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New Rules on Tip Credits and Tip Pools: Restaurants Start Taking Action

Last April, the U.S. Department of Labor made amendments to the Fair Labor Standards Act regulations on tipped employees and tip credits, and it took effect last May 5, 2011.  The amended rules necessitate that a restaurant employer also has to alter a few of the steps he needs to follow so that he can credit his employees’ tips against the minimum wage that he is required to pay.   Here are some of the necessary moves that an employer has to make to be able to comply with the new rules:

Explain to Tipped Employees How they are Using the Tip Credit

Federal law requires employers to compensate their employees a minimum wage of $7.25 per hour, plus overtime for workers who are non-exempt.  In some circumstances, upon compliance to specific requirements, employers are allowed to pay their tipped employees less than $7.25, with the understanding that the workers can cover the difference through the tips that they receive from customers.  Such understanding is the use of tip credits.

The amended rules prompt restaurant operators to communicate the following details to each employee for whom they intend to claim a tip credit:

  • Inform the employee of the restaurant’s intention to take a tip credit, and that they cannot do this unless the employee understands precisely how this works;
  • Advise the employee the amount that the restaurant is paying him per hour.  If the employers plan to take the maximum tip credit allowed by law, this amount, called the direct wage, will be $2.13 per hour.  The law varies per state, so it is important that employers are updated with the DOL Wage and Hour Division’s Minimum Wages for Tipped Employees.
  • Inform the employee how much they are claiming as a “tip credit” per hour, which will be $5.12 if they plan to claim the maximum tip credit permitted by federal law.  In effect, this amount is the difference between what the restaurant is paying per hour and the required minimum wage. Again, the rules vary depending on the state the restaurant is located.  Some states do not allow tip credits at all.
  • Make it clear to the employee that such “tip credit” will not be more than what he actually receives as tips.
  • Disclose to the employee that he is entitled to retain all his tips, except for those that he is obligated to contribute to a valid tip pool.

The law does not require employers to present all the above information in writing, but it is highly advised that restaurant operators be prudent enough in documenting their compliance.  Putting all details in writing and requiring tipped employees to sign papers in acknowledgment that they were notified of this information will prove immensely helpful should future litigations come up.  Samples of the written notifications can be found in the National Restaurant Association’s Update on the New Federal Regulations for Employers with Tipped Employees.

Audit His Tip Pooling and Tip Credit Procedures

Restaurant owners should appraise and review their existing tip pooling and tip credit procedures, making sure that they are in compliance with both federal and state laws.

Some employers who do not take tip credits and pay their employees the full minimum wage have been requiring their workers to contribute in tip pools that are not in compliance with federal or state laws.  The new regulations emphatically clarify that this should not be so – employers can only compel employees to contribute tips to valid tip pools, even if the employer do not use tip credits in paying their workers.

What makes a tip pool valid and lawful?   There are many conditions that are stipulated in the regulations and among those that have been given emphasis by industry trade groups are:

  • The participating employees are not obliged to contribute a bigger percentage of their tips to the pool than what is reasonable and agreed upon;
  • Employers should not keep any of the tips;
  • The tips can only be divided among those who have direct contact with customers and customarily receive tips from them.

Restaurant employers, then, should ensure that they are not forcing their employees to participate in tip pools that do not comply with the law, even if they do not make use of their employees’ tip credits.

The above are the immediate measures that restaurants should take, while anticipating a discussion with their legal counsels regarding the correct implementation of DOL’s Final Rule Announcing the Revised Regulations. Since the rules have already been implemented, restaurants can now get started, gradually applying the new system.