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Tipping Points – DOL Issues New Opinions About Paying Tipped Employees

Categories: Employment, Article

New rules for AZ employees that get paid in tips

Days before the January 20, 2021, presidential inauguration, the U.S. Department of Labor (DOL), under the outgoing administration, issued a flurry of new regulations, rules and opinion letters that could significantly impact the employment law landscape in the coming months or years. A gust of that wind stirs up new tipped employee regulations, set to take effect on March 1, 2021. The new regulations clarify, update and replace prior regulations that concern when and how employers may pay their tipped employees a subminimum wage under the Fair Labor Standards Act (FLSA).

Under the FLSA, employers, typically in the restaurant or hospitality business, may pay their tipped employees, typically food servers, bartenders, etc., a subminimum wage. A tipped employee is an employee whose occupation is one in which he or she “customarily and regularly” receives more than $30 a month in tips. The current federal minimum wage is $7.25 per hour. An employer may pay an employee a reduced minimum wage, currently $2.13 per hour plus tips – called taking a “tip credit” against minimum wage – if the employee qualifies as a tipped employee[1]. But even if the employee qualifies as a tipped employee, an employer must still follow the rules to be entitled to take the tip credit against minimum wage for that employee.

The rules are found in the FLSA and in DOL interpretive rules, regulations and policies stated in opinion letters responding to specific inquiries. Questions often arise about what those rules, regulations and policies are and whether an employer has complied with them. The new DOL tipped-employee regulations and opinion letters address questions about mandatory “tip pools.”

A traditional tip pool is a common practice that allows tipped employees to share their tips or a percentage of their tips among all tipped employees. But an employer may take a tip credit only for tipped employees, and tipped employees must retain all their tips. Until now, that meant an employer could not maintain a mandatory tip pool that included non-tipped employees without being disqualified from taking the tip credit for tipped employees participating in the pool. It also meant that employers could not permit non-tipped employees to share in the pool, even if they did not take the tip credit and paid their tipped employees more than the full hourly minimum wage [2]. That didn’t make much sense to anyone.

The new DOL regulations change course on that and provide a roadmap for employers to navigate the change without running afoul of the FLSA:

  1. Expanded Participation in Mandatory Tip Pools. Employers that do not take a tip credit may now maintain a mandatory tip pool that includes non-tipped employees such as hosts, greeters, cooks, dishwashers and other back-room employees. This change is supported by DOL Opinion Letter FLSA2021-4, issued January 15, 2021.
  2. Payment to Employees. An employer that collects tips from a tip pool must distribute the tips at least as often as it pays wages. vEmployers May Not Keep Tips for Themselves. Regardless of whether they take a tip credit, neither employers nor their managers or supervisors may keep employee tips for themselves for any purpose, including for the purpose of sharing tips with tipped employees in a tip pool. Whether an employee is a manager or supervisor is defined by the nature and extent of his or her duties performed for the employer.
  3. New Non-Tipped Duties Rule. Prior regulations implemented an “80/20” test to determine whether a tipped employee who had non-tipped, but related, duties (taking reservations, preparing for large parties, mopping floors, cleaning bathrooms, etc.) still qualified as a tipped employee. Employers could not assign more than 20% of their time to non-tipped, related tasks to maintain their status as a tipped employee. The new rule eliminates the “80/20” test and, instead, implements a “reasonableness” test that allows an employer to take a tip credit for the “reasonable” time a tipped employee spends on non-tipped tasks immediately before or after performing tipped duties.
  4. New Record Keeping Requirements. The new rule expands existing record-keeping requirements to employers that do not take a tip credit, but collect employee tips in a mandatory tip pool.
  5. Penalties for Violating the Rules. New civil money penalties may be imposed on employers for violating tipped employee regulations, minimum wage, and overtime provisions on employers who are repeat offenders or who willfully violate the rules.

All employers, especially those in the restaurant and hospitality industries, must prepare themselves for these changes. Also, be aware there may also be state and local rules that require more and/or additional rules applicable to your business. Regardless of whether you are an employer or an employee, these are complicated issues that require legal expertise to make sure your rights are protected. Paying an experienced employment law attorney to assist you in that process is money well spent.

About the Author: David N. Farren is an attorney at the Phoenix law firm of Jaburg Wilk whose practice focuses on employment law, contract and business disputes, and complex commercial litigation. He can be reached at 602-248-1000 or at dnf@jaburgwilk.com.

This article is not intended to provide legal advice and only relates to Arizona law. Always consult an attorney for legal advice for your particular situation.

[1.]  Some state minimum wage rates are much higher. Arizona’s minimum wage is currently $12.00 per hour, with a tipped employee subminimum wage of $3.00 less than that, currently $9.00 per hour.
[2.]  Voluntary tip pools, as long as they are truly voluntary on the part of all participating employees, are not regulated by the FLSA.