By: Laurent Badoux

Despite threatening a veto, President Trump signed the 2018 Consolidated Appropriations Act (Public Law No. 115-141) on March 23, 2018. The Act is more than 2000 pages in length. Almost at the end of it, there is a 36-word paragraph that may affect how tips are distributed for millions of hospitality industry employees across the country by amending the Fair Labor Standards Act’s (FLSA) provision on tipping (section 3(m)). Prior to this amendment to section 3(m), hospitality industry employers and representative groups, including the National Restaurant Association, had advocated that federal rules should openly allow the sharing of tips with back of the house employees, to more fairly compensate the work performed away from the eyes of the patrons. Conversely, labor groups and food servers argued that employers should increase the pay of back of the house employees without reducing the earnings of front of the house personnel. Shortly after the President signed the Act, the US Department of Labor (DOL) issued a press release indicating that “the omnibus appropriations bill includes a bipartisan statutory provision to ensure that workers in the back of the house (i.e., cooks, bussers, dishwashers) can participate in tip pools in appropriate circumstances. Importantly, this same provision makes clear that employers themselves cannot keep tips.” To the uninitiated, however, how the DOL arrives at this conclusion does not leap off the page. Indeed, there is no mention in the modified paragraph of “back of the house” jobs.

The reason is that the added paragraph creates a new standard for tip pools in states where federal law (as opposed to a more restrictive state law) controls the payment of wages to tipped employees. The two factions interpreted the FLSA in two separate ways. The DOL, under Secretary Perez’s leadership, took the position that employers could only impose a tip pool among employees that actually interacted with customers (commonly referred to as “tipped employees”) and could never be given, in whole or in part, to management. In 2011, the DOL formalized this position. Since then, some courts have disagreed with the 2011 interpretation and maintained that tips could be shared or pooled with anyone, including back of the house employees and management, as long as employers did not take an offset from minimum wage payments for tips received (an offset referred to as a “tip credit”). The current Labor Secretary, Alexander Acosta, had indicated to Congress that he agreed with the judicial interpretations and that he was working to reverse the 2011 interpretation of the tip pooling rules. Following negotiations between Secretary Acosta and Senator Patty Murray (D-WA), the Ranking Member of the committee overseeing the DOL, the new paragraph of Section 3(m) made its way into the 2018 Appropriations Act.

The new paragraph reads: “Any employer may not keep tips received by its employees for any purpose, including allowing managers or supervisors to keep any portion of employees’ tips, regardless of whether or not the employer takes a tip credit.” This new language applies to all employees, not simply “tipped employees” as before, meaning that a tip pool can apply to all, not just those regularly and customarily receiving tips, as long as they are paid at least minimum wage for each hour worked. This provision now allows employers to pool all tips collected and divide the proceeds of the pool among all employees in the establishment, regardless of whether they interacted directly with customers, as long as they are not supervisors or managers and all other applicable requirements are met. Some states have laws that limit tip pools only to tipped employees with direct interactions with guests, or that impose more stringent requirements on tip pools. These state laws will take precedence over this new provision. But in states without regulations on the issue of tips and tip pools, hospitality employers will be able to implement new tip pools that may drastically change how hospitality industry employees are paid.

The DOL plans to initiate the process for regulations shedding additional light on the revised Section 3(m), including providing greater definition to the term supervisor.