After a lengthy and contentious rulemaking process, the Department of Labor (“DOL”) published its final rule revising its tipped-employee regulations under the Fair Labor Standards Act (“FLSA”) last week. The new rules take effect 60 days from their publication in the Federal Register, which will occur shortly. Here is a summary of the new rules’ most critical provisions:
Tip Credit Provisions. Several provisions of the new rules address the FLSA’s tip credit provision, which allows employers to pay employees a base wage that is less than the federal minimum so long as the sum of employees’ cash wages and retained tips exceed the required threshold. For example, the rules state that employers that take the FLSA tip credit may not include back-of-the-house employees in their tip pools and address the common scenario in which an employee works in dual jobs (one tip-qualifying, the other non-tip-qualifying) for the same employer. Oregon and Washington do not allow a tip credit against employers’ minimum wage obligations, so these aspects of the new rules are of limited use for Oregon and Washington employers.
“Back of The House” Employees May Participate In Tip Pools. The new rules explicitly permit including “back of the house” employees (cooks and dishwashers, for example) in tip pools alongside “front of the house” employees (waiters, bartenders, and hosts, for example) in mandatory tip pools so long as the employer pays the employees at least the federal minimum wage without relying on the FLSA’s tip credit. In other words, all restaurant employees (except managers and supervisors) can lawfully be paid the minimum wage plus their share of the pooled tips. Although the DOL had previously stated as much in enforcement guidance interpreting the Consolidated Appropriations Act of 2018 (“CAA”), the law passed by Congress that changed many of the FLSA’s tip provisions, the new rules carry the force of law and are a more definitive resource for employers.
Owners, Managers and Supervisors Can Never Participate In Tip Pools. Owners, managers and supervisors can never participate in tip pools, regardless of whether the employer takes the FLSA tip credit. As it did in its earlier guidance materials interpreting the CAA, the DOL states in the new rules that it will rely on the “duties” test from the executive exemption to determine whether an employee qualifies as a manager or supervisor. Generally speaking, an employee qualifies for the executive exemption if he or she manages the enterprise or a particular division/department, customarily directs the work of two or more other employees, and has the authority to hire or fire employees or effectively recommend that same.
New Time-of-Payment and Recordkeeping Requirements. Employers generally must distribute tips no later than the regular payday for the work week in which the tips were received. If that is not possible, the employer must distribute the tips as soon as practicable. In addition, the new rules state that employers that operate a tip pool must maintain weekly or monthly reports of tips received by their employees. (Note: the rules specify that employees can use IRS Form 4070, available here). This is in addition to the normal recordkeeping requirements for non-exempt employees, e.g., hours worked, rates of pay, dates of pay periods, etc. Finally, employers must also place a notation on the payroll records of each employee who receives tips from the pool.
Please feel free to reach out to any of our attorneys if you have any questions about the new rules.