DOL Cracks Down, and Opens Cracks, on Employers Keeping Tips

Employers will soon face stricter financial penalties for keeping their employees’ tips under a final rule published by the U.S. Department of Labor (DOL) on September 24, 2021. Section 3(m)(2)(B) of the Fair Labor Standards Act (FLSA) prohibits employers—including “managers and supervisors”—from keeping employees’ tips “for any purposes,” regardless of whether employers claim a tip credit. Under the current Trump-era regulation, the DOL may only assess civil money penalties (CMPs) of up to $1,100 per violation against employers that “repeatedly or willfully” keep their employees’ tips. Notably, the new final rule revises the definition of “willful” to apply when the DOL finds the employer should have inquired as to whether its tip practices were lawful. More importantly, under the new final rule, the DOL will have the ability to levy CMPs (in addition to any back wages owed) against employers regardless of whether the violations are repeated or willful.

The new rule also clarifies that a manager or supervisor may keep tips when they are received for services the manager or supervisor directly and solely provides to the customer. A manager who serves his or her own tables may keep his or her own tips. In contrast, a manager who merely runs food to a table for which a server is otherwise responsible may not keep any portion of the tip left by the customer. As a result, the final rule essentially requires the manager to be the exclusive service provider in order to keep the tip. Thus, employers may want to have clear guidelines in place for managers to receive tips to ensure compliance with the narrow requirements under the new final rule.

Relatedly, the DOL modified 29 C.F.R. § 531.54(c)(3) and (d), which currently provide that an employer may not ever “include” managers and supervisors in tip pools or sharing arrangements (regardless of whether a tip credit is taken). Under the new final rule, a manager or supervisor who receives tips for services that he or she directly and solely provides may still be required by his or her employer to contribute some portion of those tips to a tip pool. But the new rule also clarifies that, consistent with section 3(m)(2)(B)’s prohibition on managers and supervisors keeping other employees’ tips, employers may not allow managers and supervisors to receive a share of a mandatory tip pool. The final rule also confirms that employers that do not utilize the tip credit may allow non-managerial and non-supervisory back-of-house employees to participate in a tip pool.

The new final rule is yet another example of the “Tale of the Partisan Pendulum” with regard to tips. Of course, even if an employer is complying with the FLSA, it still may be out of compliance with the requirements of stricter state laws. Accordingly, a careful review of tip-pooling or tip-sharing arrangements to ensure compliance with the FLSA, federal regulations, and applicable state laws may be warranted. The new final rule is scheduled to take effect on November 23, 2021.