New DOL Tip Credit Rule Clarifies When Managers can Keep Tips and Lays Hefty Fines for FLSA Violations

On September 24, 2021, the Department of Labor published its most recent rule regarding tip regulations under the Fair Labor Standards Act (“FLSA”). This final rule will go into effect on November 23, 2021.

Background

Generally, the FLSA requires covered employers to pay their employees at least the federal minimum wage of $7.25 per hour. However, employers of tipped employees may satisfy a part of the required minimum wage payment through a “tip credit.” While employers must pay at least $2.13 in direct wages, a tip credit is a partial credit towards the minimum wage for a tipped employee based on the tips that employee receives. This credit can only be taken by the employer if certain requirements are met, including that the employee retains all the tips they receive (although employers are permitted to require tipped employees to participate in mandatory tip pools wherein tips are shared entirely or partially by employees). Employers are not permitted to keep employee’s tips for any reason. This prohibition also extends to the employer’s managers and supervisors.

When a Manager or Supervisor Can Retain Tips

The new final rule makes clear that while managers and supervisors are prohibited from retaining tips earned by other employees, they are permitted to retain tips that they received directly from customers based on the service that the manager or supervisor directly and solely provided. This is a clarification from earlier DOL regulations, which allowed managers and supervisors to keep tips earned through service that the manager or supervisor directly, but not solely, provided. This is meant to prevent managers and supervisors from keeping tips that were earned, at least partly, by other employees. It follows, therefore, that managers are prohibited from receiving tips distributed from a mandatory tip pool or other tip sharing arrangement. However, the new rule clarifies that managers and supervisors may still contribute to tip pools and tip sharing arrangements.

Accordingly, under the new final rule, it would be permissible for a restaurant manager to retain the tips he received from customers that he alone served. The manager could contribute these tips to the restaurant’s tip pool (indeed the restaurant could require that the manager do so). However, under no circumstances could the manager receive a distribution from this tip pool.

There can often be confusion over who qualifies as a manager or supervisor under these rules, particularly where the supervisor himself performs tip-generating services. Under DOL regulations, a manager or supervisor is anyone: (1) whose primary duty is the management of the entire enterprise or of its customarily recognized subdivision or department; (2) who customarily and regularly directs the work of at least two employees; and (3) who has the right to hire or fire other employees, or whose suggestions and recommendations regarding the hiring or firing of employees are given particular weight. Additionally, a manager or supervisor could be any individual who owns at least a bona fide 20 percent equity interest in the enterprise for which they are employed and who is actively engaged in the entity’s management.

Civil Money Penalties

One of the primary means of enforcement of FLSA violations is through civil money penalties (CMP). Under prior DOL regulations, civil money penalties (CMP) could be assessed against employers who violated this law only if such violations were repeated or willful. However, the final rule changes this and imposes penalty of up to $1,162 per violation against employers who keep their employee's tips, regardless of whether it is a repeated or willful violation. However, when determining the amount of the penalty, the final rule requires that the Department consider “the seriousness of the violations and the size of the employer’s business.”

Recommendations

Given the new final rule, employers of tipped employees should carefully evaluate their procedures to ensure that they are not retaining any portion of their employee’s tips. Employers should also educate their managers and supervisors regarding the circumstances under which they are permitted to retain tips they receive from customers. Failure to do so could result in hefty penalties.

For additional questions on this legal alert, contact your Quarles & Brady attorney or:

• Christopher Nickels: (414) 277-5519 / chris.nickels@quarles.com
• Christian Yingling: (202) 780-2654 / christian.yingling@quarles.com