“Drip, drip, drip” is the best description of the Biden administration’s staggered attack on the 2020 Tip Final Rule through delays, withdrawals, amendments and notice of proposed rulemaking (NPRM). The latest action by the Department of Labor (DOL) came last week, when the Wage and Hour Division published its final rule addressing managers who receive tips and penalties for violations of the Fair Labor Standards Act (FLSA) (September Tip Final Rule). These regulatory amendments will be effective Nov. 23, 2021.
Managers Who Receive Tips
As expected, the September Tip Final Rule tracks the 2018 Consolidated Appropriations Act (CCA) by prohibiting managers, supervisors and employers from keeping employees’ tips, and it defines managers and supervisors in line with the executive exemption from overtime. See 29 C.F.R. § 531.52(b)(2); see also 29 C.F.R. §§ 541.100(a)(2)-(4) and 541.101 (delineating the executive exemption). Also as expected, the September Tip Final Rule allows mandatory tip pools to include employees who do not customarily and regularly receive tips if the employer pays all employees in the pool the full minimum wage and does not take a tip credit. See 29 C.F.R. § 531.54(c)(3) and (d).
The DOL clarified in its discussion of amended section 531.54(c)(3) and (d) that managers, supervisors and employers who receive tips could contribute to a tip pool, but they could not receive tips from a tip pool. Id. “[T]he Department adopts changes to its regulations to clarify that, while an employer may not allow a manager or supervisor to keep other employees’ tips by receiving tips from a tip pool or tip sharing arrangement, section 3(m)(2)(B) does not prohibit an employer from requiring a manager [or] supervisor who receives tips directly from customers to contribute some portion of those tips to eligible employees in an employer-mandated tip pooling or tip sharing arrangement.” 86 Fed. Reg. 52973 at 52982. Even if a manager or supervisor meets the requirements to be paid with a tip credit and to participate in a tip pool under section 3(m)(2)(A), the DOL explained that if they qualified as a manager or supervisor under section 3(m)(2)(B), they cannot receive tips from the tip pool or keep other employees’ tips. Id. at fn 15. The DOL also noted that employers could similarly contribute tips to a tip pool. Id. at 52982.
A key change to the 2020 Tip Final Rule in the September Tip Final Rule is the DOL’s decision to emphasize that supervisors and managers can keep tips only for services that they directly and solely provide. Id. at 52981. The DOL added the term “solely” in the September Tip Final Rule to “prevent managers and supervisors from keeping tips when it is not possible to attribute the tip solely to the manager or supervisor.” Id.; 29 C.F.R. § 531.52(b)(2). Thus, the supervisors and managers in compliance with the FLSA are not keeping “any portion” of other employees’ tips. 86 Fed. Reg. 52973 at 52981. As an example, the DOL explains that a manager who “simply runs food to a table for which a server is otherwise responsible” may not keep any portion of the tip left for the server because “that tip was not earned solely by the manager or supervisor.” Id.
Penalties for Violations of the FLSA
The 2020 Tip Final Rule, tracking the CCA’s amendments to the FLSA, added to the DOL’s regulations civil money penalties (CMPs) for violation of section 3(m)(2)(B) – the statutory prohibition of employers keeping employees’ tips. See 29 U.S.C. § 216(e)(2) (adding new penalty language to the FLSA). The DOL took issue with the 2020 Tip Final Rule’s limitation of CMPs to only willful or repeated violations of section 3(m)(2)(B). So, the September Tip Final Rule follows the March 25, 2021 NPRM and does not restrict CMPs for violation of section 3(m)(2)(B) to only “repeated or willful” violations. See 29 C.F.R. §§ 578.3, 578.4, 579.1, 580.2, 580.3, 580.12 and 580.18(b)(3). The DOL reasoned that the CCA did not limit the DOL’s power to assess CMPs for violations of section 3(m)(2)(B) to only willful or repeated violations and, instead, granted to the DOL the authority to assess CMPs “as the Secretary determines appropriate.” 86 Fed. Reg. 52973 at 52977. With these amendments, the DOL has “adopt[ed] the same rules, procedures, and amount considerations for tip CMP assessments as the [DOL] applies for other FLSA CMP assessments, which will promote the goals of consistency and familiarity.” Id. For employers, this means the DOL can assess CMPs when an employer keeps employees’ tips without having to establish the employer’s violation was willful or repeated.
The September Tip Final Rule goes beyond regulation of tipped employees by publishing amendments to the regulations governing when a violation of the FLSA overtime or minimum wage provisions is willful. The September Tip Final Rule amends sections 578.3(c)(2) and 579.2 in accordance with the NPRM so “an employer’s receipt of advice from [the Wage and Hour Division] that its conduct is unlawful is ‘not automatically dispositive’ of a knowing violation . . . and . . . should not ‘automatically subject’ an employer to CMPs where the employer has a legitimate disagreement with the [Wage and Hour Division] concerning the FLSA’s coverage.” Id. at 52979. But employers should not get too excited, because the amendments also emphasize that other circumstances showing the employer knew its conduct was unlawful can be sufficient to show that a violation is knowing. Id. at 52980; see 29 C.F.R. §§ 578.3(c)(2) and 579.2. “All facts and circumstances surrounding the violation must be taken into account when determining willfulness.” 86 Fed. Reg. 52973 at 52979; see 29 C.F.R. § 578.3(c)(1).
The September Tip Final Rule also defines willfulness to include “reckless disregard of the FLSA.” See 29 C.F.R. §§ 578.3(c)(3) and 579.2. According to the DOL, these amendments establish that “an employer is in reckless disregard of the FLSA when, among other situations, the Department determines based on all of the facts and circumstances that the employer should have inquired into whether its conduct was lawful but failed to do so adequately.” 86 Fed. Reg. 52973 at 52980. However, the DOL intended these amendments “to make clear that reckless disregard can be proven by evidence other than that the employer should have inquired further but did not do so adequately.” Id.; see 29 C.F.R. §§ 578.3(c)(3) and 579.2.
The Bottom Line: While the September Tip Final Rule does not include the more controversial proposals in the March 25, 2021 NPRM, employers should not disregard these amendments. Employers should exercise caution when managers or supervisors keep tips received from customers even for services they directly provided, because amended section 531.52(b)(2) does not allow a manager or supervisor to keep such tips if another employee provided services for the same customer. Additionally, while the DOL provided some clarity in the regulations governing CMPs, it also included language the DOL interprets as expanding the scope of evidence that the DOL can use to support a willful violation.
BakerHostetler’s Labor and Employment Practice Group will continue to monitor the implementation and effectiveness of the March 25, 2021 NPRM and will provide further updates as they become available. If you have any questions in the meantime, please reach out to David Grant (firstname.lastname@example.org) or Caroline Landt (email@example.com).