On Oct. 8, 2019, the U.S. Department of Labor (Department) published a proposed rule to amend employee tip regulations under the Fair Labor Standards Act (FLSA). This document provides the Department’s answers to frequently asked questions about the proposed rule and tip payment standards enforced by the WHD.

The proposed rule has been issued, in part, to incorporate legislation approved in 2018 by Congress. The rule also incorporates guidance the Department’s Wage and Hour Division (WHD) has issued about tipped wages over several years.

The Department is inviting the public to comment on this proposed rule. Employers and individuals who wish to comment must submit their remarks by Dec. 9, 2019.

Employers can use this document to better understand how this rule, if adopted, would affect wage payment practices for tipped and non-tipped employees in industries where gratuity payments are common.

1. What does the FLSA require employers to pay tipped employees?

The FLSA generally requires covered employers to pay employees at least the federal minimum wage, which is currently $7.25 per hour. Under section 3(m)(2)(A) of the FLSA, however, an employer is permitted to credit at least some of the tips that tipped employees receive toward its federal minimum wage obligations. Specifically, an employer can satisfy its obligation to pay those employees the federal minimum wage by paying a lower direct cash wage (currently no less than $2.13 per hour) and counting a limited amount of its employees’ tips (no more than $5.12 per hour) as a partial credit to satisfy the difference between the direct cash wage paid and the federal minimum wage (known as a “tip credit”) if the employer follows certain requirements.

Employers electing to use the FLSA tip credit provision must ensure that tipped employees receive at least the federal minimum wage when direct (or cash) wages and the tip credit amount are combined. If an employee’s tips combined with the employer’s direct (or cash) wages of at least $2.13 per hour do not equal at least the federal minimum wage of $7.25 per hour, the employer must make up the difference on the regular pay day for the pay period. For example, if an employer pays a tipped employee $3.00 per hour in direct wages, the tipped employee must receive at least $4.25 per hour in tips to satisfy the federal minimum wage requirement.

2. Why is the Department proposing changes to its tip regulations?

The Department is proposing revisions to its regulations to implement changes made by the Consolidated Appropriations Act, 2018, (CAA) to the tip provisions of section 3(m) of the FLSA. The law prohibits employers from keeping tips received by their employees, regardless of whether the employer takes a tip credit under the FLSA. The law also prohibits managers and supervisors from keeping employees’ tips or participating in a tip pool. The proposed changes would also allow employers that pay tipped employees at least the full FLSA minimum wage and do not claim a tip credit to include workers who do not customarily or regularly receive tips, such as cooks or dishwashers, in a mandatory tip pool.

The CAA amendments did not impact regulations that have been in place for employers that take a tip credit under the FLSA. Therefore, employers that claim a tip credit still can require only workers who customarily and regularly receive tips to participate in a traditional mandatory tip pool. This means cooks or dishwashers cannot be in such a tip pool.

The Department is also proposing to amend its regulations to reflect recent guidance regarding the tip credit’s application to employees who perform both tipped and non-tipped duties. The proposal states that an employer may take a tip credit for any amount of time that an employee in a tipped occupation performs related non-tipped duties contemporaneously with his or her tipped duties, or for a reasonable time immediately before or after performing the tipped duties. The proposed regulation would also address which non-tipped duties are related to a tip-producing occupation.

3. What are the changes made to the FLSA by the Consolidated Appropriations Act, 2018 (CAA)?

On March 23, 2018, Congress amended section 3(m) of the FLSA in the CAA. The CAA amendments made several changes. For example, the law:

Prohibits employers from keeping tips received by their employees for any purpose, regardless of whether the employer takes a tip credit under the FLSA.

Prohibits managers and supervisors from receiving or keeping employees’ tips, including from a tip pool.

Suspends the operation of the regulatory language that imposes restrictions on an employer’s use of employees’ tips when the employer does not take a tip credit. Employers that do not take an FLSA tip credit may now include a broader group of workers, such as cooks or dishwashers, in a mandatory tip pool.

Imposes new civil money penalties not to exceed $1,100 when employers unlawfully keep tips.

4. What are the key proposals in the Notice of Proposed Rulemaking (NPRM)?

To implement the CAA’s changes to FLSA section 3(m), the Department proposes to revise its relevant regulations. The proposed revisions would:

  • Prohibit employers, managers, and supervisors from keeping any portion of employees’ tips, including by participating in a mandatory tip pool, regardless of whether the employer takes a tip credit.
  • Propose that employers use the duties test under the executive employee exemption to determine whether an employee is a manager or supervisor who may not keep any portion of employees’ tips, and that an employee who owns a 20 percent equity interest in the enterprise who is actively engaged in its management also be considered a manager or supervisor.
  • Remove regulatory language imposing restrictions on an employer’s use of tips received by employees when the employer does not take a tip credit. This would allow employers that do not take an FLSA tip credit to include a broader group of workers, such as cooks or dishwashers, in a mandatory tip pool.
  • Require an employer that collects tips to facilitate a mandatory tip pool to fully redistribute the tips no less often than when it pays wages.
  • Require employers that do not take a tip credit and collect tips for a mandatory tip pool to keep records of those employees that receive tips and the tip amounts received by employees, to ensure uniformity with a similar existing requirement for employers that take a tip credit.
  • Incorporate into the regulations new civil money penalties (CMPs) not to exceed $1,100 when employers unlawfully keep tips received by employees and stating that the Department will only collect such CMPs when the employer’s violations are repeated or willful.
  • Revise those portions of the CMP regulations related to willful violations to address court decisions and ensure the regulatory language is consistent with Supreme Court authority and the way the Department actually litigates willfulness.
  • Revise the regulations for tipped employees covered by Executive Order 13658 (Establishing a Minimum Wage for Contractors) to reflect certain proposed corresponding changes in the FLSA tip regulations and to otherwise align those regulations with the authority provided in the Executive Order.
  • Withdraw the Department’s NPRM, published on December 5, 2017, that proposed changes to the Department’s tip credit regulations, as that NPRM has been superseded by the CAA.

Additionally, the Department is proposing to amend its regulations to reflect recent guidance explaining that an employer may take a tip credit for any amount of time that an employee in a tipped occupation performs related non-tipped duties contemporaneously with his or her tipped duties or for a reasonable time immediately before or after performing the tipped duties. The proposed regulation would also address which non-tipped duties are related to a tip-producing occupation.

5. Can an employer who pays the full minimum wage and does not take a tip credit include non-tipped workers in a tip pool?

Yes, employers that pay the full minimum wage and do not take a tip credit are no longer prohibited from allowing workers who do not customarily and regularly receive tips, such as cooks and dishwashers, to participate in tip pools.

6. Do the amendments to the FLSA allow employers that take a tip credit to include non-tipped workers in a tip pool?

No. The amendments to section 3(m) of the FLSA do not eliminate any of the pre-existing requirements for employers that take a tip credit. Employers that take a tip credit under the FLSA may require a tip pool composed of only those employees who customarily and regularly receive tips (for example, servers and bussers). As mentioned above, however, employers, managers, and supervisors may not participate in the tip pool or keep employees’ tips regardless of whether the employer takes a tip credit.

7. Could this proposed rule discourage customers from leaving tips?

We have no information to indicate whether this proposed rule would negatively affect customer tipping. Customers choose to leave tips for a variety of reasons, such as the quality of customer service provided. To the extent that employers respond to this rule by broadening the kinds of employees who may participate in a tip pool to include, for instance, cooks or dishwashers, customer tipping behavior may not change.

8. Does the proposed rule require employers to distribute tips from the tip pool to employees daily?

No. The proposed rule does not require that employers distribute employees’ tips daily. Employers that facilitate tip pooling by collecting and redistributing employees’ tips do not violate the prohibition on keeping tips if they fully and promptly distribute any cash and credit card tips collected on the regular payday or, in certain cases, as soon as practicable after the regular payday.

9. What recourse does an employee have if their employer keeps tips?

The CAA amended sections 16(b) and 16(c) of the FLSA to permit private parties and the Department to recover tips unlawfully kept by an employer in violation of section 3(m)(2)(B), plus an equal amount in liquidated damages. Accordingly, an employee may sue their employer or file a complaint with the local Wage and Hour Division district office by calling 1-866-4US-WAGE.

10. Does the proposed rule address the Department’s requirements concerning employers taking a tip credit for non-tip producing activities related to the tipped occupation?

Yes. The proposed rule reflects the Department’s recent guidance removing the 20 percent limit on the amount of time that an employee for whom an employer takes a tip credit can perform related, non-tipped duties. See WHD Opinion Letter FLSA2018-27 (Nov. 8, 2018). The proposed rule explains that an employer may take a tip credit for time that an employee in a tipped occupation performs related non-tipped duties contemporaneously with his or her tipped duties, or for a reasonable time immediately before or after performing the tipped duties.

11. Why did the Department issue guidance concerning employers taking a tip credit for non-tip producing activities related to the tipped occupation and when did it become effective?

The Department has in the past advised that an employer may not take a tip credit for the time a tipped worker spends performing non-tipped duties related to a tipped occupation when such time exceeded 20 percent of the employee’s workweek. This policy was difficult for employers to administer and it led to confusion because employers lacked guidance to determine whether a particular non-tipped duty is “related” to the tip-producing occupation. On November 8, 2018, the Department issued opinion letter FLSA 2018-27 to address these concerns, and subsequently issued new guidance to its field personnel reflecting the interpretation of related duties in this opinion letter. The new guidance, issued as Field Assistance Bulletin 2019-2 and Field Operations Handbook chapter 30d00(f), explained that the Department would no longer prohibit an employer from taking a tip credit for any amount of time an employee in a tipped occupation performs related non-tipped duties—as long as those duties are performed contemporaneously with, or for a reasonable time immediately before or after the tipped duties. The guidance became effective on the date the opinion letter was issued, November 8, 2018. The Department is now proposing to revise its regulations to reflect this guidance.

12. What non-tipped duties are related to the tipped-producing occupation?

The current regulation provides that non-tipped duties related to a tipped-producing occupation include a server spending part of their time performing such non-tipped duties as “cleaning and setting tables, toasting bread, making coffee, and occasionally washing dishes or glasses.” In addition to these examples listed in the regulation, the proposed rule provides that a non-tipped duty is related to a tip-producing occupation if the duty is listed as a task of the tip-producing occupation in the Occupational Information Network (O*NET at www.onetonline.org).

13. What are the benefits of the proposed rule?

The proposed rule would allow employers that do not take a tip credit to distribute tips to larger tip pools that include non-tipped workers, such as cooks and dishwashers. This would potentially increase the earnings of those employees who are newly added to the tip pool. The proposed rule would additionally provide employers greater flexibility in determining pay practices for tipped and non-tipped workers. It also may allow for a reduction in wage disparities among employees who contribute to the customers’ experience.

14. Would this proposed rule require employers to make changes to their pay practices?

No. Employers may choose to take, or not take, a tip credit under the FLSA and may also choose to implement a mandatory tip pool or not. The proposed rule would eliminate certain regulatory restrictions on an employer’s use of tips if the employer pays at least the full federal minimum wage and does not take a tip credit; doing so would allow employers to include non-tipped employees, such as cooks and dishwashers in a restaurant, in the tip pool.

15. What if a state or city has its own laws addressing tipped employees?

The FLSA provides minimum wage and hour standards for covered workers, and does not preempt states or localities from establishing more protective standards. If a state or locality establishes a more protective standard than the FLSA, the employer must follow the higher standard in that state or locality. Just as some states and localities have minimum wage rates higher than the current federal minimum wage of $7.25 per hour, certain states and localities place their own restrictions on an employer’s ability to claim a tip credit, use tips, or set up a mandatory tip pool. This proposed rule would not preempt or otherwise affect any of those state or local laws.

16. What is the projected economic impact of this proposed rule?

The total first year potential transfer from tipped employees (e.g., servers and bartenders) to non-tipped employees (e.g., janitors, cooks, and dishwashers), is estimated to be $107 million. Transfers would arise when employers that do not take a tip credit and previously did not have a mandatory tip pool or only had a traditional tip pool institute nontraditional tip pools whereby tipped employees are required to share their tips with employees who do not customarily and regularly receive tips (e.g., janitors, cooks, and dishwashers). Directly-observable transfers will only occur among employees because employers, managers, and supervisors are prohibited from being included in these tip pools and from otherwise keeping employees’ tips by the CAA and these proposed regulations. However, employers may in the long term offset this transfer (from front-of-the-house to back-of-the-house employees) by reducing the direct wage that they pay back-of-the-house workers (as long as they do not reduce these employees’ wages below the applicable minimum wage). Some employers may begin paying their tipped workers a direct cash wage of at least the full FLSA minimum wage in order to institute a tip pool with back-of-the-house workers; this potential transfer is not quantified due to uncertainty regarding how many employers would choose to no longer use the tip credit. The Department lacks data to quantify any potential costs, benefits, or transfers which may be associated with the implementation of the proposed regulation regarding the tip credit’s application to employees who perform tipped and non-tipped duties, but the proposed rule discusses the potential costs, benefits, or transfers of this portion of the rule qualitatively and welcomes comments on the impact of this proposal.

17. What are the potential costs or cost savings of the proposed rule?

The Department estimates regulatory familiarization cost of $3.86 million in the first year for more than 290,063 establishments nationwide employing tipped workers. Due to many variables and assumptions needed to estimate how employers will respond to the proposed regulatory changes, the Department has not quantified a monetary value for any additional costs or cost savings in this NPRM.

The Department believes that the flexibility and cost savings associated with this proposed rule, which the Department discusses qualitatively, will outweigh any increased rule familiarization and recordkeeping costs. The cost savings associated with this rule would result from the increase in earnings for non-tipped employees. Higher earnings for these employees could result in reduced turnover, which reduces hiring and training costs for employers. This proposed rule will also result in greater efficiency for the employer when it comes to tip pooling, because it may reduce effort spent ensuring that the tip pool is only limited to customarily and regularly tipped employees.

18. Are the CAA amendments to the tip provision of the FLSA effective now?

Yes. Changes to FLSA section 3(m) became effective on March 23, 2018 when Congress amended the FLSA in the CAA. This means employers are prohibited from keeping employee tips, regardless of whether the employer takes a tip credit. The Act also prohibits managers or supervisors from keeping employees’ tips, either directly or indirectly, such as via a tip pool. Employers who do not take a tip credit are no longer prohibited from allowing employees who are not customarily and regularly tipped—such as cooks and dishwashers—to participate in tip pools.

Although the above changes have been in effect, the Department needs to revise its regulations to implement these changes, including by defining the terms “managers and supervisors,” and providing guidance regarding how the Department will implement the new civil money penalty provision. The existing tip regulations also need to be revised to conform to the CAA amendments.

19. How can I submit a comment in response to this proposed rule?

Response to this NPRM is voluntary. If you wish to submit a comment, we encourage you to comment electronically at https://www.regulations.gov/. All comment submissions must include the agency name and Regulatory Information Number (RIN 1235-AA21) for this NPRM. The Department requests that no business proprietary information, copyrighted information, or personally identifiable information be submitted in response to this NPRM. Submit only one copy of your comment by only one method (e.g., persons submitting comments electronically are encouraged not to submit paper copies). Anyone who submits a comment (including duplicate comments) should understand and expect that the comment will become a matter of public record and will be posted without change to http://www.regulations.gov, including any personal information provided. All comments must be received by 11:59 p.m. on Decem