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Wage and Hour Division (WHD)


FACT SHEET: NOTICE OF PROPOSED RULEMAKING TO RESCIND PORTIONS OF TIP REGULATIONS

The Department is proposing to rescind portions of its tip regulations issued pursuant to the Fair Labor Standards Act (FLSA) that impose restrictions on employers’ use of tip pools when they pay their tipped employees a direct cash wage of at least the full Federal minimum wage and do not claim a tip credit against their minimum wage obligations. This proposed removal of the regulatory limitation on an employer’s ability to share tips received by employees if it pays a direct cash wage of at least the full Federal minimum wage will allow employers to, among other things, reallocate tips in a mandatory tip pool that is not limited to customarily and regularly tipped employees.

Key Provisions of the Proposed Rule

The Notice of Proposed Rulemaking (NPRM) proposes to remove the portions of the regulations at 29 CFR §§ 531.52, 531.54, and 531.59 that impose restrictions on employers that pay a direct cash wage of least the full Federal minimum wage and do not claim a tip credit under the FLSA.

The proposal would, for example, allow such employers to distribute customer tips to a larger tip pool that includes non-tipped workers. The proposal would not affect employers that claim a tip credit under the FLSA.

Background

The FLSA generally requires covered employers to pay employees at least the Federal minimum wage, which is currently $7.25 per hour. Under section 3(m) of the FLSA, which defines the term “wage,” an employer of tipped employees can satisfy its obligation to pay those employees the Federal minimum wage by paying a lower direct cash wage (no less than $2.13 per hour) and counting a limited amount of its employees’ tips (no more than $5.12 per hour) as a partial credit to satisfy the difference between the direct cash wage paid and the Federal minimum wage (known as a “tip credit”) if it follows certain requirements.

An employer may take a tip credit under section 3(m) only if, among other things, its tipped employees retain all of their tips. The employer taking a tip credit is allowed, however, to implement a tip pool in which tips are shared only among those employees who “customarily and regularly receive tips.” The FLSA contains no such express restrictions for employers that do not claim a tip credit. But in 2011, the Department revised its tip regulations to apply the statutory condition in section 3(m) of the FLSA that tipped employees retain all of their tips (except for those tips distributed through a tip pool limited to customarily and regularly tipped employees) to all employers, regardless whether they claim a tip credit.

As the NPRM explains, 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 an employer’s use of tips received by its employees when the employer pays a direct cash wage of at least the Federal minimum wage and does not take a tip credit. Moreover, 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.

The proposed rule would allow employers to distribute customer tips to larger tip pools that include non-tipped workers, such as cooks and dishwashers. This would likely increase the earnings of those employees who are newly added to the tip pool and further incentivize them to provide good customer service. The proposed rule would additionally provide employers greater flexibility in determining pay practices for tipped and non-tipped workers. It also may allow for a reduction in wage disparities among employees who all contribute to the customers’ experience.

How to Comment

The Department encourages interested parties to submit comments on the NPRM. The full text of the NPRM, as well as information on the deadline for submitting comments and the procedures for submitting comments, can be found at the Wage and Hour Division’s Proposed Rule website.