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New DOL Regulations Regarding Tipped Employees

By: Cady Barrett

The Department of Labor has revised the regulations regarding tips, ownership of tips and tip pooling. These regulations are applicable to employers who are subject to the Fair Labor Standards Act (FLSA) - e.g. businesses whose annual gross revenue is at least $500,000. For more details on FLSA click here.

The DOL regulations now state that tips belong to the employee even when the employer does not rely on the tip credit (when the employer pays the full minimum wage). Tipped employees are those who are customarily tipped and receive more than $30 a month in tips. The employer may consider tips as part of wages, but the employer must pay at least $2.13 an hour in direct wages.   

Tip Pooling: The tips all belong to the employee who received them, but the DOL still permits tip pooling for those who want to participate. The new requirement of tip pooling however, is that every contributor to the tip pool must be an employee who customarily receives tips. Those who customarily receive tips are waiters, waitresses, bussers and service bartenders. Within this DOL regulation, a valid tip pool may not include employees who do not customarily receive tips, such as dishwashers, cooks or chefs. With the new regulations, there is no maximum contribution percentage to the tip pool.

Tip Credit: The employer is prohibited from using an employee's tips for any reason other than as a "tip credit". Section 3(m) of the FLSA permits an employer to take a tip credit toward its minimum wage obligation for tipped employees equal to the difference between the required cash wage (which must be at least $2.13) and the federal minimum wage. Therefore, the maximum tip credit that an employer can currently claim under the FLSA is $5.12 per hour (the minimum wage of $7.25 minus the minimum required cash wage of $2.13).

The employer is prohibited from using an employee's tips for any reason other than as a credit against its minimum wage obligation to the employee "tip credit" or in furtherance of a valid tip pool. Only tips actually received by the employee may be counted in determining whether the employee is a tipped employee and in applying the tip credit.

Employers must now inform employees, in advance of taking the tip credit, that the employer is using the tip credit of section 203(m) of the FLSA, and must include the following information:

  • The amount of the cash wage that is to be paid by the employer to the tipped employee must be at least $2.13 an hour;
  • The additional amount claimed by the employer as a tip credit, which cannot exceed $5.12 (the difference between the minimum required cash wage of $2.13 and the current minimum wage of $7.25);
  • That the tip credit claimed by the employer cannot exceed the amount of tips actually received by the tipped employee;
  • That all tips received by the employee must be retained by the employee except for tips contributed to a valid tip pool limited to employees who customarily and regularly receive tips;
  • There is any required tip pool contribution amount;
  • That the tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions.

The DOL does not require that the notice be in writing- but the safest course is to provide written notice in order to document compliance with the regulation.

An employer who fails to provide the required information cannot use the tip credit provisions and therefore must pay the tipped employee at least $7.25 per hour in wages and allow the tipped employee to keep all tips received.

For the Department of Labor fact sheet related to this topic, Click Here

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