By Payroll and Entitlements Editorial Staff
On December 22, 2020, the Department of Labor announced a final rule revising its tipped employee regulations to address amendments made to section 3(m) of the FLSA by the Consolidated Appropriations Act of 2018 (CAA). That amendment prohibits employers from keeping tips received by their employees, regardless of whether the employer takes a tip credit. It also prohibits employers from allowing managers or supervisors to keep any portion of employee’s tips. The final rule codifies the Department’s guidance regarding the tip credit—how that credit applies to employees who perform tipped and non-tipped duties, and which non-tipped duties are related to a tip-producing occupation.
Tip credit tip pools. The CAA did not affect long standing regulations that apply to employers that take a tip credit under the FLSA. For example, employers that claim a tip credit must ensure that a mandatory “traditional” tip pool includes only workers who customarily and regularly receive tips. This means, for example, that employees such as cooks or dishwashers cannot be part of such a tip pool.
Non-tip credit tip pools. However, the CAA removed 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, which may include employees such as cooks and dishwashers.
Key provisions. In this final rule, the Department:
- removes the portions of the regulations that prohibited employers that do not take a tip credit from implementing mandatory “nontraditional” tip pools-that is, tip pools that include employees who do not customarily and regularly receive tips;
- explicitly prohibits employers-regardless of whether they take a tip credit-from keeping employees’ tips for any purpose, which includes prohibiting managers and supervisors from keeping tips received by employees;
- amends its regulations to state that an employer that collects tips to facilitate a mandatory tip pool must fully redistribute the tips no less often than when it pays wages to avoid “keep[ing]” the tips in violation of section 3(m)(2)(B);
- incorporates the CAA’s new requirements regarding civil money penalties (CMP) into its regulations and revises additional portions of its CMP regulations to address court decisions that have raised concerns;
- incorporates a new record keeping requirement for employers that do not take a tip credit but collect employees’ tips to operate a mandatory tip pool;
- codifies recent guidance explaining that an employer may take a tip credit for time that an employee in a tipped occupation performs related non-tipped duties, either contemporaneously with or for a reasonable time immediately before or after performing tipped duties; the final rule also states that, in addition to the examples listed in the regulation, a non-tipped duty is presumed to be related to a tip-producing occupation if it is listed as a task of the tip-producing occupation in O*NET;
- amends the regulations that address the payment of tipped employees under Executive Order 13658 (Establishing a Minimum Wage for Contractors) to reflect the corresponding changes in the FLSA regulations and to otherwise align those regulations with the Executive Order.
Frequently asked questions. The Department also published 18 Frequently Asked Questions concerning the final rule, several of which relate to the DOL’s significant change allowing employers to take a tip credit for time that an employee in a tipped occupation performs related non-tipped duties, either contemporaneously with or for a reasonable time immediately before or after performing tipped duties. For example:
FAQ 9 asks about the Department’s requirements concerning employers taking a tip credit for non-tip producing activities related to the tipped occupation. It reflects the Department’s recent guidance removing the 20 percent limitation on the amount of time that an employee for whom an employer takes a tip credit can perform related, non-tipped duties. See WHD Opinion Letter FLSA2018-27 (Nov. 8, 2018). An employer may take a tip credit for time that an employee in a tipped occupation performs related non-tipped duties—as long as those duties are performed contemporaneously with or for a reasonable time immediately before or after the tipped duties.
FAQ 11 explains what non-tipped duties are related to the tipped-producing occupation. The current regulation states that non-tipped duties related to a tip-producing occupation include a server spending part of their time performing such non-tipped duties as “cleaning and setting tables, toasting bread, making coffee, and occasionally washing dishes or glasses.” In addition to these examples listed in the regulation, the Final Rule provides that a non-tipped duty is presumed to be related to a tip-producing occupation if the duty is listed as a task of the tip-producing occupation in the Occupational Information Network (O*NET at www.onetonline.org).
Economic analysis. In addition, the DOL has included in FAQ 12 the projected economic impact of the rule, estimating “a potential transfer of $109 million between employees, as tip pools expand from front-of-the-house employees alone to include back-of-the-house employees. Transfers would arise when employers that do not take a tip credit and previously did not have a mandatory tip pool or only had a traditional tip pool institute nontraditional tip pools whereby tipped employees are required to share their tips with employees who do not customarily and regularly receive tips (e.g., janitors, cooks, and dishwashers).”
The DOL goes on to note that “assuming the shared tips are large enough to maintain wage levels for all workers in the tip pool, the Department acknowledges that some employers could potentially offset some of the increase in total compensation received by back-of-the-house workers by reducing the direct wage that they pay those workers (as long as they do not reduce their wage below the applicable minimum wage). The rule may also result in transfers from employers to workers as employers who adopt tip pools containing back-of-the-house workers may not take a tip credit for their front-of-the-house staff and will be required to increase direct or cash wages paid to those employees. The Department also acknowledges the possibility that some transfers could occur as a result of the changes to the regulations involving when an employer may take a tip credit, but the Department is unable to estimate the likelihood or magnitude of these transfers.”
“Clarity and flexibility.” “This final rule provides clarity and flexibility for employers and could increase pay for back-of-the house workers, like cooks and dishwashers, who have been excluded from participating in tip pools in the past,” said Wage and Hour Administrator Cheryl Stanton. “Newly allowed tip sharing may incentivize the inclusion of these previously excluded workers and reduce wage disparities among all workers who contribute to customers’ experience.”
Not yet published in Federal Register. The DOL published the 148-page Final Rule: Tip Regulations under the FLSA, as well as an Appendix: Data Tables and Regression Results, on December 22, prior to the official publication of the rule in the Federal Register, as has become its common practice. The final rule has been submitted to the Office of the Federal Register (OFR) for publication, and is currently pending placement on public inspection at the OFR and publication in the Federal Register. This version of the final rule may vary slightly from the published document if minor technical or formatting changes are made during the OFR review process. Only the version published in the Federal Register is the official final rule.
The final rule is effective 60 days after its publication in the Federal Register. More information about the rule is available at the Wage and Hour Division’s Tipped Employee Regulations page.
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