retaining tips:

(The worker’s) primary duty is management of the enterprise … or of a customarily recognized department or subdivision thereof;

(The worker) customarily and regularly directs the work of two or more other employees; and

(The worker) has the authority to hire or fire other employees or whose suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees are given particular weight.

(The above duties test may sound familiar because it is the duties test that the DOL uses for the executive exemption to the FLSA’s minimum wage and overtime requirements.) 

In addition to prohibiting employers, managers and supervisors from retaining any portion of employees’ tips under any circumstances, the recent amendments to the FLSA also state:

The portions of the [DOL’s 2011 revisions to its tip regulations] that are not addressed by section 3(m) of [the FLSA, which addresses the tip credit] (as such section was in effect on April 5, 2011) shall have no further force or effect until any future action taken by the Administrator of the Wage and Hour Division of the Department of Labor.

That language is not a model of clarity, but it appears that the purpose of that amendment is to allow employers who do not take a tip credit to pool or share employees’ tips among employees who do not customarily and regularly receive tips—provided, of course, that those employees are not managers or supervisors. As noted above, when employers do take a tip credit the pooling or sharing of tips with employees who do not customarily and regularly receive tips (such as cooks and other back-of-the-house workers) is prohibited. 

As can be seen from the statutory language above, the FLSA amendment does not explicitly say that when no tip credit is taken, employers may require tip pooling or sharing with non-customarily tipped employees who are not managers or supervisors. But, thankfully, in its Field Assistance Bulletin the DOL agreed that “employers who pay the full FLSA minimum wage are no longer prohibited from allowing [non-supervisory] employees who are not customarily and regularly tipped—such as cooks and dishwashers—to participate in tip pools.”

Although the DOL gave initial guidance on its interpretation of the FLSA amendments in its Field Assistance Bulletin, hospitality employers should stay tuned because the DOL also said that it anticipates that it will proceed with formal rulemaking to fully address the FLSA amendments described herein.

Of course, in addition to complying with the federal FLSA, restaurants and other hospitality employers must ensure that they comply with any applicable state laws. And those laws may be more restrictive than the FLSA. Given the ever-changing legal landscape with respect to tips, employers with questions about their tip obligations should consult with counsel to ensure they meet all applicable legal requirements.

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