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Labor Department Proposes Reversing Obama-Era ‘Tip-Pooling’ Rule

By Jeffrey W. Brecher and Eric R. Magnus
  • December 6, 2017

Employers would be expressly permitted to require servers and other tip-earning employees to share their tips with employees working in the kitchen and other “back of the house” employee, but only when the employer does not use the tip credit and state law would not otherwise prohibit the practice, under proposed regulations published by the Department of Labor (DOL). This is a reversal of the current DOL regulations, which would be rescinded.

Generally, under the Fair Labor Standards Act, employers may pay tipped employees a cash wage of as little as $2.13 per hour, as long as workers make up the difference between the cash wage and the federal minimum wage ($7.25 per hour) in tips. Employers may take this tip credit only if all of the tips are retained by the employee receiving the tips, unless there is a valid pool that is limited to tipped workers, defined as those who customarily receive more than $30.00 a month in gratuities.

Under the current rule, promulgated during the Obama Administration in 2011, employers are prohibited from requiring tipped workers to pool their gratuities with non-tipped workers, regardless of whether the employer takes a tip credit. This rule repeatedly has been challenged in court, most notably in Oregon Restaurant & Lodging Ass’n v. Perez, 816 F.3d 1080 (9th Cir. 2016), petition for cert. filed (Jan. 19, 2017). In that case, a highly divided U.S. Court of Appeals for the Ninth Circuit upheld the rule. By contrast, the U.S. Court of Appeals for the Tenth Circuit held that the rule is invalid in Marlow v. New Food Guy, Inc., 861 F.3d 1157 (10th Cir. 2017). The DOL may argue the proposed rule moots the petition for certiorari pending in Oregon Restaurant.

Many employers who do not take a tip credit will like this proposed regulation. It would allow those employees working in the back of the house, who typically receive no tips at all, to share in sometimes lucrative tips (particularly in high-end restaurants) received by servers. This rule reversal, however, (1) applies only to employers who do not take the tip credit (i.e., pay tipped employees an hourly wage greater than the applicable minimum wage), and (2) would not be of any use in states, such as California and New York, where state law otherwise prohibits such tip-pooling practices.

Pursuant to its Notice of Proposed Rulemaking, the DOL has provided a 30-day comment period, until January 4, 2018, on the new rule.

Please contact Jackson Lewis with any questions about the proposed rule or other compliance issues with tip-pooling and tip credit laws.

©2017 Jackson Lewis P.C. This material is provided for informational purposes only. It is not intended to constitute legal advice nor does it create a client-lawyer relationship between Jackson Lewis and any recipient. Recipients should consult with counsel before taking any actions based on the information contained within this material. This material may be considered attorney advertising in some jurisdictions. Prior results do not guarantee a similar outcome.

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