Buried in the recently passed budget reconciliation bill, Congress addressed a Fair Labor Standards Act (“FLSA”) dispute regarding tip pooling arrangements. Restaurant and hotel owners with tipped staff need to be aware of these changes and to reevaluate their tip-pooling arrangements accordingly.

The FLSA permits employers to require employees who are customarily and regularly tipped (e.g., wait staff, bell hops, etc.) to participate in a mandatory tip pool. In a tip pool, the tipped employees pool their tips and the employer distributes the tips to employees participating in the tip pool. Employers using a mandatory tip pooling arrangement cannot claim the tip credit against the federal minimum wage for the employees participating in the tip pool. For many businesses, tip pooling is an effective way to more fairly distribute tips and to incentivize participating employees to provide good customer service.

Until now, however, it has been unclear whether the FLSA permitted an employer to distribute tips from a tip pool to employees who do not otherwise regularly and customarily receive tips, such as dishwashers, cooks, and other “back of house” staff. As the FLSA itself is mute on this point, over the years employers have included both tipped and non-tipped employees in tip pools, and there have been numerous lawsuits challenging tip pooling arrangements. Employees have objected especially to the employer retaining some of the tips or distributing tips to managers or supervisors.

In 2011, the U.S. Department of Labor (“DOL”) issued regulations that interpreted the FLSA to exclude from tip pools all employees who would not otherwise regularly and customarily receive tips. Several restaurant industry associations filed lawsuits challenging the validity of those new DOL regulations. With a new presidential administration in power, in December 2017 the DOL proposed new regulations that would supplant the 2011 regulations to permit the inclusion of non-tipped employees in tip pools so long as the employer did not take a tip credit against the federal minimum wage. This DOL proposal was highly controversial, with many employee-side attorneys arguing that it amounted to wage theft to require tipped employees to share their tips with non-tipped staff, particularly with owners, managers, and supervisors.

The March 2018 budget reconciliation bill presented an opportunity for Congress to resolve the dispute by amending the FLSA. Hidden deep within the huge stack of paper that Trump signed, vowing to “never sign another bill like this again,” was a provision amending the FLSA to permit employers to impose mandatory tip pooling that includes non-tipped staff—but not owners, managers, or supervisors—if the employer pays the tipped workers contributing to the pool at least the full federal minimum wage (i.e., the employer cannot claim the tip credit against the federal minimum wage). Even under the new law, employers with tip pools are prohibited from retaining any of the tips; all tips must be distributed to the employees in the tip pool. Employers still need to comply with any state or local laws affecting wages.

In light of this change, employers should review their tip pooling arrangements to ensure that owners, managers, and supervisors do not receive tip distributions and that participating employees are paid at least minimum wage, without any tip credit. Those employers without tip pooling arrangements may want to revisit whether tip pooling would work for their businesses. As always, it is important to consult with an experienced labor and employment law attorney regarding employee compensation to ensure that your business is compliant with applicable law. The labor and employment law attorneys at Vandeventer Black LLP are available to assist you.