Change in Tip Pool Rules – DOL Plans to Revoke Prior Tip Pool Restrictions

On July 20, 2017, as part of the Trump Administration’s Unified Regulatory Agenda, the United States Department of Labor (“DOL”) announced its intent to rescind regulations prohibiting tip pools which include certain restaurant staff.  Under prior DOL rules issued in 2011, employers cannot require wait staff, bussers, bartenders, and other customer-facing “front of the house” staff to share the tips they receive with “back of the house” staff such as cooks, expediters, dishwashers, etc.

Once the proposed change is enacted, so long as an employer pays the full federal minimum wage (currently $7.25 per hour) to tipped employees, a lawful tip pool can include “back of the house” staff. Rescission of the current DOL regulations on tip pooling also means that Hawaii employers can take the tip credit under Hawaii minimum wage law authorized by HRS 387-2, and require tipped employees to participate in a tip pool that includes “back of the house” staff.

Under the Hawaii tip credit law, for 2017 (when the Hawaii minimum wage is $9.25 per hour), an employer can pay its tipped employees a direct wage of $8.50 per hour (and take a tip credit of 75 cents) so long as the tipped employee receives and retains at least $7.75 per hour in tips.   All told, the employee must receive at least $16.25 per hour ($8.50 in direct wages and a minimum of $7.75 in tips).   If a tipped employee averages more than $7.75 per hour in tips during a workweek, the employer could then direct that some (or perhaps all) of the tips above $7.75 per hour be used to “tip out” back of the house staff.   This is great news for restaurant owners, who have had to develop alternate means of rewarding kitchen workers for their efforts.

Background to the Tip Pooling Changes

In 2010, the federal Ninth Circuit Court of Appeals (which includes the state of Hawaii) issued a decision in Cumbie v. Woody Woo, Inc. holding that in situations where a tipped employee is paid the full applicable minimum wage, the employer could require the tipped employee to participate in a tip pool that includes kitchen staff and other employees who do not “customarily and regularly” receive tips.

Subsequently, in April 2011, the federal DOL issued regulations disagreeing with the Ninth Circuit’s decision in Cumbie.  The 2011 DOL regulations, which are currently in effect, made clear that regardless of whether an employer takes a tip credit against the minimum wage, employers cannot require customarily and regularly tipped employees such as waitstaff to share their tips with back of the house kitchen staff.

In 2016, the Ninth Circuit revisited the law on unlawful tip pools in Oregon Restaurant and Lodging Assn. v. Perez.   In Oregon Restaurant and Lodging, the Ninth Circuit reversed its 2010 ruling in Cumbie and held that because the FLSA was silent on the issue of the type of employees who could participate in tip pools where no tip credit is taken, the statute’s silence created a gap which the DOL, in interpreting the FLSA, was authorized to fill through its 2011 regulations.  The Ninth Circuit then upheld the 2011 DOL rules prohibiting back of the house staff from participating in tip pools, even in situations where no tip credit was taken by the employer.

The Oregon Restaurant and Lodging Association and the National Restaurant Association have petitioned the United States Supreme Court to appeal of the Ninth Circuit’s ruling.  Many commentators believe the U.S. Supreme Court is likely to hear the appeal.

What Does This Mean For Restaurants?

Although the DOL’s announcement is certainly good news, employers should exercise caution before immediately including back of the house staff in their tip pools.  The change to the tip pooling rules will require a notice and comment period, and it will take some months before the current rule is officially rescinded.  Although the DOL has informally stated that it will suspend its own enforcement actions for unlawful tip pooling arrangements until the current rule is rescinded, in the meantime plaintiffs can still bring private lawsuits relying on the current DOL tip pooling rules.

Clayton Kamida, CEO, Hawaii Employers Council

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