The rules around tip pooling have been mired in litigation since 2011, when regulations came into effect that forbid tip pooling between employees who customarily receive tips and those who do not. The recently passed federal budget bill has created clarity by amending the Fair Labor Standards Act (FLSA) and eliminating that rule for employers who do not take a tip credit.

In short what this means is:

• The bill expressly prohibits employers, managers, or supervisors from collecting or retaining tips made by employees— one of the biggest concerns opponents had against the Department of Labor’s most recent, and strongly disliked proposal. The bill nullifies that previous proposal.
• The new law allows tip sharing between tipped and non-tipped employees— for example, between servers and cooks — if a restaurant pays the full minimum wage to all employees. The is a departure from Obama-era rules, which did not allow such sharing of tips.

The tip credit under the FLSA permits an employer to pay its tipped employees less than the federal minimum wage of $7.25 per hour, and a minimum of $2.13 per hour, relying on customer tips to satisfy the difference between the hourly wage and the minimum wage.

The amended portion of the FLSA, while allowing for tip pooling between front and back of house employees if no tip credit is taken, clearly states that tips cannot be shared with managers or supervisors. To determine if someone is a manager or supervisor for the purpose of the tip pooling statute, employers should apply the White Collar Executive duties test below. An employee is only disallowed from sharing in tips if all of the following are true:

1. Their primary duty is the management of an enterprise in which the person is employed or a customarily recognized department or subdivision; and
2. They customarily and regularly direct the work of two or more full-time employees (or the equivalent, e.g., four 20-hour per week employees); and
3. They have the authority to hire, fire, or promote other employees or effectively recommend similar actions.

Given the specificity of the test, a fair number of workers who operate in a supervisory capacity on an occasional basis, or while performing their own customer service tasks, will likely still be eligible to share in tips.

Employers who do take a tip credit are still prohibited from enforcing any tip pooling system that shares tips with employees who do not customarily receive tips.

Employers should review their current tip pooling policies considering this FLSA amendment. Employers will need to determine if it makes more sense to take advantage of tip credits or to use a tip pooling arrangement in the workplace.

If you have any questions about this or any other wage and hour issue, please contact a friendly Payroll Medic to help guide you.