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The U.S. Department of Labor (DOL) this week announced the timing for implementation of its much-awaited Final Rule controlling which employees can participate in a mandatory tip pool and changes to the “80/20” rule. The Final Rule, which revises the Fair Labor Standards Act’s (FLSA) tip regulations and implements an earlier statutory amendment concerning the tip credit and mandatory tip pools, has faced a cloud of uncertainty since its publication on Dec. 30, 2020, as a result of the change in administrations. The DOL proposed to bifurcate implementation of its Final Rule concerning compensation for tipped employees, allowing certain provisions of the Final Rule to take effect on April 30, 2021, while delaying and revising other provisions, subject to public comment.
The DOL’s <a href="https://www.dol.gov/newsroom/releases/whd/whd20210323">latest announcement</a>, issued on March 23, 2021, resolves some of this uncertainty, outlines new changes for employers beginning next month and provides interested stakeholders with an opportunity to submit public comments regarding portions of the Final Rule that remain under review.
Tip Credits and Tip Pooling Under the FLSA
As background, the FLSA allows employers the option of paying tipped employees a reduced hourly cash (or direct) wage if the cash wage plus tips actually received by an employee satisfy the federal minimum wage. This so-called tip credit is the amount of employee tips employers are permitted to apply toward their minimum wage obligations. Currently, the FLSA’s maximum allowable tip credit is $5.12 an hour, which is the difference between the current minimum wage of $7.25 an hour and the required cash wage of $2.13 an hour. (Note, however, that many states have enacted higher minimum wage rates, including for tipped employees, and some states do not allow tip credits at all.)
The FLSA provides that an employer may take a tip credit only for “tipped employees” and only if, among other things, its tipped employees retain all their tips. This requirement does not, however, 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.”
Regulatory Background
Despite this, the DOL has historically left unsettled the question of whether restrictions on tip pooling and tip retention applied only to employers claiming a tip credit.
In 2011, for example, the DOL amended its tip credit regulations to prohibit employers from using employee tips for any reason other than (1) as a credit against the employer’s minimum wage obligations to the employee or (2) to further a valid tip pool that includes only tipped employees. Notably, the DOL’s regulatory revisions imposed an express limitation on the use of employee tips, extending the tip pooling restrictions of Section 203(m) to all employers, not just those taking a tip credit. Indeed, even in the absence of a tip credit, the regulations made clear that an employer could not “take the employee’s tips to further an invalid tip pool, such as one that includes employees who do not customarily and regularly receive tips, like cooks, janitors, or dishwashers.”
In 2017, however, the DOL announced a proposal to rescind regulatory restrictions on employers that did not take a tip credit. In conjunction with this announcement, the DOL also issued a nationwide nonenforcement policy stating that it would not enforce employee tip-retention regulations against employers that did not take a tip credit and paid tipped employees cash wages of at least the federal minimum wage. Under this revised proposal, employers would pay tipped employees cash wages equal to the minimum wage while pocketing any excess tips, also known as tip skimming. Before this proposal could take effect, however, Congress, in March 2018, passed the Consolidated Appropriations Act (the CAA) as part of a budget compromise. In effect, the CAA amended the FLSA by reversing the DOL’s proposal to not restrict employers that did not use the tip credit in favor of a more balanced approach.
The CAA
Under the CAA, employers are prohibited from keeping tips received by their employees, regardless of whether the employer takes a tip credit. In addition, employers are prohibited from allowing managers or supervisors to keep any portion of employees’ tips. The CAA, however, does 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 still ensure that a mandatory “traditional” tip pool includes only workers who customarily and regularly receive tips. This means, for example, employees such as cooks or dishwashers cannot be part of such a tip pool. However, the CAA completely eliminated regulatory restrictions on employers’ ability to require tip pooling when they do not take a tip credit; those employers may now implement mandatory, “nontraditional” tip pools, which may include employees such as cooks and dishwashers.
December 2020 Final Rule
On Dec. 30, 2020, the DOL published its Final Rule “Tip Regulations Under the FLSA.” The Final Rule conforms to the FLSA regulations to the CAA’s tip pooling and sharing provisions. In relevant part, under the Final Rule:
<ul>
<li>An employer may exert control over tips only to (1) promptly distribute tips to the covered employee/employees; (2) require employees to share tips with other eligible employees; or (3) where the employer facilitates tip pooling by collecting and redistributing employees’ tips, promptly distribute tips to eligible employees in a tip pool.</li>
<li>An employer may mandate a nontraditional tip pool that includes tipped employees (e.g., servers) and non-tipped employees (e.g., cooks), provided that (1) the pool does not include any employers, managers or supervisors and (2) the employer does not pay the tipped employees using a tip credit but instead pays them the full minimum wage without applying any tip credit.</li>
<li>Where an employee performs tipped and non-tipped duties (i.e., dual jobs), the employer may take a tip credit for non-tipped duties performed, so long as (1) the duties are related to the employee’s tipped occupation and (2) the related duties are performed either contemporaneously with the tip-producing activities or “within a reasonable time immediately before or after” the tipped activities. (Note that the effect of this provision is to eliminate the widely used 80/20 rule.)</li>
<li>Employers will be required to (1) identify on their payroll or other records each employee who receives tips and (2) keep records of the weekly/monthly amount of tips received by each employee.</li>
</ul>
In addition to these changes, the Final Rule incorporates the CAA’s requirements related to civil monetary penalties, including the circumstances under which the DOL can assess penalties for violations.
Implementation and Effect
The Final Rule was originally set to become effective March 1, 2021. On Feb. 24, 2021, however, in response to administrative pressure to provide the Biden administration with additional time to review the pending laws through a regulatory freeze, the DOL announced that it would delay the effective date of the rule until April 30, 2021, “to allow the Department to review issues of law, policy, and fact raised by the rule before it takes effect.” The DOL proposals announced this week represent the next step in that process.
Under the bifurcated approach promulgated by the DOL, several portions of the Final Rule will go into effect on April 30, 2021, including, most significantly:
<ul>
<li>The restriction on employers, including supervisors and managers, keeping tips received by workers, regardless of whether the employer takes the credit.</li>
<li>The ability of employers that do not take tip credits to include non-tipped workers, such as back-of-the-house employees, in nontraditional tip-sharing agreements and, by doing so, boost their earnings.</li>
<li>All tipped employee recordkeeping requirements.</li>
</ul>
As for the remaining provisions of the Final Rule, the DOL has proposed further extending, until Dec. 31, 2021, the effective date of the assessment of civil monetary penalties and the FLSA’s tip credit application to employees who perform dual tasks. The DOL also seeks <a href="https://www.dol.gov/agencies/whd/flsa/tips">public comments</a> on whether to revise the provision addressing “managers and supervisors” who cannot keep employee tips and advice on how the agency can improve, in future rulemaking, the tip rule’s recordkeeping requirements.
The Bottom Line
Employers that rely on tip credits or employ tipped employees should prepare now for the law’s partial implementation effective April 30, 2021. Employers should review and revise their policies and practices applicable to tipped employee wages and compensation, including any tip-sharing agreements impacting non-tipped employees. Additionally, employers should ensure that all financial recordkeeping practices are in line with the law’s new requirements and should plan for periodic audits to avoid increased liability. Employers with employees who perform dual tasks or are otherwise impacted by the delayed provisions of the Final Rule should also continue to track implementation of the remaining provisions, currently set to become effective Dec. 31, 2021, and which remain subject to additional changes.
BakerHostetler’s Labor and Employment Practice Group will continue to monitor the implementation and effectiveness of the December 2020 Final Rule and will provide further updates as they become available. If you have any questions in the meantime, please reach out to David Grant (<a href="mailto:dgrant@bakerlaw.com">dgrant@bakerlaw.com</a>), Caroline Landt (<a href="mailto:clandt@bakerlaw.com">clandt@bakerlaw.com</a>) or Jake Bruner (<a href="mailto:jbruner@bakerlaw.com">jbruner@bakerlaw.com</a>).

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