FLSA/Wages, News

Spending Bill’s Tip-Pooling Provision Opens Options for Employers

Employers of tipped employees have new options under a provision of the $1.3 trillion spending bill President Donald Trump signed on March 23, but a final rule from the U.S. Department of Labor (DOL) concerning tip pooling is yet to come.tips

Under provisions included in the spending bill, employers may require their tipped employees to contribute to a tip pool to be shared with nontipped employees but only if all employees are paid the full minimum wage, not just the tipped minimum wage.

The federal minimum is $7.25 an hour, but employers can pay a tipped minimum as low as $2.13 an hour as long as a worker’s tips bring the pay up to at least the full minimum. Employers in states and cities that have minimum wages higher than the federal level must pay the minimums required in those jurisdictions. A handful of states require all workers, including tipped workers, to receive the full minimum wage.

Old and New Tip-Pool Rules

The provisions in the spending bill, which will become part of a new final rule from the DOL, represent a change from the old regulation on tip pools. That regulation, put out in 2011, requires that pooled tips be distributed only to tipped employees, such as restaurant servers. Nontipped employees, such as cooks and dishwashers, can’t be paid out of tip pools and therefore have to be paid at least the full minimum wage.

In December 2017, the DOL proposed a regulation to change the Obama-era rule so that employers would be able to distribute pooled tips to nontipped workers as well as tipped workers. That proposed rule ran into opposition from critics, who claimed it would have allowed employers to use workers’ tips to subsidize nontipped employees’ wages and even would have allowed owners to pocket money from the tip pool. The provision in the newly signed law allows money from tip pools to be shared with nontipped employees but prohibits owners, managers, and supervisors from receiving any of the tip pool.

Under the new law, employers that pay a tipped minimum wage still have to share any tip pool only with tipped employees, just like under the 2011 regulation. But if no tip credit is taken, employers can require that tips be shared with the nontipped back-of-house workers, “which is a complete departure from the Obama-era regulation that said tips always belong to the workers who earn them,” says James P. Reidy, an attorney with Sheehan Phinney Bass & Green PA in Manchester, New Hampshire, and an editor of New Hampshire Employment Law Letter.

Reidy says the provision in the spending bill is a win for employee advocates since it ensures that tips will remain in tipped employees’ hands. “It’s also a partial win for the Department of Labor, and Secretary [Alexander] Acosta in particular, as it will distract from the criticism levied in recent weeks over the attempt to hide research that managers would skim $640 million from workers’ tips each year if the DOL’s proposed rule was enacted,” he says.

Employer Considerations

The new law means employers wanting to use a tip pool have to look at how they pay their tipped and nontipped workers. Reidy says employers deciding to use tip pooling first must make sure they’re paying every employee at least the full minimum wage, but they also must carefully think about who can participate in the pool. The new law says managers and supervisors can’t receive pay out of a tip pool, but it doesn’t define “manager” and “supervisor.” That may lead to litigation, he says.

“For example, should a low-level supervisor who customarily receives tips, such as a head waiter or shift lead, be allowed to participate? Unfortunately, that’s not a question we can answer right now,” Reidy says.

Employers also should consider the potential impact on workforce morale, Reidy says. If tipped front-of-house employees resent tip pools that benefit nontipped back-of-house employees, customer service may suffer, and employers may have a harder time retaining talent if surrounding employers decide not to make use of the new law, he says.

Jason A. Culotta, an attorney with Jones Walker LLP in New Orleans and a contributor to Louisiana Employment Law Letter, agrees that employee morale needs to be considered when deciding whether to use tip pools, and he’s not expecting drastic change soon, especially in restaurant cities such as New Orleans, where waiters at leading restaurants have built long careers waiting tables and “earn more in tips per year than some professionals. Those waiters won’t want change and will likely fight it.”

David S. Fortney of Fortney & Scott, LLC, in Washington, D.C., agrees that requiring employers to pay a full minimum wage to tipped employees if they want to use tip pooling may have a chilling effect on an employer’s willingness to use tip pools.

Unusual Process

Fortney, who is also an editor of Federal Employment Law Insider, points out the unusual route the tip-pool regulation is taking. Under the normal rulemaking process, a rule is proposed, it goes out for a comment period, and then it is finalized and goes into effect. This time, Congress stepped in in the middle of the process and declared what the rule would be.

Even though provisions in the spending bill cover how tip pools can be used, the DOL still will have to finalize a regulation. Fortney says the original schedule called for the rule to be out later this year, and he doesn’t know whether that timetable is still on track.

Tammy Binford writes and edits news alerts and newsletter articles on labor and employment law topics for BLR web and print publications.