On September 24, 2021, the US Department of Labor (DOL) announced a final rule regarding tip regulations under the Fair Labor Standards Act (FLSA) which goes into effect November 23, 2021. The rule makes clear the DOL’s intention to aggressively enforce FLSA and other tip requirements. 

Modifications to Tip Pooling Regulations

The new rule modifies and clarifies the following provisions:

1. Employers will not violate the law if a manager or supervisor keeps tips they receive if:
   1. They receive the tip directly from the customer; and
   2. They receive the tip based on service they directly and solely provided.
2. Employers may not allow a manager or supervisor to receive tips from tip-pooling arrangements.
3. Employers may require a manager or supervisor to contribute tips to such an arrangement.

Under DOL regulations, a “manager” or “supervisor” is anyone who meets the following criteria:

1. Whose primary duty is management of the establishment in which the employee is employed;
2. Who customarily and regularly directs the work of two or more other employees; and
3. Who has the authority to hire or fire other employees or whose suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees are given particular weight.

Generally, the FLSA applies to:

1. Employees of entities that have an annual gross volume of sales made or business done totaling $500,000 or more;
2. Employees individually covered by the law because they are engaged in interstate commerce; or
3. Employees engaged in the production of goods for such interstate commerce; and
4. Some employees of hospitals, businesses providing medical or nursing care for residents, schools (for-profit or non-for-profit), and public agencies.

Minimum Wage Requirements

1. the FLSA requires covered employers to pay at least the federal minimum wage of $7.25 per hour to their employees. Employers of tipped employees may use a “tip credit” to cover a portion of this mandatory minimum wage payment, but they must pay at least $2.13 in direct wages.
2. When local and federal minimum wage rates differ from one another, the more favorable rate for the employee always prevails.
3. In Illinois, minimum wage is $11.00 per hour for workers 18 years of age or older. In Illinois, tipped employees must be paid minimum wage, but the employer can take a tip credit in an amount not to exceed 40% of the wages.
4. Illinois state laws do not address tip pooling, so tip pooling falls under the FLSA rules.

Employers can only use the tip credit if they meet the following requirements:

1. There is no traditional tip pool;
2. The tipped employee retains all the tips they receive; and
3. Those tips are sufficient to make up the difference between cash wages paid and the current federal minimum wage of $7.25 per hour, or in Illinois, the difference between cash wages paid and the state minimum wage of $11.00 per hour.

If employers use this tip credit along with a tip pool, the tip pool may only include traditionally eligible employees. If employers do not use a tip credit, they may include employees who do not customarily and regularly receive tips. This includes traditionally eligible employees along with back-of-the-house employees, such as dishwashers, cooks, and custodians.

The rule prohibits employers from receiving any tips from the tip pool. Supervisors and managers also cannot receive tips from the pool. However, employers can require managers and supervisors to contribute tips to such a tip-pooling arrangement.

Bottom Line:

• Employers should carefully consider the individuals they permit to share tips.
• A manager or supervisor may not receive tips from a tip pool.
• A manager or supervisor may only keep tips they receive directly from customers for services they directly and solely provide.
• Irrespective of a violation’s categorization as repeated or willful, employers can be penalized for a violation. As a result, employers should put in place clear guidelines for managers’ receipt of tips to ensure compliance within the narrow scope of this tip requirement.

Action Items:

• Understand and comply with the FLSA tipped employee rules.
• Review and update any related employer policies to ensure compliance with the new law.
• Train supervisors and managers to comply with the new law.
• Contact B&D if you want to review further.

For more details, please contact us.

We are available to answer your questions about any general issues concerning your business.

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