Department of Labor Seeks to Loosen Reins on Restaurant Industry By Rescinding Regulation of Certain Tip Pooling Practices

December 18, 2017

By Matthew E. Feinberg

Earlier this year, in “Restaurant Industry Headed To U.S. Supreme Court Over Tipping Practices”, I wrote about the Department of Labor’s (“DOL”) 2011 Regulation related to restaurant tip distribution practices and its journey to the U.S. Supreme Court. The regulation in question announced broadly that “[t]ips are the property of the employee” and “prohibited [employers] from using an employee’s tips . . . for any reason other than . . . [a]s a credit against its minimum wage obligations to the employee, or in furtherance of a valid tip pool.” What this means is that, under the current DOL regulation, even if a restaurant pays its employees a base hourly wage above the minimum wage (without consideration of tips), the restaurant is still required to distribute all tips among its tipped employees, i.e., servers, bartenders, and other waitstaff, but it cannot distribute any tips to back-of-house employees, such as cooks, dishwashers, and janitorial staff.
 
In 2016, the Ninth Circuit Court of Appeals upheld the regulation in Oregon Restaurant and Lodging Association v. Perez, but other Courts of Appeal have rejected or refused to apply it. The restaurant industry appealed the Perez decision, but the U.S. Supreme Court is still considering whether it will hear the case. The split among the appellate courts has created substantial confusion in the industry about how and to whom customer tips must be distributed, despite the DOL implementing a temporary nonenforcement policy.
 
In response to Perez and other private litigation, the DOL recently moved to alleviate the confusion. In the December 5, 2017 edition of the Federal Register, the Wage and Hour Division of the DOL gave public notice of its proposal to rescind portions of its 2011 regulations. Under the proposed rulemaking, specifically, the DOL seeks to lift the requirement that all tips be distributed to regularly tipped employees and to consider whether it should rescind the prohibition on restaurants distributing tips to back-of-house employees, such as kitchen employees and dishwashers, so long as all employees of the restaurant receive base hourly rates of pay of at least the minimum wage. 
 
The practical application of the DOL’s proposed new rulemaking, if adopted, is that restaurants that pay all of their employees a base hourly rate above the minimum wage could reach agreement with their employees to distribute a tip pool among a larger group of employees, essentially providing a pay raise to traditionally-lower-paid—yet critical—back-of-house members of a restaurant’s staff that do not customarily receive tips under the present DOL regulation. Notably, the proposed rulemaking would have no effect on restaurants that elect to take a tip credit when paying their employees, i.e., where a restaurant pays a server or bartender a base hourly rate less than the minimum wage (as low as $2.13 per hour) and makes up the difference by distributing tips among employees.
 
The DOL is currently seeking comments from the public, including businesses in the restaurant industry, to help determine the impact the proposed rulemaking could have on the restaurant industry and the labor market in general. In particular, the DOL is interested in hearing from restaurant industry participants that pay their employees a base hourly rate at or above the minimum wage on the following topics: whether those businesses allocate tips among non-tipped employees and how those tips are distributed; whether those businesses utilize tip pools and, if so, why that tip distribution practice was instituted; and whether tip pool employees receive a fixed-dollar or fixed-percentage amount. In addition, the DOL is soliciting comments about how the food service industry and its customers would react to the proposed rulemaking if adopted.
 
The deadline for submitting comments to the DOL’s proposed rulemaking is January 4, 2018. If you are interested in submitting comments to the DOL, or if you have questions about whether your business is in compliance with current or potential future regulatory requirements, the attorneys at PilieroMazza can help.

About the author: Matt Feinberg is an associate with PilieroMazza in the Litigation Group. He may be reached at mfeinberg@pilieromazza.com.
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