By Andrew J. Adams
On October 7, 2019, the U.S. Department of Labor (DOL) announced a proposed rule affecting businesses with tipped employees. The rule would change tip restrictions regarding “back of the house” employees (such as cooks and dishwashers) and allow them to participate in non-traditional tip pools when their employer does not take a tip credit. Despite the possible effect on employers nationally, those doing business in the Commonwealth will still be subject to the more stringent Massachusetts tip pool statute.
A Quick Refresher
Under the Fair Labor Standards Act (FLSA) and Massachusetts law, employers are generally required to pay tipped employees the prevailing minimum wage. However, these employers are permitted to count a set amount of tips as a partial credit (tip-credit) to satisfy the difference between the paid cash wage and the minimum wage, thereby offsetting their payroll costs. If the employee’s hourly rate, including tips, dips below the minimum it is the employer’s responsibility to pay the difference.
Current Tipped Wage Rates:
Massachusetts Minimum: $4.35 Must equal at least $12.00/hr for all hours worked after tips
Federal Minimum: $2.13 Must equal at least $7.25/hr for all hours worked after tips
Both the FLSA and Massachusetts law allow employers with tipped employees to institute tip pooling arrangements where all tipped employees put part or all of their tips together. Those collective tips are then divided and distributed to the participating employees in a manner predetermined by the employer.
Despite their similarities, the Federal Rules and Massachusetts law differ in some very important ways. Misunderstanding which set of rules applies to your business can have serious implications as tip diversion settlements can rise into the millions.
The DOL’s Proposed Rule
Last year in the Consolidated Appropriations Act, 2018 (CAA), Congress amended the FLSA to prohibit employers from keeping or diverting any tips, even if that employer does not take a tip credit. As a result, the DOL has proposed a new rule modifying the current tip regulations to comply with the CAA. In addition to this change, the new rule would allow employers who do not take a tip credit to implement non-traditional tip pools. These tip pools could include “back of the house” employees such as cooks and dishwashers. The rule prohibits employers, managers, or supervisors from keeping or receiving any portion of employee’s tips even if they participate in non-traditional pools. The DOL believes that this new rule will help equalize income and promote collaboration and cooperation between employees by incentivizing back of the house employees. The rule’s benefit analysis also highlighted that implementing non-traditional tip pools would allow employers to reduce the pay of their non-service staff by providing alternative avenues for compensation.
No Tips for You
Despite the changes to the Federal Rule, Massachusetts law still prohibits non-service employees from receiving any portion of tips, whether or not the employer makes use of a tip credit. The law prohibits the distribution of tips to any employees other than wait staff, service employees, and service bartenders, with the additional caveat that those participating in tip pools may not exercise any managerial responsibility.
It is important that employers with operations in Massachusetts understand that the new DOL regulations do not change their current obligations. Noncompliance with the Massachusetts law carries the potential liability of three times the amount of tips that employees would have received had they not been improperly distributed. Determining which employees must be excluded from tip pools in Massachusetts can be a complicated undertaking and should be done with the consultation of experienced labor and employment counsel.