U.S. Department Of Labor Announces Final Rule Updating Tipped Employee Regulations

Beginning March 1, 2021, the long-awaited revision of section 3(m) of the Fair Labor Standards Act (“FLSA”) regarding tipped employee regulations will go into effect. On December 22 2020, the U.S. Department of Labor (“DOL”) amended the rule to provide more clarity and flexibility to employers of tipped employees. Under this new rule, there are significant revisions to requirements for tip pooling arrangements and it further codifies the Department’s guidance regarding applications of the “tip credit” for tipped employees. These revisions will prevent employers from keeping tips received by their employees, regardless of whether the employer takes a tip credit. Furthermore, employers will be prohibited from allowing supervisors or managers to take any portion of the employees’ tips. This new rule will protect millions of employees across that nation that work hard for their rightfully earned wages.

Currently, the FLSA requires covered employers to pay their employees at least the federal minimum wage, which is $7.25 an hour. Nevertheless, employers will often pay employees that receive tips a lower cash wage and credit up to $5.12 per hour of an employee’s tip towards the federal minimum wage requirement. Under the DOL’s previous regulations, employers were capable of executing such actions by implementing a mandatory tip pooling arrangement, so long as they did not involve those employees who did not customarily receive tips in these arrangements.

In 2018, however, the Consolidated Appropriations Act of 2018 (“CAA”) amended the FLSA to prohibit employers from keeping any employee tips for any purpose. As a response, in 2019, the DOL issued a new rule making proposal to update its tip regulations to be in accord with the CAA Amendments. Today, the final rule clarifies that an employer may only exert control over its employees’ tips to 1) distribute the tips to employees who received them; 2) ensure that employees share tips with other eligible employees; or 3) facilitate a tip pool wherein the tips of eligible employees will be collected and redistributed.

In this final ruling, the Department:

• removes the portions of the regulations that prevented employers that do not take a tip credit from implementing mandatory “nontraditional” tip pools—tip pools that include employees who do not traditionally receive tips;
• prohibits managers and supervisors from keeping employees’ tips directly or indirectly, including new language to define the roles of managers and supervisors;
• States that an employer that collects tips to facilitate a mandatory tip pool must fully redistribute the tips to the employees no less often than when it pays wages in order to avoid a violation of section 3(m)(2)(B);
• requires a new recordkeeping system for employers that do not take a tip credit;
• codifies guidance on when an employer may take a tip credit for time that an employee in a tipped occupation performs related non-tipped duties;
• eliminates the “80-20 rule” that prevented employers from taking tip credits for non-tipped work that exceeded 20% of the employees’ workweek;
• amends the regulations that address the payment of tipped employees to reflect the corresponding changes in the FLSA regulations and to otherwise align those regulations with the Executive Order.

For more information please visit: https://www.federalregister.gov/documents/2021/02/26/2021-04118/tip-regulations-under-the-fair-labor-standards-act-flsa-delay-of-effective-date

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