Department of Labor Finalizes Rule Allowing Mandatory Tip Pools
On December 22, 2020, the Department of Labor (DOL) announced its final rule modifying federal regulations regarding compensation for tipped employees.
This new rule follows 2018 federal legislation which amended the Fair Labor Standards Act (FLSA) to prohibit employers from keeping their employees’ tips. The new rule makes it legal for some restaurants to implement mandatory tip pools—and force front-of-house servers and bussers to share their earnings with non-tipped employees.
This rule benefits the restaurant industry because tip pools can help businesses cut down on labor costs. Previously the tip pool was only open to employees who received tips and contributed to the tip pool. Because of tips, a server can take home several times the money that a prep cook or dishwasher earns. Under the new rule, an employer may require tipped employees to share tips with other non-tipped employees, such as cooks and dishwashers in the kitchen. However, under the new rule, the applicable law has not changed in that a shared tip pool cannot include managers or supervisors. The impact of the new rule will likely be felt in larger cities and in fine-dining establishments, where it is not unusual for servers to bring home six-figure earnings, largely due to tips.
The new rule provides employers with flexibility to include traditionally non-tipped employees in a tip pool – but only if the employer does not take the “tip credit.” This allows employers to more effectively recruit and retain traditionally non-tipped employees as these employees will now be able to potentially receive greater wages. Additionally, the new rule provides employers with further guidance on what “related” tasks an employee may perform without disqualifying employers’ utilization of the “tip credit.”
The rule, which goes into effect in February, does not apply to every restaurant—only those where employers do not take a tip credit to pay their front-of-house employees a subminimum wage, and where state law does not prohibit tip pools. However, it is important to keep in mind that wage and hour requirements are a product of both federal and state legislation. State laws and rules may be more restrictive than federal laws and rules. Additionally, with the upcoming change in leadership at the federal level (from a Trump administration to a Biden administration) it is likely that wage and hour regulations will be amended. Employers should be prepared for further changes.