New Rules for Paying Tipped Employees

On April 5, 2011, the Wage and Hour Division of the U.S. Department of Labor published its final amendments to regulations interpreting the Fair Labor Standards Act of 1938 (FLSA) and the Portal-to-Portal Act of 1947. Several of the amendments will impact the way restaurants pay tipped employees.

The FLSA now requires employers taking advantage of the federal tip credit to inform employees of the employer’s intent to do so before utilizing the tip credit. The employer must inform a tipped employee of the following:

• The amount of the cash wage the tipped employee is receiving directly from the employer;
• The additional amount the employer is using as a credit against tips received;
• That all tips received by the employee must be retained by the employee except for tips contributed to a valid tip pool; and
• That the tip credit shall not apply to any tipped employee who does not receive such notification

While the notification is not required to be made in writing, it is recommended that the employer do so.

The amendments also address tip pooling in more detail. There is some good news; the final regulation eliminates the limitation on the maximum permissible contribution percentage to a tip pool.

However, the regulation also prohibits an employer from using an employee’s tips for any reason other than as a tip credit or in furtherance of a legitimate tip pool under the FLSA, regardless of whether the employer uses tip credits.  This directly contradicts the holding in the 9th Circuit under Cumbie v. Woody Woo, Inc. 556 F.3d 577 (9th Cir. 2010). Indeed, the summary of comments specifically disagrees with Woody Woo, which allowed restaurants to require tip pooling with the back of the house in states such as California, Washington, and Oregon, where state law does not allow employers to take a tip credit. The summary of comments states, “The Department respectfully believes that Woody Woo was incorrectly decided” and goes on to state that tips are ultimately “owned” by the employee, and that the employee can be required to share those tips only with employees who “customarily and regularly” receive tips. Thus, employers who were relying on Woody Woo and pooling with the back of the house should immediately stop that practice and revert to tip pooling only with employees who customarily and regularly receive tips.