Hunton Employment & Labor Perspectives

Earlier this month, the U.S. Department of Labor’s Wage and Hour Division issued a Notice of Proposed Rulemaking (“NPRM”) seeking to repeal a 2011 rule that significantly impacted the compensation of hospitality workers.  Specifically, the NPRM proposes to allow hospitality employers to control the distribution of the tips they pool assuming their employees are paid the full minimum wage.  By way of background, the FLSA requires employers to pay employees a minimum wage (currently $7.25 per hour) plus overtime for all hours worked over 40 in a single workweek.  Employees who “customarily and regularly receive tips” must still receive the minimum wage, but employers may elect to take a “tip credit” by counting up to $5.12 per hour of those employees’ tips toward the minimum wage, meaning employers may pay a reduced wage of $2.13 to tipped employees.  Historically, employers that take the tip credit have been prohibited from sharing money from a tip-pooling system to employees who do not traditionally receive direct tips (cooks, dish washers, etc.).  In 2011, the DOL extended the tip-pooling prohibition to apply to employers even if they do not take the tip credit and pay their employees the full federal minimum wage.

The NPRM seeks to reverse the course set by the 2011 rule by only requiring the tip-pooling prohibition when an employer takes the underlying tip credit.  The corresponding DOL news release provides that the NPRM seeks to give employers “the freedom to allow sharing of tips among more employees” and to “decrease wage disparities between tipped and non-tipped workers.”  Such employer flexibility has been restricted by the 2011 rule, which the news release notes has been subject to “a significant amount of litigation involving the tip pooling and tip retention practices of employers.”  Although the proposed rules will presumably settle any interpretation disputes that have occurred in the courts, in the interim, hospitality employers should consult counsel regarding compliance with the current rule in those jurisdictions where the rule has not been deemed invalid.  To date, only the Fourth, Tenth, and Eleventh Circuit Courts of Appeal have held the 2011 rule invalid.  The DOL will be accepting public comment on the proposed rule until January 4, 2018.