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DOL proposes to rescind 2011 tip-pooling rule

By Lisa Milam-Perez, J.D.

The Department of Labor intends to rescind a 2011 regulation that prohibited restaurants and other service-industry employers from requiring tipped employees to share their tips with non-tipped coworkers, even when the employer does not take a tip credit to satisfy a portion of the federal minimum wage and instead pays its tipped employees the full hourly rate of $7.25. The agency issued a formal notice of proposed rulemaking (NPRM) in the December 5 Federal Register, followed by a 30-day comment period.

Section 203(m) of the FLSA requires that tipped employees who are paid a tip credit rate of $2.13 per hour must retain all of their tips, except for tips that are shared as part of a mandatory tip-pooling arrangement. There are specific requirements as to what constitutes a valid tip-pooling arrangement; most notably, a tip pool can only include workers who “customarily and regularly receive tips” (for example, in the restaurant industry, waiters and bartenders) and it prohibits the sharing of tips with “back of the house” employees who do not customarily earn tips (such as cooks and dishwashers).

Obama-era rule. In 2011, the DOL issued a rule extending this requirement to employers that do not avail themselves of the tip credit and pay their tipped workers the full hourly minimum wage, even though the language of the FLSA itself does not provide for such a restriction unless the tip credit is taken. That meant employers could not use mandatory tip pools even if they pay tipped workers the full $7.25 an hour minimum wage, or better.

The DOL’s current proposed rule would rescind the 2011 changes, allowing these employers to utilize mandatory tip-pools that include employees who do not traditionally receive direct tips. Specifically, according to the DOL’s fact sheet, the proposed rule would revise 29 CFR §§ 531.52, 531.54, and 531.59, provisions that impose restrictions on employers that pay a direct cash wage of at least the full federal minimum wage and do not claim a tip credit under the FLSA. The current proposal applies only to employers that pay a full minimum wage and do not take a tip credit.

The proposed rule would not change the rules as applied to employers that do take the tip credit. If a tip credit is taken, then the sharing of tips between tipped and non-tipped employees is still prohibited.

The NPRM does not propose any new requirements or restrictions on employers, according to the DOL.

Circuit split. The Obama-era tip rule caused much consternation in the restaurant industry, in particular, and sparked a considerable amount of litigation challenging both the substance of the provision as well as the DOL’s authority to promulgate it with respect to employers that do not use the tip credit, in light of the clear language of the FLSA, which places restrictions on the use of tips only as to employers that take the statutory tip credit.

Most notably, in Oregon Restaurant and Lodging Association v. Perez, a divided Ninth Circuit reversed a federal district court’s order invalidating the 2011 revisions, with the majority reasoning that the FLSA’s “clear silence as to employers who do not take a tip credit has left room for the DOL to promulgate the 2011 rule.” Subsequently, the full Ninth Circuit denied a petition for en banc rehearing of this 2016 decision, with 10 judges dissenting from the denial. In its latest NPRM, the DOL noted the strength of the dissent’s objections. The National Restaurant Association has filed a petition for certiorari in the Supreme Court (National Restaurant Association v. Department of Labor, No. 16-920), one of two certiorari petitions currently pending in the Supreme Court challenging the 2011 DOL regulation. And most recently, in Marlow v. The New Food Guy, Inc. —a June 2017 case that did not involve tip-pooling but rather, challenged an employer’s right to retain an employee’s gratuities—the Tenth Circuit held the DOL overstepped its authority when it implemented the 2011 rule categorically prohibiting employers from retaining tips regardless of whether they take the tip credit.

Current rulemaking. In its NPRM, the DOL said it is now “seriously concerned that it incorrectly construed the statute in promulgating the tip credit regulations that apply to such employers.” The agency first indicated that it planned to revoke the 2011 rule in its July semi-annual agenda; on July 20, the DOL issued a non-enforcement policy noting it would no longer enforce the provision against employers that pay tipped workers the full minimum wage, pending completion of this rulemaking. The DOL also explained in its NPRM that, since 2011, there have been numerous state law changes requiring employers to pay their tipped employees a direct cash wage of at least the federal minimum wage rate; these changes have left even greater numbers of service industry employers unable to claim a tip credit but nonetheless subjected to the tip-pool restrictions. The agency cited these developments in asserting the need for its current rulemaking.

“The proposed rule would allow employers to distribute customer tips to larger tip pools that include non-tipped workers, such as cooks and dishwashers,” the DOL said. “This would likely increase the earnings of those employees who are newly added to the tip pool and further incentivize them to provide good customer service. The proposed rule would additionally provide employers greater flexibility in determining pay practices for tipped and non-tipped workers. It also may allow for a reduction in wage disparities among employees who all contribute to the customers’ experience.”

The new rule also would make it clear that when employers do not claim a tip credit, and pay a full hourly wage that satisfies the statutory minimum, “the treatment and disposition of tips is a matter of agreement between the employer and employees or of state law.”

Comment request. The 30-day comment period will end January 4, 2018. Comments may be submitted at www.regulations.gov. Written comments, with supporting data, if possible, are to be directed to Melissa Smith, Director of the Division of Regulations, Legislation, and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S-3502, 200 Constitution Avenue, NW, Washington, DC 20210. The DOL encourages interested persons to submit their comments electronically. Submit only one copy of the comment, by only one method (e.g., persons submitting comments electronically are encouraged not to submit paper copies).

All comment submissions must include the agency name and Regulatory Information Number (RIN 1235-AA21) for this NPRM. The DOL requests that no business proprietary information, copyrighted information, or personally identifiable information be submitted. Comments received will become a matter of public record and will be posted publicly, without change, including any personal information provided.