On December 22, 2020, the Department of Labor (DOL) issued the final Regulations to accompany and clarify the latest amendment to the Fair Labor Standards Act (FLSA). This is the first of three updates relating to these regulations. These regulations go into effect on March 1, 2021.
SUPER QUICK BACKGROUND…
In 2018, congress passed the Consolidated Appropriations Act (CAA) which amended the FLSA. In response to the CAA Amendments, the DOL issued regulations that clarify the amendments and provide businesses with tipped employees (restaurants, salons, etc.) further explanation.
The DOL Updated Regulations make impactful substantive changes to the regulations.
FIRST: General Restrictions on Employers’ use of Employees’ Tips.
- Employers cannot keep tips of employees regardless of whether that employer takes a tip credit.
- The definition of Manager and Supervisor
- Managers and Supervisors may not keep tips of Employees.
SECOND: Tip Pooling
- Explains scenarios where employees who do not customarily and regularly receive tips can participate in a Tip Pool.
THIRD: Dual Jobs
- The elimination of the 80/20 Rule.
- New Recordkeeping Requirements
These rule updates are substantive and impactful. There is a lot to digest. We will address each of the 4 changes one at a time.
This article focuses on the first listed change: The General Restrictions on Employers’ use of Employees’ Tips. This is the first of four blogs on the regulation update.
LET’S GET STARTED…
WHAT IS THE “TIP CREDIT?”
We will be referencing a Tip Credit (TC) in this article, and in the subsequent articles. Let’s break down the TC.
- TC is when the employer pays a tipped employee a Cash Wage of $2.13 per hour, instead of the minimum wage (Federal: $7.25, State: depends on the state).
- NOTE: In Pennsylvania, the minimum wage matches the federal minimum wage.
- NOTE: A Tipped Employee is any employee engaged in an occupation in which they customarily and regularly receive more than $30 a month in tips.
- When an employer pays a Cash Wage of $2.13 per hour, then the employer can take the credit if the employee’s Cash Wage ($2.13/hr) plus Cash Tips is equal to or higher than $7.25 (or the applicable state minimum wage).
- If the employee does not earn sufficient tips to bring the hourly earning to a minimum wage, then the employer must pay additional wages required to make up the difference.
FLSA SECTION 3(M)(2)(B) PROHIBITS ALL EMPLOYERS FROM KEEPING EMPLOYEE TIPS
In 2018, Congress added Section 3(m)(2)(B) to the FLSA. This section applies to all employers regardless of whether they take a tip credit. Section 3(m)(2)(B) instructs that:
- an employer may not keep tips received by employees for any purposes; and
- managers or supervisors are prohibited from keeping any portions of employees’ tips.
Employers who take the Tip Credit can only use the employees’ tips for either:
- A credit against its minimum wage obligation (ie- the difference between $2.13 and the minimum wage); or
- A Tip Pool limited to employees who customarily and regularly receive tips.
What Can an Employer Do With Employees’ Tips?
Credit Card Processing Fees
Employers are not violating the law when they deduct the actual cost of credit card processing charges from the employees’ tips. The Comments to the regulations are clear that the credit card processing fees are simply the “price of converting credit obligations to cash.” It follows that an employer is not violating the FLSA by deducting from the employee’s tips the credit card processing fees for such tips.
Employers are allowed to require a tip split between two employees in accordance with the regulations. For instance, when a waitress splits their tip with the busser.
Employers may facilitate a tip pool by collecting a redistributing the money in accordance with the regulations.
MANAGERS AND SUPERVISORS VS. EMPLOYEES
The regulations provide more clarity as to the definition of a Manager/Supervisor. The status of an individual as a Manager or Supervisor affects their ability to collect tips.
First: What is a “Manager” or “Supervisor”
Managers and Supervisors are the Business Owners as defined by the FLSA, or the individuals who have Executive Duties as defined by the FLSA. D
The FLSA defines a Business Owner as any individual who (1) owns at least 20% equity interest in the enterprise, (2) actively employed, and (3) actively engaged in management.
If the individual does not satisfy the Business Owner definition, then the Regulations instruct us to employ Duties Test that is outlined in the Executive Exemption Regulation. NOTE: There is no salary threshold for an individual to be considered a Manager or Supervisor.
REAL QUICK: When assessing whether an employee is exempt under the Executive Exemption, the FLSA requires the review of the individual’s (1) compensation and (2) duties. The Updated Regulations explain that when determining whether an employee is a Manager or Supervisor, employers must use the Duties Test that is already defined in the FLSA for the purposes of the Executive Exemption. Again, an individual’s “Duties” must be evaluated- not their “Salary.”
So, Managers and Supervisors are those whose:
- Primary Duty is the management of the restaurant/salon etc., or a recognized department or subdivision thereof; (NOTE: The FLSA regulations expound on what constitutes “primary duty.” Employers should consult with counsel to confirm an employee’s “primary duty.”)
- Who customarily and regularly directs the work of at least 2 full-time employees or their equivalent; and
- Who has the authority to hire or fire other employees, or whose suggestions and recommendations as to the hiring/firing are given particular weight.
When a Manager/Supervisor Can Keep Tips
A Manager or Supervisor can keep tips that they receive directly from customers based on the service that they directly provide. In other words, a supervisor who waits on a table, can keep any tip from that table.
Managers and Supervisors are PROHIBITED from keeping any tips received by other employees.
Managers/Supervisors are Prohibited from Participating in Tip Pools
Tip Pools will be discussed at length in a future blog; however, it must be noted that Managers and Supervisors are prohibited from participating in a Tip Pool.
Employees Cannot Split/Share a Tip with a Manager/Supervisor
As explained above, the Regulations allow for employees to share/split tips with other employees (ie- waitress/busser; hairstylist/hair-washer); however, employees are not permitted to split/share tips with a Manager/Supervisor.
WHAT DOES THIS MEAN?
Businesses with tipped employees have been put through the ringer in 2020 and 2021 does not seem to be shaping up to be much better. While compensation plans may not be top of mind for restaurant and salon owners, it would behoove these employers to re-visit compensation policies. Employers with tipped employees should confirm the status’ of employees with Managerial/Supervisory roles.
While assessing job duties is most likely the last thing any small-business owner wants to do, FLSA violations carry liquidated damages, and can come in the form of collective actions. Such lawsuits could be detrimental if not fatal to a business.
Stay tuned for the next blog where we will discuss Tip Pools.
ABOUT SUSIE CIRILLI
Susie M. Cirilli is a Labor & Employment attorney that assists clients with issues involving the ADA, FMLA, and Title VII claims. Susie litigates on matters related to hostile work environment, discrimination based on sex, sexual orientation, pregnancy, race and disability. Susie has experience representing employers in fact-finding conferences and mediations before the PHRC and the EEOC. Susie’s practice also consists of counseling and advising clients on employment matters. She often advises employers on day to day employment matters and assists her clients on employee issues such as hiring and terminations, which includes drafting and negotiating separation agreements. Susie has experience drafting and revising employment agreements, employee handbooks, non-compete and non-solicitation agreements. Susie is admitted in the Middle District and Eastern District of Pennsylvania. She is also admitted in the Federal Court for the District of New Jersey.
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