I.                    The History of Tip Pooling

The Fair Labor Standards Act (“FLSA”) permits employers to mandate that tips be shared between a pool of eligible employees. A tip pool may either be traditional or nontraditional. In a traditional tip pool, only employees who “customarily and regularly” receive tips may share. A non-traditional pool is more expansive, including employees who do not receive their own tips but may contribute to the overall customer experience.

In 2011, the DOL prohibited the sharing of tips with employees who do not customarily and regularly receive tips. Effectively, back-of-the-restaurant staff, like cooks and dishwashers, could never partake in a tip pool.

Congress later passed the Consolidated Appropriations Act of 2018 (“CAA”), forbidding employers from taking employee tips, but remaining silent on who can share in a tip pool. The DOL supplemented this gap with guidance on April 6, 2018 advising employers that non-tipped employees could partake in tip pools under certain conditions.

II.                 The DOL’s December 2020 Regulations

On December 22, 2020, the DOL issued revised regulations formalizing the aforementioned guidance position.

Where employers pay less than the minimum wage and claim a tip credit, they must still implement a traditional tip pool only including customarily and regularly tipped employees.

Under the new regulations, nontraditional tip pools—with employees who do not normally receive tips—are permitted if the employer directly pays at least the federal minimum wage and does not take a tip credit. These employers accordingly enjoy a new flexibility to incentivize tipped and non-tipped employees who contribute to the overall customer experience.

III.               Tip Pooling Requirements Under California Law

California law similarly authorizes non-traditional tip pools. However, California law does not recognize a tip credit towards the minimum wage. California law authorizes mandatory tip pooling as long as the employees sharing in the pool are part of the “chain of service” with some relationship to the customer experience. In other words, like the new DOL regulations, California contemplates tip pooling to employees who do not themselves customarily receive tips.

IV.               Tip Pooling in Practice

The DOL’s new tipping regulations will become effective on March 1, 2021. Restaurants can avail themselves of the DOL’s new regulations and include back-of-the-restaurant employees, such as bussers, cooks, dishwashers, and other kitchen staff, in mandatory tip pools.

Any employer implementing this nontraditional tip pool must remember that they are forbidden from keeping employee tips or sharing the tip pool with managers or supervisors. Employers must also be mindful of recordkeeping requirements under both California and federal law, including: identifying each employee who receives tips, maintaining a weekly or monthly report of the amount of tips reported by each employee, maintaining a record of all gratuities placed into the pool, and permitting the California Labor Commissioner to inspect such records.

Businesses seeking guidance on a mandatory tip pooling arrangement in their particular circumstances should feel free to contact the authors of this Blog or their usual labor and employment counsel at AALRR.

This AALRR post is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing
process.

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