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Department of Labor Issues Final Rule on the Employer Tip Credit and Tip-Pooling

Department of Labor Issues Final Rule on the Employer Tip Credit and Tip-Pooling

January 20, 2021

On December 22, 2020, the United States Department of Labor (DOL) issued a final rule related to compensating tipped employees. The final rule modifies federal regulations in the following ways:

  • It prohibits employers from keeping their employees’ tips;
  • It clarifies when an employer may take a tip credit; and
  • It allows tip-pooling with non-tipped workers when the employer pays full minimum wage to tipped workers.

Employers Prohibited from Keeping Their Employees’ Tips

The DOL’s final rule matches amendments made to the Fair Labor Standards Act (FLSA) in 2018, which prohibit employers from keeping tips received by their employees for any purpose. Under the FLSA and the final rule, managers and supervisors are prohibited from keeping any portion of employees’ tips. An employer may only exert control over tips to promptly distribute tips to employees, require employees to share tips with other eligible employees, or to promptly distribute tips to eligible employees in an appropriately-facilitated tip-pool.

Employer Tip Credit

Rather than pay the full federal minimum wage amount, the FLSA permits an employer to credit an employee’s tips toward the employer’s minimum wage obligations for employees who “customarily and regularly receive tips.” An employer taking a tip credit must still pay the employee at least $2.13 per hour (as of December 2020) in addition to the employee’s tips, and the employer must pay additional wages to meet the federal minimum wage amount ($7.25 per hour) if the employee’s tips are not sufficient to meet the minimum wage. (Employers should also be aware of any applicable state or municipal minimum wage requirements of any locations in which they operate.)

The DOL’s final rule also eliminates the previous “80/20” rule, which limited the percentage of time a tipped employee could spend performing related non-tipped tasks. The new rule allows an employer to take a tip credit for time a tipped employee spends performing related non-tipped tasks, such as cleaning and setting tables, either contemporaneously or within “a reasonable time immediately before or after” performing tipped duties.

Non-Traditional Tip-Pooling

The DOL’s final rule also now allows employers to use nontraditional tip pools, which include tipped employees and non-tipped employees, such as cooks. An employer using nontraditional tip-pooling must not take a tip credit to pay tipped employees. Instead, all tipped and non-tipped employees must be paid the federal minimum wage in addition to their respective shares of the pooled tips.

If you have questions or concerns related to compensating your tipped employees, the employment attorneys at Martin Pringle are ready to help.

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