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Final Rule on Tip Credits Published by the US DOL

On September 23, 2021, the U.S. Department of Labor (DOL) announced the publication of a Final Rule (Rule). The Rule will amend Fair Labor Standards Act (FLSA) regulations for tipped employees and is expected to become effective on November 23, 2021.

What Does the Final Rule Do?

This Rule clarifies the receipt of tips by managers and supervisors and what constitutes a valid tip pool arrangement.

Managers and Supervisors

The Rule prohibits managers and supervisors from keeping any portion of an employee’s tips, regardless of whether the employer takes a tip credit. The Rule further clarifies that managers and supervisors may only keep the tips they receive directly from customers based on the services they directly and solely provide.

Tip Pooling

Managers and supervisors are not permitted to receive tips from an employee tip pool, but they are permitted to contribute tips to the pool.

The Rule also allows employees who do not customarily receive tips, such as dishwashers and cooks to participate in the tip pool if the employer pays tipped employees the full minimum wage and does not take a tip credit.

What Happens If An Employers Fail to Comply?

The Rule restores the DOL’s ability to assess civil money penalties of up to $1,100 per violation against employers who take tips earned by their employees, regardless of whether those violations are repeated or willful.

Next Steps for Employers

Employers with tipped employees should become familiar with this Final Rule to ensure that their tip pooling arrangements meet the requirements of the Final Rule and that managers and supervisors are not participating in these arrangements. Employers should also review and adjust their payroll practices, update any correlating written policies or procedures and ensure these changes are communicated to impacted employees.

In addition, employers must also be mindful of applicable state laws. While the FLSA allows employers with tipped workers to pay as little as $2.13 per hour and take a credit against the tips earned by the employee to make up the balance of the federal minimum wage of $7.25 per hour, many states have higher minimum wage rates and/or laws regarding tipped workers which may differ from the FLSA. Where federal and state laws differ, employers should adhere to the law that is most beneficial to the employee.

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