Restaurants and other employers who have tipped employees may face significant liability if they redistribute tips among employees in violation a new regulation issued by the Department of Labor (“DOL”). Restaurants who take a tip credit (i.e. pay a lower hourly wage based on tips employees receive) against their employee minimum and overtime wage obligations, have always needed to follow very specific guidelines should they pool and redistribute tips of tipped employees (a “tip pool”). The DOL’s new regulation and guidance it provided earlier this year require that all employers that have a tip pool must follow the DOL guidelines, even if the hourly wages paid to their employees before tips exceed federally mandated minimum wages (i.e. even if the employer does not take a tip credit). In short, the DOL is taking the position that employees’ tips are the property of the employee and may only be redistributed amongst employees as the DOL has authorized. In response, the Restaurant and Trade Association (“RTA”) has filed a lawsuit suit which seeks to invalidate this regulation as it applies to employers who do not take a tip credit.
The DOL’s new regulation stems from the 9th Circuit Court of Appeals decision in Cumbie v. Woody Woo, Inc.,. In Cumbie, the 9th Circuit held that when an employer pays a base hourly rate greater than the minimum wage to its wait staff, it is permissible for the employer to require its wait staff to participate in a “tip pool” that redistributes a portion of the wait staff’s tips to the kitchen staff (employees not customarily tipped in the restaurant industry). The DOL’s regulations at that time prohibited employees in positions that are not traditionally tipped from participating in a tip pool, where tipped employees were paid below minimum wage due to a tip credit. Having such an invalid tip pooling arrangement resulted in an employer having to pay back its tipped staff all tips taken from them in the tip pool, plus liquidated and other damages . The 9th Circuit determined that where an employer paid its tipped employees above the minimum rate of pay, the DOL’s restrictions on what constituted a valid tip pool did not bind the employer. Thus, under this decision an employer not taking a tip credit was arguable free to redistribute tips received by employees as the employer deemed appropriate.
In response to the decision rendered by the 9th Circuit in 2011, the DOL amended its tip regulations to overturn Cumbie. Specifically, the new regulation (29 CFR § 531.52) prohibits any employer regardless of the rate of pay paid to its employees from using employees’ tips in any manner not specifically permitted by DOL regulations. The new regulation clarifies that tips are the property of the employee to whom they are given, whether or not the employer has taken a tip credit against its minimum wage obligations to the employee. In February 2012, the DOL issued a memorandum making it clear that the DOL’s position is that the employer’s practices in Cumbie are illegal under the FLSA.
In response, the RTA’s lawsuit asks the Court to overturn the DOL’s regulation and allow employers that adequately pay their employees (i.e. who do not take a tip credit) to have flexibility in how they structure tip distribution among their employees.
Until this lawsuit is decided, restaurants and other employers who have tipped employees should ensure their practices comply the DOL’s revised regulations.