On March 23, 2018, with national attention focused on the specter of a government shutdown and a potential veto on Congressional spending measures, President Donald Trump signed into law the Consolidated Appropriations Act of 2018 (the Act). In doing so, the President and Congress quietly passed legislation making employer retention of tips illegal under the Fair Labor Standards Act (FLSA) (see Section 1201).
Under its 2011 final rule concerning tipped employees, the U.S. Department of Labor (DOL) asserted that tips were the exclusive property of the employees receiving them regardless of whether an employer took a tip credit, which is a credit for tips received by its tipped employees equal to the difference between the statutorily-required cash wage and the applicable minimum wage. That position on tip ownership, however, resulted in numerous legal challenges to the DOL’s authority to promulgate the 2011 final rule. A split in Federal judicial circuits also evolved regarding the application of the final rule to employers that paid tipped employees a direct cash wage equal to or greater than the Federal minimum wage and did not take a tip credit.
Through the Act, Congress amended Section 3(m) of the FLSA (29 U.S.C. § 203(m)) to expressly prohibit employers, managers, and supervisors from keeping any portion of tips received by employees for any purpose, regardless of whether the employer takes a tip credit. The Act further amends Section 16 of the FLSA (29 U.S.C. § 216) by (1) creating a private right of action against employers that unlawfully retain employee tips, and (2) expanding the scope of remedies available to aggrieved employees.
Employers who violate the FLSA’s anti-tip retention provision will now be liable for (1) the amount of tip credit taken on the affected employee(s), (2) the amount of the tips kept by the employer, and (3) an additional equal amount of liquidated damages. Employers who unlawfully keep their employees’ tips could also be subjected, at the discretion of the Secretary of Labor, to newly enacted civil monetary penalties (not to exceed $1,100 for each violation).
In addition to formally protecting employees from tip theft in the FLSA, the Act also narrows the application of the 2011 final rule. Specifically, the Act provides that portions of the DOL’s 2011 final rule concerning tipped employees not addressed in the FLSA and the foregoing amendments “shall have no further force or effect” until future action is taken on the matter by the DOL Wage and Hour Administrator.
While the foregoing amendments provide some meaningful guidance on how employers should handle their employees’ tips under the FLSA, it remains to be seen how the DOL and courts will practically apply the same. For example, neither the FLSA nor any applicable DOL regulation defines the terms “manager” or “supervisor.” Thus, some ambiguity could exist regarding whether it is permissible for employees with marginal supervisory duties to retain tips, for example, as members of a tip pool. Likewise, it is unclear from the FLSA amendments and the Act’s invalidation of the DOL’s 2011 rule whether the permissible nature of tip pooling has expanded for employers not taking a tip credit to include “back-of-the-house” employees (e.g., cooks and dishwashers). Adding to the potential confusion, the DOL indicated via a March 23, 2018 press release that such back-of-the-house tip pool participation could now occur because of the Act’s passage under unspecified “appropriate circumstances.”
Employers with tipped employees should take this opportunity to review their tip pooling and tip distribution practices to ensure that ownership and management are not retaining any employee tips. Employers of tipped employees taking a tip credit may also wish to review their compliance efforts with Section 3(m)’s tip credit notice requirements and, to the extent necessary, use the FLSA’s amendment as a basis for confirming that proper notice has been provided to all tipped employees.