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Paul Zimmerman

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Here’s a Tip: Be Mindful of Pending Changes in the Treatment of Gratuities

The U.S. Department of Labor (“USDOL”) has pulled the trigger on its plan to roll back its regulations put in place in 2011 under then-President Barack Obama expressly prohibiting employers from forcing tipped employees to share gratuities with non-tipped staff (the “Obama regulations”). Once finalized, the DOL’s newly proposed rule, widely hailed by employers in the hospitality industry, will permit employers who pay its workers at least the full federal minimum wage to require traditionally tipped employees like waitstaff, captains, bussers, bartenders and runners to share customer tips with so-called “back-of-house” workers – chefs, cooks, dishwashers and porters.

Tip Credits and the FLSA

To better understand the intended shift in the law, a bit of background is helpful:

Under the Fair Labor Standards Act (FLSA), restaurant employers may take a “tip credit” allowing them to pay service-facing employees (those who customarily earn tips) a reduced minimum wage (now $2.13 an hour) as opposed to the full federal minimum wage (now $7.25 an hour), so long as the gratuities they receive bring their wages up to at least $7.25 an hour. Employers are required to pay non-tipped employees (such as those working in the kitchen) the full federal minimum wage out of pocket. Tipped employees take the position gratuities belong only to them and an employer cannot force them to share tips with non-tipped staff, a sentiment supported by the Obama regulations.

However, the DOL’s new rule (subject to any revisions in the wake of public comments) would permit employers who forgo taking a “tip credit” against a tipped employee’s minimum wage (and instead pay all employees the full minimum wage) to require the sharing of tips amongst servers and kitchen staff. Consequently, tips will no longer be considered the property of the tipped employees.

Leveling the Playing Field

Many believe this move by the USDOL under President Trump will help to remedy the climate of “haves” and “have-nots” within the restaurant space. In the wake of steadily climbing menu prices, tipped employees currently can make significantly more than their back-of-house co-employees and vast multiples of what they earned decades ago. In fact, over the years, as servers have prospered, there has been only a meager increase in compensation paid to kitchen workers merely reflecting incremental raises in the minimum wage. By doing away with the Obama regulations, it is argued, the existing income inequality may be leveled, which will allow employers in competitive markets a mechanism to retain excellent back-of-house workers. 

Potential Pitfalls and the Impact of State Law

One concern for employees is that under the new tip-pooling rules, restaurant employers could improperly retain gratuities and not “share the wealth.” That being said, such action would likely result in litigation alleging wage theft and misappropriation of tips, something that could be quite costly for management, both financially and in terms of reputation.

For restaurateurs, the new paradigm presents possible financial difficulties. Because restaurant margins are quite slim, it may be a tough decision for some owners to increase their labor costs by paying customarily tipped employees the full minimum wage, representing a more than $5 per hour, per employee, increase.

Diners are affected too given the lack of transparency that may result from changes to the Obama regulations. Simply stated, how is a customer supposed to know whether or not a restaurant is sharing tips, and to which employees, to reward good service?

Finally, it is important to note that despite any shift in the current federal law, many states and municipalities, New York and California included, have their own laws paralleling (in whole or in part) the Obama regulations (e.g., prohibiting restaurant employers from requiring servers to share tips with kitchen staff, and explicitly forbidding management from receiving gratuities). In locations where state or local law is more restrictive than the federal law, the USDOL’s new rule regarding tip pooling may not make as much (or any) difference to employers.

The Takeaway

The USDOL rule signals a continuing effort by the Trump administration to roll back much of the regulatory framework set into motion in the Obama era. This action is a welcome victory for hospitality employers, but employers should be wary of potential pitfalls of improper implementation of policies and practices to avoid wage and hour troubles.

This blog post is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.