On Friday, July 21, 2017, the U.S. Department of Labor announced plans to rescind the controversial tip-pooling restrictions imposed on employers in 2011. The announcement has potential to significantly impact hospitality employers throughout California.
Under the Fair Labor Standards Act, hospitality employers may pay wait staff a lower wage so long as they receive enough tips to bring their hourly rate to the $7.25 federal minimum wage. While banned in California, this option, known as a “tip credit,” allows employers to pay wages as low as $2.13 per hour so long as the employee receives at least $5.12 in tips. If the employee does not earn at least $7.25 after factoring tips, the employer must pay the difference; if there are more than enough tips, the employee keeps the excess.
2011 Tip-Pooling Restrictions
The current tip-pooling restrictions were enacted by the Obama administration in 2011. The rules established that tips are the property of employees and cannot be distributed to other workers or by the employer, even if the employer does not take a tip credit and pays tipped employees the full minimum wage. Several circuit courts have struck down these restrictions, holding that they do not apply to employers who pay employees at least the $7.25 minimum wage. Employers in these circuit jurisdictions have thus been permitted to retain employee tips and distribute them to back-of-house employees who do not otherwise receive tips. Such tip-pooling arrangements are designed to make pay more equitable throughout a restaurant.
The Ninth Circuit, holding jurisdiction over California, has disagreed; hospitality employers throughout the state have thus remained subject to the tip-pooling restrictions and have had no control over employee tips. In effect, back-of-house staff have been excluded from tip pooling arrangements.
Effect of the July 21, 2017 Announcement
The announcement by the U.S. Department of Labor on July 21, 2017 to rescind the tip-pooling restrictions thus is significant to California employers and others throughout the Ninth Circuit. If the Department proceeds as planned, California hospitality employers may exercise control over employee tips and arrange tip pooling that benefits back-of-house staff.
Hospitality employers should understand that the announcement does not have any legal effect; the restrictions remain in place until further action is taken by the U.S. Department of Labor. Nonetheless, given the split amongst circuit courts, employers should expect the Department to act quickly.
Mitzel Group attorneys will monitor developments in this regard and update employers of any further changes. Please contact us with any questions.