New Budget Bill About Much More Than the Budget: What Employers Need to Know About the Future of Tipped Employees

As is common with large spending bills, the recently enacted Federal Budget Law has a lot of “tag-along” legislation that we will be learning about for months to come. One of those tag-along measures will affect employers who employ tipped employees.
The new law amends the Fair Labor Standards Act (FLSA) to address an issue that has been bouncing around for several years. Owners of restaurants have long sought to require tipped employees to pool their tips and share them with back-of-the-house employees such as cooks, other food preparers and dishwashers who have no customer contact. On the one hand, this helped correct a wage imbalance between such employees who are typically paid above the minimum wage, but whose compensation can be far less than server compensation when a server’s “tip wage” (i.e., a mandatory wage that is below the minimum wage) is combined with tips. On the other hand, servers complained that use of their tips to pay back-of-the-house employees effectively was a confiscation of their wages by the Employer who used their tips to pay cooks, etc. out of the servers’ pockets rather than out of the Employers’.
An Obama era regulation prevented Employers using tip pools to pay back-of-the-house employees, while President Trump’s Department of Labor team has recently been working to reverse that position. The new Budget law brings some resolution to the issue but does not answer all questions.
Under the new law, some things are clear. First, tip money may never be kept by the Employer or used to pay managers, at least not when they are acting as managers. Nor may Employers require tipped employees to share their tips with back-of-the-house employees unless all employees are paid at least the state minimum wage (which can be higher than the federal minimum wage). If the state minimum wage is paid to all employees, the Employer may require tip pooling and sharing tips with back-of-the-house employees. This will address Employer pay equity concerns but will prevent employers from “punishing” tipped employees by paying them a tip wage while requiring them to share their tips with back-of-the-house employees. Tip pools must exclude supervisors, managers, and owners. Employers will still be obligated to make up any difference between the combination of a tip wage and tips received and either the federal or state minimum wage, whichever is greater. Finally, the law is not limited to the restaurant industry but applies to all tipped employees such as hairdressers and valets. 
However, the new law does leave some questions unanswered. For example, if a manager fills in a shift as a server or bartender, can the manager share in a tip pool? It is clear that the manager may keep tips actually received, but if there is a tip pool must he or she contribute to the pool and may he or she share in that pool? A tip credit is available only for employees who “customarily and regularly” receive tips. It is unlikely (but not impossible) that a manager would meet that definition. In most cases, therefore, a manager will be able to keep tips he or she actually receives but will not be required or able to share in a tip pool.
Most importantly, the law imposes substantial new fines for a violation, including a civil penalty of $1,000 per violation plus having to reimburse the employee the wage due. This is in addition to the usual penalties under the FSLA which include attorneys’ fees and costs.

For questions, comments, or additional information, please contact Bob Small at or via phone at 215.495.6541.