Tip-Pooling Rules Clarified Under Amended FLSA

The rules regarding tip pooling have been bogged down in litigation since 2011, when regulations were issued regarding tip ownership and tip pooling between hospitality industry employees who customarily receive tips (e.g. servers, bartenders, bellhops) and those who do not (e.g. cooks, dishwashers, janitors).  In addition, federal court decisions were inconsistent regarding whether employers who paid federal minimum wage to tipped employees could distribute tips to non-tipped employees.

The recently passed federal budget bill has provided clarity by amending the Fair Labor Standards Act (FLSA).  The bill provided that tips can be pooled between the tipped and non-tipped groups where the employer does not take a tip credit—that is, where the employer pays full minimum wage to all employees.  Since the rule has been eliminated entirely, court decisions interpreting it are now irrelevant.

A little background is in order on the tip credit.  The FLSA has a tip credit provision that allows employers to pay less than minimum wage to tipped employees, on the condition that those employees receive enough tips to bring their hourly rate up to minimum wage.  Employers can claim credit for the tips employees receive directly, as well as those received via a tip pool. 

The amended portion of the FLSA, while allowing for tip pooling between front and back of house employees if no tip credit is taken, clearly states that tips cannot be shared with managers or supervisors.  To determine if someone is a manager or supervisor for the purpose of the tip-pooling statute, employers should apply the White Collar Executive duties test below.  An employee is only disallowed from sharing in tips if all of the following are true:

1. The employee’s primary duty is the management of an enterprise or a customarily recognized department or subdivision of the enterprise; and
2. They customarily and regularly direct the work of two or more full-time employees (or the equivalent, e.g., four 20-hour per week employees); and
3. They have the authority to hire, fire, or promote other employees or effectively recommend similar actions.

Managers and supervisors who violate these rules are subject to penalties up to $1,100 for each violation, in addition to being liable to the employee or employees affected for all tips unlawfully kept.  This is a significant departure from previous remedies available under the FLSA, which only permitted the recovery of the difference between the minimum wage ($7.25 per hour) and the amount paid as the “tip credit” wage (e.g. currently $2.13 in Georgia).

Given the specificity of the test, a fair number of workers who operate in a supervisory capacity on an occasional basis, such as lead waiters or lead bartenders, or while performing their own customer service tasks, will likely still be eligible to share in tips.

Employers who do take the tip credit are still prohibited from enforcing any tip-pooling system that shares tips with employees who do not customarily receive tips.

For more information on this and other labor law rules, contact the experts at our HR Support Center, who contributed to this post.