Keeping Workers' Tips Will Prove Costly Under New Rule

Author: Michael Cardman, Brightmine Legal Editor

September 29, 2021

The US Department of Labor (DOL) will soon:

  • Be able to penalize employers $1,162 each time they keep employees' tips, even if those violations are not repeated or willful;
  • Allow employers to require managers and supervisors to contribute to tip pools;
  • Allow managers and supervisors to keep tips they receive directly from customers only when those tips are based on the service that they directly and solely provide; and
  • Broaden the circumstances under which an employer's minimum wage and overtime violations can be considered "repeated and willful," and therefore subject to civil money penalties.

These changes will take effect November 23 under a final rule published September 24.

The new rule marks the latest in a series of employee-friendly changes to the Fair Labor Standards Act (FLSA) tip credit regulations that the Biden administration has made this year, which undo the more employer-friendly changes made by the Trump administration in previous years.

In addition to the aforementioned changes, the Biden administration is expected to finalize a proposed rule to resurrect the so-called "80/20 rule," which limits how much time tipped employees may spend on "sidework" such as cleaning tables or making coffee.

Strengthening Civil Penalties

In 2018, Congress amended the FLSA to prohibit an employer from keeping tips received by its employees for any purpose, including allowing managers or supervisors to keep any portion of employees' tips, regardless of whether or not the employer takes a tip credit.

Congress also gave the DOL the authority to impose penalties of up to $1,162 each time that employers violate this prohibition against keeping employees' tips. (That comes on top of liability for all tips unlawfully kept, doubled as liquidated damages.)

In 2020, the DOL issued a rule limiting itself to levying penalties only when employers' tip-retention violations were repeated and willful.

With its new 2021 rule, the DOL will relax this limitation and allow itself to impose penalties any time an employer keeps tips - regardless of whether the violation was repeated or willful.

"The final rule announced today strengthens protections for tipped workers - who are largely women, immigrants and people of color - and advances equity in the workplace," said Wage and Hour Division Acting Administrator Jessica Looman. "Civil money penalties are an incentive for employers to comply with their legal responsibilities. When they do comply, essential workers benefit. When employers don't comply, these penalties are a useful enforcement tool we can use to help achieve compliance."

Allowing Managers to Contribute to Tip Pools

Although employers are forbidden from retaining employees' tips, they are allowed to require tipped employees to participate in a tip pool, in which tipped employees share tips with other employees who customarily and regularly receive tips.

Under the DOL's new rule, employers will be allowed to require managers and supervisors to contribute tips to tip pools (but not receive tips from tip pools).

The DOL said this "is particularly important given that managers or supervisors may have the opportunity to serve the largest tables or groups of customers, or work the more desirable shifts."

According to the National Restaurant Association, in some restaurants it is common for managers or supervisors to have a responsibility for serving tables. The restaurant may have a tip-sharing arrangement whereby the servers "tip out" a portion of their tips to other employees - such as bartenders, bussers, food runners or hosts - who in various ways help the server to take care of the customers.

"In that situation, allowing the manager-server to contribute into the tip share, just as the other servers do, in order to facilitate payments to the other tipped employees, in no way undermines the [prohibition against employers keeping tips], as tipped employees are not sharing their tips with managers or supervisors," the association said in comments on the proposed rule.

Letting Managers Keep Tips Only From Unassisted Service

Managers and supervisors are prohibited from keeping any portion of an employee's tips; however, they are allowed to keep tips that they receive directly from customers based on the service that they directly provide.

The DOL's new rule will further limit the tips which managers and supervisors may keep to those based on service that they directly and solely provide. This will prevent managers and supervisors from keeping tips when it is not possible to attribute the tip solely to the manager or supervisor.

"Thus, a manager who serves her own tables may keep her own tips, for example. However, when a manager simply runs food to a table for which a server is otherwise responsible, she may not keep any portion of the tip the customer leaves for the server since that tip was not earned solely by the manager or supervisor," the DOL commented.

Broadening the Definition of "Repeated and Willful"

Although DOL will no longer need to show that an employer's violations were "repeated and willful" in order to assess civil penalties for violations of the prohibition against keeping tips, it will still need to do so to assess penalties for violations of the FLSA's minimum wage and overtime provisions (which are currently $2,074 per violation, on top of back wages and other potential liabilities).

The DOL's new rule will make this easier by restoring a standard that an employer's violation can be found to be willful if the employer should have inquired further into whether its conduct was in compliance with the FLSA, but it failed to make "adequate further inquiry."