The proposed tip rule would make significant changes to the tip credit. If the rule is finalized as proposed, the DOL says that the updated regulations could result in a potential transfer of $107 million, as tip pools are expanded to share tips among both front-of-the-house and back-of-the-house employees.
On October 7, 2019, the U.S. Department of Labor announced a proposed rule for tip provisions of the FLSA, implementing provisions of the Consolidated Appropriations Act of 2018 (CAA). The proposal also would codify existing Wage and Hour Division (WHD) guidance into a rule. This notice of proposed rulemaking (NPRM) is available for review and public comment for 60 days. The Department’s NPRM is scheduled to be published on October 8, 2019, in the Federal Register, 29 CFR Parts 10, 516, 531, 578, 579, and 580.
Tip credit. The FLSA generally requires covered employers to pay employees at least a federal minimum wage, which is currently $7.25 per hour. Section 3(m) of the FLSA allows an employer that meets certain requirements to count a limited amount of the tips that its “tipped employees” receive as a credit toward its minimum wage obligation (known as a “tip credit”). An employer may take a tip credit only for “tipped employees” and only if, among other things, its tipped employees retain all their tips.
However, this requirement does not preclude an employer that takes a tip credit from implementing a tip pool in which tips are shared only among those employees who “customarily and regularly receive tips.”
Congressional amendments. On December 5, 2017, the Department published notice of proposed rulemaking (NPRM), 82 FR 57,395, which proposed to rescind the parts of its tip regulations that applied to employers that pay a direct cash wage of at least the full federal minimum wage and do not take a tip credit. On March 23, 2018, Congress amended section 3(m) of the FLSA in the CAA, Pub. L. No. 115-141, Div. S., Tit. XII, §1201, 132 Stat. 348, 1148-49 (2018). Among other things, the CAA revised section 3(m) by renumbering the existing tip credit provision as section 3(m)(2)(A).
Because the Congressional amendments to the FLSA directly impacted the subject of the Department’s 2017 NPRM, that proposal has been withdrawn. The CAA did not change the existing rules that apply to employers that take a tip credit, now in section 3(m)(2)(A) of the FLSA, which provide that such employers may institute a mandatory, “traditional” tip pool that is limited to employees who “customarily and regularly” receive tips. But the CAA did eliminate the regulatory restrictions on an employer’s ability to require tip-pooling when it does not take a tip credit: Those employers may now implement mandatory, “nontraditional” tip pools in which employees who do not customarily and regularly receive tips may participate.
Significantly, the CAA added a new section 3(m)(2)(B), which prohibits employers, whether or not they take a tip credit, from keeping their employees’ tips “for any purposes, including allowing managers or supervisors to keep any portion of employees’ tips.” The CAA amended sections 16(b) and 16(c) of the FLSA to permit private parties and the Department to recover any tips unlawfully kept by an employer in violation of section 3(m)(2)(B), in addition to an equal amount of liquidated damages. The CAA also amended section 16(e) of the FLSA to provide the Department discretion to impose civil money penalties (CMPs) up to $1,100 when employers unlawfully keep employee’s tips.
Impact of proposed rule. Now the Department is proposing to update its tip regulations to incorporate the CAA’s amendments to the FLSA. Although the CAA renumbered the FLSA’s existing tip credit provision as section 3(m)(2)(A), it did not substantively change that provision. Therefore, this rulemaking does not address the Department’s existing regulations and guidance implementing 3(m)(2)(A) that apply to employers that take a tip credit, unless it is necessary to clarify how those provisions relate to the statutory amendment.
To be clear, the proposed rule would not impact regulations providing that employers who take a tip credit may only have a tip pool among traditionally tipped employees. An employer may take a tip credit toward its minimum wage obligation for tipped employees equal to the difference between the required cash wage (currently $2.13 per hour) and the federal minimum wage. Establishments utilizing a tip credit may only have a tip pool among traditionally tipped employees.
Tip-pools outside of tip credit. The Department is proposing to incorporate the new statutory provision, section 3(m)(2)(B)— which applies regardless of whether the employer takes a tip credit—into its existing regulations and is proposing to incorporate a new recordkeeping provision to assist the Department with its administration of that provision.
The Department’s proposed rule would allow employers who do not take a tip credit to establish a tip pool to be shared between workers who receive tips and are paid the full minimum wage and employees that do not traditionally receive tips, such as dishwashers and cooks. The proposed regulation also explicitly prohibits employers, managers, and supervisors from keeping tips received by employees.
Tip credit for non-tipped “contemporaneous” duties. Additionally, the proposed rule reflects the Department’s guidance explaining that an employer may take a tip credit for any amount of time an employee in a tipped occupation performs related non-tipped duties with tipped duties. For the employer to use the tip credit, the employee must perform non-tipped duties contemporaneous with, or within a reasonable time immediately before or after, performing the tipped duties. The proposed regulation also addresses which non-tipped duties are related to a tip-producing occupation.
Civil money penalties. The Department is also proposing to incorporate the FLSA’s new civil money penalties (CMP) provision into its existing regulations. In addition to revising the CMP regulations to reflect the statutory amendments, the Department also proposes to revise portions of its CMP regulations to address courts of appeals’ decisions that have raised concerns that some of the regulations’ statements regarding willful violations are inconsistent with Supreme Court authority and how the Department actually litigates willfulness.
As provided under the CAA, new civil money penalties, currently not to exceed $1,100, may be imposed when employers unlawfully keep tips.
Finally, the Department is proposing to amend the provisions of its regulations that address the payment of tipped employees under Executive Order 13658 (Establishing a Minimum Wage for Contractors) to reflect the rescissions proposed in the FLSA regulations for tipped employees, to incorporate the Department’s guidance on when an employee performing non-tipped work is a tipped employee, and to otherwise align those regulations with the authority provided in the Executive Order.
This notice of proposed rulemaking (NPRM) is available for review and public comment for 60 days. The Department encourages interested parties to submit comments on the proposed rule.
The DOL has also released a fact sheet noting the key provisions of the proposed rule.
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