Professional Service Agreement

FLSA Amendment Bars Employers from Retaining Tips But Removes DOL Prohibition on Tip Sharing

April 02, 2018

An amendment to the Fair Labor Standards Act (FLSA) in the omnibus budget bill, “Consolidated Appropriations Act, 2018,” provides that an employer “may not keep tips received by its employees for any purposes, including allowing managers or supervisors to keep any portion of employees’ tips, regardless of whether or not the employer takes a tip credit.”

However, the amendment also expressly rescinds the portions of Department of Labor (DOL) regulations that prohibited employers from requiring tipped employees to share their tips with traditionally “non-tipped” employees. That prohibition is no longer valid, thus restoring federal law as it existed prior to the 2011 regulation,i.e.,permitting, under federal law, tipped and non-tipped workers to share tips, as long as the employer does not take a “tip credit.”

Trump Administration’s Proposed Rule Change

In 2017, the DOL issued a Notice of Proposed Rulemaking to rescind the tip-sharing prohibitions of a 2011 rule. However, nothing in the language of the proposed new rule would have prevented members of management, or even employers themselves, from retaining employee tips; the proposed rule did not in any way regulate tip distribution where no tip credit was sought and taken. As a result, employee advocacy groups and members of Congress balked. The DOL’s new proposal received even further backlash when accusations arose that the agency intentionally secreted a pre-proposal study showing this rule could result in employee tips being retained by employers.

New Congressional Amendment

The amendment to the FLSA unequivocally states that employers may not “retain” employee tips regardless of whether a tip credit is taken. The amendment extends this concept to prohibit “managers” and “supervisors” from retaining tips, although it fails to define those terms and, therefore, creates ambiguity as to whether employees with any supervisory authority would be prohibited from sharing tips, even if they are in positions that traditionally do so.

The amendment further provides that a violation of this provision subjects the employer to a civil penalty of up to $1,100 for each such violation, as well as liability to the affected employee(s) for the unlawfully retained tips and an equal amount in liquidated damages. Moreover, if the employer retains tips and takes a tip credit, the penalty also includes loss of the tip credit in addition to disgorgement of the unlawfully retained tips.

To the extent that it precludes employers from keeping tips, the provision is in accord with the 2011 rule. However, in a return to the pre-2011 rule, the amendment will allow employers to require traditionally tipped employees to share their tips with traditionally non-tipped employees — as long as the tipped employees are paid at least the full minimum wage.

To recap, the amendment to the FLSA establishes a compromise: it permits tip splitting among and with non-supervisory, non-service employees (such as cooks) where no tip credit is taken, but otherwise forbids distribution of tips to such employees when a tip credit is taken, and categorically bans retention of tips by an employer, manager, or supervisor under either scenario.