New federal rules went into effect May 5 requiring restaurant employers to make sure they appropriately inform tipped employees of their tip-credit-related practices.

The new regulations, the first changes to the Fair Labor Standards Act of 1938 concerning tip credits in 44 years, provide guidance on the ownership of employee tips, acceptable tip-pooling
arrangements and the employer’s obligation to notify employees of their tip-credit practices.

Industry watchdogs were displeased with the changes, which the U.S. Department of Labor, or DOL, issued April 5 with only a 30-day implementation period. The National Restaurant Association unsuccessfully tried to have the rules withdrawn or delayed for at least 120 days to ease what it called an “immediate and negative impact on U.S. restaurants with tipped employees.”

According to the NRA, about 2.4 million servers and 500,000 bartenders, as well as employees who receive tips indirectly, should by now have received notice of their employers’ tip-credit practices. Restaurant employers that do not follow the new rules could lose the right to apply tip earnings toward the wages of tipped employees.

Lee Schreter, a shareholder with the law firm Littler Mendelson P.C. in Atlanta and co-chair of the firm’s wage and hour practice group, said that the new rules “could have enormous consequences” for the industry. She pointed to the many lawsuits questioning tip ownership and tip-pooling rights that have roiled the industry in recent years, and talked with Nation’s Restaurant News about what the new rules mean for operators.

What do the new rules say about ownership?

There’s been a dispute brewing across the country about who owns tips. It’s always been the DOL’s point of view that they are the property of employees, and some courts have said that that is certainly true. But there was an open question for employers who do not claim the tip credit.

So here’s the setup: Last year in Cumbie v. Woody Woo Inc., the 9th Circuit looked at whether tips are the property of the employee or the employer. Oregon [where Woody Woo is located] does not have a tip credit, and the employer was requiring servers to contribute to a tip pool for the back-of-the-house. If an employer claims a tip credit, only tipped employees can be required to [participate in a tip pool; nontipped employees must be excluded from the pool.]

The plaintiff said servers should not be required to pool tips for back-of-the-house employees, and the DOL filed an amicus brief, and the 9th Circuit rejected [the argument].

In these new regulations the DOL continues to take the position that tips — whether an employer claims the tip credit or not — are the property of the employee. That sets up a real mess for some employers.

In other parts of the country, employers are not bound by the 9th Circuit decision, but now they have the DOL regs. In the 9th Circuit, which includes Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington state, employers can rely on the Woody Woo decision … and if you don’t claim the tip credit, you can require employees to tip out to other employees that are not part of the tip pool. If you are outside of the 9th Circuit, whether you are claiming the tip credit or not, you cannot compel employees to contribute their tips to a tip pool in which nontipped employees participate.

So how should employers proceed?

Outside of the 9th Circuit you absolutely have to make sure you are in compliance with federal and state law. I think there are some employers outside of the 9th Circuit who demand employees turn over tips, and that is not permissible under the FLSA as these regulations stand right now. … If the state prohibits the tip credit, the smartest thing to do is look at state and federal law. [Alaska, California, Minnesota, Montana, Nevada, Oregon and Washington prohibit tip credits.]

What else do the new rules require?

There are notice requirements. There are any number of cases going on right now [concerning] the required notice an employer has to give and what it has to include. [Under the new rules] first and most important is that the tip-credit notice must be made in advance of the employer claiming the tip credit. If employers are not giving advanced notice, then employers cannot claim the tip credit. … It doesn’t have to be in writing, but if you don’t give notice in writing, you’re setting yourself up where an employee can say that they didn’t get the notice. We advise it is given in writing and the employer document it in the employee’s file. The practical effect is that it imposes an added burden on employers, but you don’t want to be caught in court with a potential failure of notice — that could have enormous financial implications if you are claiming the tip credit.

Is there anything good about the new regulations, in your opinion?

The tip-out provision is actually a win for employers. Previously, DOL said that the most employers could require was 15 percent of tips received or 2 percent of daily gross sales. A number of courts said that’s not correct, and in fact the DOL concedes in the rules. The regulations issued specifically now state that there’s not a maximum contribution percentage for tip outs, but they add that only people who regularly receive tips can participate in the tip pool.

Any parting advice for restaurant employers?

Make sure you get good advice about what to do with tips and how to handle them because it’s very easy to misstep, and it’s easier now to misstep with these new regulations.

Elements to include when notifying employees a tip credit will be taken:

• The amount of the cash wage that is to be paid by the employer to the tipped employee.
• The amount of tips that will be credited as wages toward the
• minimum-wage requirement. The maximum is $5.12 per hour toward the federal minimum wage of $7.25 per hour. Minimum wage and allowable tip credits vary by state, however, and employers should make sure they are in compliance with state requirements.
• The fact that all tips received by the employee must be retained by the employee, except for tips contributed to a valid tip pool, which is limited to employees who customarily and regularly receive tips.
• The required tip-pool contribution amount.
• The fact that the tip credit shall not apply to any employee who has not been informed of the employer’s tip-credit intentions.

Although written notice is not required by the new regulations, Littler Mendelson advises that employers prepare and distribute written notice to tipped employees incorporating these elements. A written notice, signed by each employee, will provide more definitive proof of compliance if the adequacy of notice is legally challenged.

Source: Littler Mendelson P.C.

Contact Robin Lee Allen at robinlee.allen@penton.com.