U.S. Department of Labor Proposes New Rules on Tip Sharing

The U.S. Department of Labor has issued a proposal to change the tip sharing regulations under the Fair Labor Standards Act (FLSA).  Under the proposed rule, workplaces would have the freedom to allow sharing of tips among more employees.  The proposal would help decrease wage disparities between tipped and non-tipped workers – an option that is currently restricted by a rule promulgated in 2011 that has been challenged in a number of courts. 

The Department of Labor’s proposal only applies where employers pay a full minimum wage and do not take a tip credit and allows sharing tips through a tip pool with employees who do not traditionally receive direct tips – such as restaurant cooks and dish washers. These “back of the house” employees contribute to the overall customer experience, but may receive less compensation than their traditionally tipped co-workers.  The proposal would not affect current rules applicable to employers that claim a tip credit under the FLSA. 

The Department of Labor promulgated tip regulations in 2011 that restricted this option. Since 2011, there has been a significant amount of litigation involving the tip pooling and tip retention practices of employers that pay a direct cash wage of at least the federal minimum wage and do not claim a FLSA tip credit.  There has also been litigation directly challenging the Department’s authority to promulgate the provisions of the 2011 regulations that restrict sharing of tips. 

The Department of Labor stated that in the past several years, several states have changed their laws to require employers to pay tipped employees a direct cash wage that is at least the federal minimum wage.  This means that fewer employers can take the FLSA tip credit.  The Department of Labor’s proposed new rule follows these developments, along with serious concerns that it incorrectly construed the statute when promulgating the 2011 regulations. It should be noted that many states like New York and California, have laws that prohibit tips from being shared between back-and-front-of-the-house employees, and that also explicitly prohibit management from sharing in the pot.