We all know a bit about tipping. Each of us has dined in restaurants, ridden in cabs or visited settings where we tipped a tour guide. But few of us have likely thought about the way our tips interact with federal minimum-wage laws. For example, are the tips we provide employees considered property of employers or employees? It turns out that the answer to this question is not so simple and may soon change.
The relationship between tipping and minimum wage begins with the Fair Labor Standards Act, which establishes minimum-wage, overtime-pay, recordkeeping and youth-employment standards. It sets baseline federal requirements and allows states to enact more expansive protections.
Additionally, the FLSA has special provisions that apply to employers and employees in service-facing industries. For example, in jobs where employees get tipped, employers can pay tipped employees less than the minimum wage. That is, employers can pay a “tipped minimum wage” of $2.13–so long as, when combined with tips the employee receives, the employees’ wages total $7.25 per hour.
Now we come to “tip pooling.” This practice allows employers to decide whether employees must share their tips in order to lessen disparities between front-of-the-house and back-of-the-house employees. The FLSA prohibits employers that pay the tipped minimum wage from requiring a tip pool, but the statute is silent on whether the practice is prohibited when employers pay the full minimum wage. This gap has led the Department of Labor to recently step in.
In 2011, the DOL banned tip pooling for businesses that pay the regular minimum wage. This rule was seen as helping tipped workers by reinforcing that tips are the property of employees. But the rule garnered outcry from the hospitality industry, such as the National Restaurant Association, which sued the DOL in several high-profile lawsuits, some of which have been appealed to the Supreme Court.
In December 2017, the DOL announced that it planned to enact a rule that would again allow employers that pay the full minimum wage to require tip pooling. The notice abides by a process set out in the Administrative Procedure Act, which allows federal agencies to enact rules only after giving notice to the public and allowing them to comment. Now the comment period has ended, and the DOL will have to address the issues raised and craft a final rule.
Most public comments reflect fear that restaurant owners will be able to pocket tips for themselves because the proposed rule allows managers to use pooled tips to make structural improvements and lower menu prices. Critics have pointed to studies showing how the rule would adversely affect women and non-white tipped employees most. Workers’ rights groups argue that there is no way to check that employers actually distribute pooled tips to back-of-the-house employees.
The DOL can modify the proposed rule, rescind it or go forward with it as proposed. Whatever it decides, it must provide a well-reasoned decision that responds to the public comments. Although most predict that the DOL will enact the new rule, Labor Secretary Alexander Acosta and the GOP chairman of the House Labor Appropriations Panel recently endorsed a provision that would explicitly prohibit employers from requiring tip pooling. As the congressional debate ignites, legal challenges to the rule are sure to come.