Wage and Hour Division (WHD)
Frequently Asked Questions
- What does the Fair Labor Standards Act (FLSA) require employers to pay tipped employees?
- Does the FLSA permit mandatory tip pools?
- What would this proposed rule do?
- Why is the Department proposing this rule?
- What are the benefits of the proposed rule?
- Would this proposed rule require employers to make changes to their pay practices?
- What if a state or city has its own laws addressing tipped employees?
- What is the projected economic impact of this proposed rule?
- What is the estimated number of employees affected by the proposed rule?
- What are the potential costs or cost savings of the proposed rule?
- How can I submit a comment in response to this proposed rule?
1. What does the Fair Labor Standards Act (FLSA) require employers to pay tipped employees?
The FLSA requires employers to pay all covered non-exempt employees at least the federal minimum wage of $7.25 per hour and overtime pay at a rate not less than time and one-half their regular rates of pay for all hours worked over 40 in a workweek. Section 3(m) of the FLSA, however, permits employers to credit at least some of the tips that a tipped employee receives toward their minimum wage obligation. Specifically, provided certain requirements are met, an employer may claim a “tip credit” toward its minimum wage obligation on account of tips received by a tipped employee equal to the difference between the cash wages it pays the employee (which must be at least $2.13 per hour) and the $7.25 per hour Federal minimum wage.
Employers electing to use the FLSA tip credit provision must ensure that tipped employees receive at least the minimum wage when direct (or cash) wages and the tip credit amount are combined. If an employee’s tips combined with the employer’s direct (or cash) wages of at least $2.13 per hour do not equal the Federal minimum wage of $7.25 per hour, the employer must make up the difference on the regular pay day for the pay period. For example, if an employer pays a tipped employee $3.00 per hour in direct cash wages, the tipped employee must receive at least $4.25 per hour in tips to satisfy the Federal minimum wage requirement.
2. Does the FLSA permit mandatory tip pools?
Yes, but some restrictions apply. Employers that take a FLSA tip credit can only require tipped employees1 to participate in a mandatory tip pool if the tip pool is limited to other employees who customarily and regularly receive tips, such as servers, bartenders, and bussers.
The Department’s 2011 tip regulations apply these same restrictions to employers that pay the full Federal minimum wage directly and do not claim a tip credit against their minimum wage obligations.
3. What would this proposed rule do?
The proposal would rescind the above-referenced regulatory restrictions on employers that pay a direct cash wage of at least the full Federal minimum wage ($7.25 per hour) and do not take a FLSA tip credit. The removal of these restrictions would allow such employers to, among other things, reallocate tips in a mandatory tip pool that is not limited to customarily and regularly tipped employees. This proposed rule does not change the FLSA’s restrictions on the use of an employee’s tips when an employer takes a tip credit under the FLSA.
4. Why is the Department proposing this rule?
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 take a FLSA tip credit. There has also been litigation directly challenging the Department’s authority to promulgate the 2011 regulations as they apply to employers that pay a direct cash wage of at least the Federal minimum wage. Additionally, 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 is issuing this NPRM in part because of these developments and the Department’s serious concerns that it incorrectly construed the statute when promulgating the 2011 regulations.
5. What are the benefits of the proposed rule?
Under the proposed rule, employers who do not take a tip credit could share tips with back-of-house workers and other employees who do not customarily and regularly receive tips. This not only may allow employers to reduce wage disparities among employees who all contribute to a customer’s experience, but it also incentivizes all employees to improve customers’ experience.
The proposed rule may also result in less litigation, as it would rescind the restrictions on employers that pay at least the full Federal minimum wage directly and do not take a tip credit.
6. Would this proposed rule require employers to make changes to their pay practices?
No. The proposed rule would eliminate certain regulatory restrictions on an employer’s use of tips if the employer pays at least the full FLSA minimum wage directly and does not take a tip credit. The NPRM does not propose any new requirements or restrictions.
7. What if a state or city has its own laws addressing tipped employees?
The FLSA provides minimum wage and hour standards for covered workers, and does not preempt states or localities from establishing more protective standards. If a State or locality establishes a more protective standard than the FLSA, the employer must follow the higher standard in that State or locality. Just as some states and localities have minimum wage rates higher than the current $7.25 per hour Federal minimum wage, certain states and localities place their own restrictions on an employer’s ability to claim a tip credit, use tips, or set up a mandatory tip pool. This proposed rule would not preempt or otherwise affect any of those state or local laws.
8. What is the projected economic impact of this proposed rule?
Due to a lack of adequate data and the speculative nature of determining how employers, employees, and customers would all react in the absence of the regulations identified for elimination, the Department could not quantify the potential benefits and transfers of its proposed rule. The proposed rule does, however, provide a qualitative discussion of potential benefits and transfers, and asks some specific questions that may help the Department quantify benefits and transfers in the Final Rule analysis. The Department welcomes comments that provide data or information regarding the potential benefits and transfers of this proposed rule.
9. What is the estimated number of employees affected by the proposed rule?
The Department did not quantify the number of employees that will be affected by its proposed rule, but did estimate that there are approximately 1.08 million waiters and waitresses and 219,000 bartenders nationwide who receive tips. The Department considered these two occupations, as they constitute a large percentage of tipped workers. The estimate is based on data from the Current Population Survey, U.S. Census Bureau.
Many of these waiters, waitresses, and bartenders, however, may not be affected by the proposed rule, either due to market forces or because they live in states or localities that impose restrictions on the handling of tips at least as stringent as those in the current federal regulations that have been proposed for elimination.
10. What are the potential costs or cost savings of the proposed rule?
The Department estimates regulatory familiarization cost of $3.4 million in the first year for more than 280,000 establishments nationwide employing tipped workers. Due to many variables and assumptions needed to estimate how employers will respond to the proposed regulatory changes, the Department has not quantified a monetary value for any additional costs or cost savings in this NPRM. The Department invites comments regarding any potential costs or cost savings attributable to the proposed rule.
11. How can I submit a comment in response to this proposed rule?
Response to this NPRM is voluntary. If you wish to submit a comment, we encourage you to comment electronically at at at http://www.regulations.gov. All comment submissions must include the agency name and Regulatory Information Number (RIN 1235-AA21) for this NPRM. The Department requests that no business proprietary information, copyrighted information, or personally identifiable information be submitted in response to this NPRM. Submit only one copy of your comment by only one method (e.g., persons submitting comments electronically are encouraged not to submit paper copies). Please be advised that comments received will become a matter of public record and will be posted without change to http://www.regulations.gov, including any personal information provided. All comments must be received by 11:59 p.m. on January 4, 2018 for consideration.
1 Any employee engaged in an occupation in which he or she customarily and regularly receives more than $30 a month in tips is considered a “tipped employee” under the FLSA.