Allan Holmes: “The New Proposed Tipping Regulation: What It Does – and Does Not – Propose”.

The New Proposed Tipping Regulation:  What It Does – and Does Not – Propose.

© 2018 Allan R. Holmes, Gibbs & Holmes, www.gibbs-holmes.com

On December 5, 2017, the Wage & Hour Division of the Department of Labor proposed a regulation intended to address what employers who do not use the tip credit wage may do with their employees’ tips. The comment period has ended, and the date for promulgation for the final regulation has not yet been set.  Significant modifications to the final regulation are possible as the proposed regulation has generated a very large number of comments.

As virtually every restaurant employer knows, the federal Fair Labor Standards Act (FLSA) has a provision – § 3(m) of the Act – which permits use of the “tip credit wage”. An employer can pay a tipped employee a cash wage which is below the federal minimum wage, and designate a portion of the employee’s tips to cover the difference between the cash wage and the minimum wage.  Under the current regulation, the cash wage can be as low as $2.13 per hour, and thus, as much as $5.12 per hour can be designated from the employee’s tips to pay the current $7.25 per hour minimum wage.

Of course, use of the tip credit wage requires compliance with related regulatory provisions:  e.g., a “tipped” employee, sufficient tips to allow the designation, proper notice, and so forth.  For purposes of this brief article, I’m omitting any detailed discussion of these related matters and focusing only on the single regulatory change that is being proposed.  I’m also omitting any discussion of the widespread litigation that serves as a backdrop to the proposed rule.  Suffice it to say, the litigation has resulted in inconsistent and unpredictable decisions across much of the United States.  Finally, in this brief memo, I’m not going to discuss various State law constraints on the use of tips and the tip credit.

The relevant current § 3(m) regulation provides that tipped employees retain all tips, except for those tips distributed through a tip pool limited to customarily and regularly tipped employees, regardless whether the employees work for an employer that takes a tip credit.

Under the proposed regulation, an employer that does not take a tip credit, i.e. an employer who pays a cash wage of no less than the minimum wage, would no longer be required to allow its employees to retain all their tips, nor would such an employer be required to limit its tip pool to customarily and regularly tipped employees.

Thus, under the new regulation, such an employer could require its tipped employees to share their tips with back of the house employees as the tip pool would no longer be limited to “customarily and regularly tipped” employees.

Also, under the new regulation, the provision of the former regulation – that tipped employees must retain all tips – would no longer apply to an employer who pays a cash wage of no less than the minimum wage.  However, this would not necessarily free these tips up for the employer’s grab. The comments accompanying the proposed regulation suggest that § 3(m) of the FLSA could continue to restrain employers who tried to take employees’ tips directly.

A section of the Notice of Proposed Rulemaking in which the Wage & Hour Division discusses its proposal contains the following explanation:

If an employer takes a tip credit against its wage obligations, § 3(m) applies, along with its attendant protections that restrict the employer’s use of tips received by its employees.  Where an employer has paid a direct cash wage of at least the full Federal minimum wage and does not take the employee tips directly, a strong argument exists that the statutory protections of section 3(m) do not apply.14

14If an employer pays its tipped employees a direct cash wage of at least the full Federal minimum wage but takes its employees’ tips to satisfy the entirety of its minimum wage obligation, there is a question as to whether the employer is circumventing the protections of section 3(m) because it is utilizing its employees’ tips toward its minimum wage obligations to a greater extent than permitted under the statute for employers that take the tip credit.  The Department will consider whether additional guidance on this circumvention issue should be issued in the future.

Federal Register / Vol. 82, No. 232, p. 57402. (emphasis mine).

Thus, even if the proposed regulation goes into effect, an employer who pays the $7.25 cash wage out of pocket, may still run afoul of the FLSA if it tries to reimburse itself with the employee’s tips.  Given the epidemic of private lawyer FLSA lawsuits, and the sympathy courts show for them, it would be the bold employer who attempts this approach in the absence of additional guidance.

What about the employer who pays the $7.25 cash wage out of pocket, but only takes tips directly in an amount equal to, or less than, the amount permitted by the § 3(m)?  In such a case, the employer is not “utilizing its employees’ tips toward its minimum wage obligation to a greater extent than permitted under the statute for employers that take the tip credit.”   However, it would be argued that such an employer is circumventing the statutory requirements for the use of the tip credit.  Again, only the boldest employers would attempt such an approach.

These concerns might also lead to problems with tip pools which require tip outs to various types of managers.  Under the FLSA, “‘Employer’ includes any person acting directly or indirectly in the interest of an employer in relation to an employee …” 29 U.S.C. § 203(d).  Consequently, while the proposed regulation would eliminate the requirement that tip pool participants be limited to “customarily and regularly tipped employees”, this should not be read as a green light for the “employer’s” participation in the pool through its agent. There are decisions which recognize that the employer’s participation in a tip pool – through an agent – is barred even if the agent is someone who would otherwise be customarily and regularly tipped.  The theory underlying these cases is that the employer is never permitted to take tips directly, and the employer’s agent is considered the employer.  These cases link the employer’s exclusion from the tip pool to the employer’s use of the tip credit wage.  But, it is possible, even after the proposed regulation goes into effect, that courts might find that direct taking through an agent is but another attempt to circumvent the statutory requirements of § 3(m).  The argument would be that this is just another example of the employer obtaining reimbursement of its out of pocket payment of the $7.25 cash wage.

If these concerns are valid, the only practical effect of the new regulation would be its allowance of the inclusion of back of the house employees in the employer’s tip pool – IF the employer is prepared to go out of pocket (and stay out of pocket) for the amount of cash it would otherwise designate from tips when using the tip credit wage.

Recently, the Wage & Hour Division announced its return to the practice of providing employers with advisory opinions.  Unless administrative guidance accompanies the finalization of the proposed regulation, employers who have designs on directly taking employees’ tips would do well to consider seeking Wage and Hour Division advice as well as the advice of legal counsel before implementing such a practice.

Set out below are the relevant portions of the current regulation as they would be amended by the proposed regulatory modifications:

  • 531.52 General characteristics of “tips.”

A tip is a sum presented by a customer as a gift or gratuity in recognition of some service performed for him. It is to be distinguished from payment of a charge, if any, made for the service. Whether a tip is to be given, and its amount, are matters determined solely by the customer, who has the right to determine who shall be the recipient of the gratuity. An employer that takes a tip credit is prohibited from using an employee’s tips for any reason other than that which is statutorily permitted in section 3(m): As a credit against its minimum wage obligations to the employee, or in furtherance of a valid tip pool. Only tips actually received by an employee as money belonging to the employee may be counted in determining whether the person is a “tipped employee” within the meaning of the Act and in applying the provisions of section 3(m) which govern wage credits for tips.

  • 531.54 Tip pooling.

Where employees practice tip splitting, as where waiters give a portion of their tips to the busboys, both the amounts retained by the waiters and those given the busboys are considered tips of the individuals who retain them, in applying the provisions of section 3(m) and 3(t). Similarly, where an accounting is made to an employer for his information only or in furtherance of a pooling arrangement whereby the employer redistributes the tips to the employees upon some basis to which they have mutually agreed among themselves, the amounts received and retained by each individual as his own are counted as his tips for purposes of the Act. Section 3(m) does not impose a maximum contribution percentage on valid mandatory tip pools, which can only include those employees who customarily and regularly receive tips. However, an employer that takes a tip credit must notify its employees of any required tip pool contribution amount, may only take a tip credit for the amount of tips each employee ultimately receives, and may not retain any of the employees’ tips for any other purpose.

  • 531.59 The tip wage credit.

(a)In determining compliance with the wage payment requirements of the Act, under the provisions of section 3(m) the amount paid to a tipped employee by an employer is increased on account of tips by an amount equal to the formula set forth in the statute (minimum wage required by section 6(a)(1) of the Act minus $ 2.13), provided that the employer satisfies all the requirements of section 3(m). This tip credit is in addition to any credit for board, lodging, or other facilities which may be allowable under section 3(m).

(b)As indicated in § 531.51, the tip credit may be taken only for hours worked by the employee in an occupation in which the employee qualifies as a “tipped employee.” Pursuant to section 3(m), an employer is not eligible to take the tip credit unless it has informed its tipped employees in advance of the employer’s use of the tip credit of the provisions of section 3(m) of the Act, i.e.: The amount of the cash wage that is to be paid to the tipped employee by the employer; the additional amount by which the wages of the tipped employee are increased on account of the tip credit claimed by the employer, which amount may not exceed the value of the tips actually received by the employee; that all tips received by the tipped employee must be retained by the employee except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips; and that the tip credit shall not apply to any employee who has not been informed of these requirements in this section. The credit allowed on account of tips may be less than that permitted by statute (minimum wage required by section 6(a)(1) minus $ 2.13); it cannot be more. In order for the employer to claim the maximum tip credit, the employer must demonstrate that the employee received at least that amount in actual tips. If the employee received less than the maximum tip credit amount in tips, the employer is required to pay the balance so that the employee receives at least the minimum wage with the defined combination of wages and tips. With the exception of tips contributed to a valid tip pool as described in § 531.54, the tip credit provisions of section 3(m) also require employers that take a tip credit to permit employees to retain all tips received by the employee.