US Department of Labor Announces Intention to Repeal Tip-Pooling Regulation

As set forth in its July 20, 2017 Regulatory Agenda, the United States Department of Labor (“USDOL”) has announced its intention to rescind the controversial 2011 regulation enacted by the Obama Administration (the “2011 Regulation”), which restricted employers from requiring employees to share tips even when no tip credit is taken and tipped employees are paid the full minimum wage.

The 2011 Regulation established that tips are the property of the employee and thus cannot be forcibly distributed to other workers even if no tip credit is taken and the employee receives the full hourly minimum wage.  29 C.F.R. § 531.52.  By way of background, the Fair Labor Standards Act (“FSLA”) contains a tip credit provision, which allows employers of tipped employees the option of paying a reduced hourly wage rate of $2.13 as long as employees receive sufficient tips to bring their hourly rate to the applicable federal minimum wage.  If an employee does not receive sufficient tips to meet the minimum wage, the employer must pay the difference but the employee is also permitted to retain all extra tips. 29 U.S.C. § 203(m). The tip credit provision has resulted in disparity in the incomes of tipped employees and non-tipped “back of the house” kitchen employees.  For this reason, many restaurants and hospitality associations have turned to “tip-pooling,” which many believe allows for a more uniform distribution of income.

Following the enactment of the 2011 Regulation, courts have split as to the proprietary of the Regulation with the Tenth Circuit (covering Colorado, Kansas, New Mexico, Oklahoma, Wyoming and Utah), Fourth Circuit (covering Maryland, North Carolina, South Carolina, Virginia and West Virginia) and Eleventh Circuit (covering Alabama, Florida, and Georgia), holding that the Regulation is not valid and does not apply where an employee is paid the applicable minimum wage.  In contrast, in February 2016, in Oregon Restaurant and Lodging Association v. Perez, the Ninth Circuit held that the FLSA is silent on the question of whether employers who do not take a tip credit can use tip-pooling and, therefore, the USDOL could impose a regulation to fill the gap, thus finding the Regulation to be valid. The National Restaurant Association and other hospitality groups have asked the United States Supreme Court to grant certiorari to resolve this issue and that request is pending.

As the USDOL’s proposal to rescind the 2011 Regulation is subject to the rulemaking process, it will take some time to actually rescind the rule. Accordingly, employers outside of the Tenth, Fourth and Eleventh Circuits, including those in the Tristate Area, should continue abiding the 2011 Regulation until further notice.

Importantly, employers must also be mindful of similar state laws.  For example, New York employers in particular should note that New York’s Hospitality Wage Order and Labor Law restricts tip-pooling participation.