The new regulations interpreting the Fair Labor Standards Act (FLSA) will take effect May 5, 2011. Published earlier this month by the Wage and Hour Division of the U.S. Department of Labor (DOL), the final amendments to the regulations provide employers with much needed clarification on taking tip credits and constructing valid tip pooling arrangements.
The amendments make clear that an employer may not use or divert an employee’s tips for any reason other than a valid tip pooling arrangement, which can include only those employees who customarily and regularly receive tips. This is true even if the employer takes no tip credit and instead pays the tipped employee the full minimum wage. The DOL expressly rejected a 2010 Ninth Circuit decision in which the Court of Appeals held that a mandatory tip pool can include non-tipped employees if the employer takes no tip credit.
The DOL also declined to impose a maximum contribution percentage on valid mandatory tip pools. Prior DOL opinion letters and the Field Operations Handbook had provided that the maximum contribution percentage was limited to an amount that was “customary and reasonable,” which the DOL defined as 15% of tips received or 2% of daily gross sales. The amendments to the regulations adopt the view of several courts that have found this limitation to be unsupported by the language of the statute. That said, an employer must notify employees of any mandatory tip pool contributions. Also of significance, an employer must now notify employees of its use of the tip credit in advance of taking the credit.