Tip-Pooling Under the Fair Labor Standards Act (FLSA)

On September 23, 2021, the Department of Labor (DOL) issued a final rule clarifying its position on tip-pooling under the Fair Labor Standards Act (FLSA). Back in 2018, Congress passed the Consolidated Appropriations Act of 2018 (CAA) which included some amendments to the FLSA concerning tip-pooling. In 2020, the DOL issued regulations on the topic, as well. Now, the Biden Administration’s DOL has issued its own regulations on the topic, clarifying its position on tip pooling under the FLSA and its ability to impose civil money penalties (CMPs) for employers who violate the law.

Tip-Pooling Changes Under the CAA

Before we address what’s changing now, we thought we’d discuss how the FLSA was amended under the CAA. First, it permitted tipped employees to pool tips with non-tipped employees, so long as the employer didn’t take a tip credit (meaning it didn’t take employees’ earned tips as credit towards its obligation to pay employees the minimum wage). It also expressly prohibited employers from keeping employees’ tips “for any purposes.” This was understood to mean that managers or supervisors could not participate in any sort of tip sharing pool. The DOL regulations issued in 2020 stated it would assess CMPs for repeated or willful violations of these provisions.

Changes Under the 2021 Final Rule

The new Final Rule does the following:

Removes language that limited the DOL’s ability to assess CMPs for tip pool violations to only repeated or willful violations. Now, CMPs may be awarded as the Secretary of Labor deems appropriate when it comes to tip-pooling violations. CMPs may be in an amount up to $1,100.
Amends DOL regulations for determining whether an FLSA violation is willful when the “willful or repeated” standard applies. The “willful or repeated” standard applies to other FLSA violations, and the new Final Rule provides that violations can be considered willful if they are knowing or if they are done with reckless disregard for whether the conduct violates the FLSA. The Wage and Hour division of the DOL (which enforces things like minimum wage and overtime violations) will consider all the facts and circumstances when considering whether a violation of the FLSA was willful.
Permits managers and supervisors to keep tips they directly and solely earn and participate in tip pools by contributing those tips to the pool. Under the CAA and the first regulations that followed, it was clear that managers and supervisors could retain tips that they directly and solely earned. However, it was unclear whether their contribution of such tips to a tip pool violated the FLSA. The DOL clarified that while supervisors or managers may contribute a portion of tips to other employees as part of a tip pool, they cannot receive tips given to other employees from a tip pool.

These changes go into effect on November 23, 2021.

Don’t Forget About State Laws!

Some of this information may be immaterial if the state in which your business is located has even stricter tip sharing laws. For example, Minnesota employers are completely prohibited from requiring employees to participate in a tip pool, though they can help employees facilitate a tip pool at the employees’ request. Cities may have their own local ordinances governing tip pools, as well. Always make sure to check the law at the state and local level before implementing a new tip pooling policy—Thompson Coe attorneys can help you do so!

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