{"id":35,"date":"2018-02-06T15:48:14","date_gmt":"2018-02-06T15:48:14","guid":{"rendered":"http:\/\/www.gibbs-holmes.com\/blog\/?p=35"},"modified":"2018-03-12T20:26:20","modified_gmt":"2018-03-12T20:26:20","slug":"allan-holmes-new-proposed-tipping-regulation-not-propose","status":"publish","type":"post","link":"https:\/\/www.gibbs-holmes.com\/blog\/2018\/02\/06\/allan-holmes-new-proposed-tipping-regulation-not-propose\/","title":{"rendered":"Allan Holmes: “The New Proposed Tipping Regulation: What It Does \u2013 and Does Not \u2013 Propose”."},"content":{"rendered":"

The New Proposed Tipping Regulation:\u00a0 What It Does \u2013 and Does Not \u2013 Propose. <\/strong><\/p>\n

\u00a9 2018 Allan R. Holmes, Gibbs & Holmes, www.gibbs-holmes.com<\/p>\n

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\u2019 tips. The comment period has ended, and the date for promulgation for the final regulation has not yet been set.\u00a0 Significant modifications to the final regulation are possible as the proposed regulation has generated a very large number of comments.<\/p>\n

As virtually every restaurant employer knows, the federal Fair Labor Standards Act (FLSA) has a provision – \u00a7 3(m) of the Act – which permits use of the \u201ctip credit wage\u201d. An employer can pay a tipped employee a cash wage which is below the federal minimum wage, and designate a portion of the employee\u2019s tips to cover the difference between the cash wage and the minimum wage.\u00a0 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\u2019s tips to pay the current $7.25 per hour minimum wage.<\/p>\n

Of course, use of the tip credit wage requires compliance with related regulatory provisions: \u00a0e.g.,<\/em> a \u201ctipped\u201d employee, sufficient tips to allow the designation, proper notice, and so forth.\u00a0 For purposes of this brief article, I\u2019m omitting any detailed discussion of these related matters and focusing only on the single regulatory change that is being proposed.\u00a0 I\u2019m also omitting any discussion of the widespread litigation that serves as a backdrop to the proposed rule.\u00a0 Suffice it to say, the litigation has resulted in inconsistent and unpredictable decisions across much of the United States.\u00a0 Finally, in this brief memo, I\u2019m not going to discuss various State law constraints on the use of tips and the tip credit.<\/p>\n

The relevant current \u00a7 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.<\/p>\n

Under the proposed regulation, an employer that does not take a tip credit, i.e.<\/em> 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.<\/p>\n

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 \u201ccustomarily and regularly tipped\u201d employees.<\/p>\n

Also, under the new regulation, the provision of the former regulation \u2013 that tipped employees must retain all tips \u2013 would no longer apply to an employer who pays a cash wage of no less than the minimum wage.\u00a0 However, this would not necessarily free these tips up for the employer\u2019s grab. The comments accompanying the proposed regulation suggest that \u00a7 3(m) of the FLSA could continue to restrain employers who tried to take employees\u2019 tips directly.<\/p>\n

A section of the Notice of Proposed Rulemaking in which the Wage & Hour Division discusses its proposal contains the following explanation:<\/p>\n

If an employer takes a tip credit against its wage obligations, \u00a7 3(m) applies, along with its attendant protections that restrict the employer\u2019s use of tips received by its employees.\u00a0 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<\/em>, a strong argument exists that the statutory protections of section 3(m) do not apply.14<\/p>\n

14If an employer pays its tipped employees a direct cash wage of at least the full Federal minimum wage but takes its employees\u2019 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\u2019 tips toward its minimum wage obligations to a greater extent than permitted under the statute for employers that take the tip credit.<\/em>\u00a0 The Department will consider whether additional guidance on this circumvention issue should be issued in the future.<\/p>\n

Federal Register \/ Vol. 82, No. 232, p. 57402. (emphasis mine).<\/p>\n

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\u2019s tips.\u00a0 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.<\/p>\n

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 \u00a7 3(m)?\u00a0 In such a case, the employer is not \u201cutilizing its employees\u2019 tips toward its minimum wage obligation to a greater extent than permitted under the statute for employers that take the tip credit.\u201d \u00a0\u00a0However, it would be argued that such an employer is circumventing the statutory requirements for the use of the tip credit.\u00a0 Again, only the boldest employers would attempt such an approach.<\/p>\n

These concerns might also lead to problems with tip pools which require tip outs to various types of managers.\u00a0 Under the FLSA, \u201c\u2018Employer\u2019 includes any person acting directly or indirectly in the interest of an employer in relation to an employee \u2026\u201d 29 U.S.C. \u00a7 203(d).\u00a0 Consequently, while the proposed regulation would eliminate the requirement that tip pool participants be limited to \u201ccustomarily and regularly tipped employees\u201d, this should not be read as a green light for the \u201cemployer\u2019s\u201d participation in the pool through its agent. There are decisions which recognize that the employer\u2019s participation in a tip pool \u2013 through an agent \u2013 is barred even if the agent is someone who would otherwise be customarily and regularly tipped.\u00a0 The theory underlying these cases is that the employer is never permitted to take tips directly, and the employer\u2019s agent is considered the employer.\u00a0 These cases link the employer\u2019s exclusion from the tip pool to the employer\u2019s use of the tip credit wage.\u00a0 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 \u00a7 3(m).\u00a0 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.<\/p>\n

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\u2019s 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.<\/p>\n

Recently, the Wage & Hour Division announced its return to the practice of providing employers with advisory opinions.\u00a0 Unless administrative guidance accompanies the finalization of the proposed regulation, employers who have designs on directly taking employees\u2019 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.<\/p>\n

Set out below are the relevant portions of the current regulation as they would be amended by the proposed regulatory modifications:<\/p>\n