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DOL Proposes Repeal of Obama-Era Tip Credit Rule

    Client Alerts
  • December 11, 2017

Last week, the federal Department of Labor’s Wage and Hour Division proposed repealing a controversial regulation affecting employers in the hospitality industry. The regulation interpreted a provision of the Fair Labor Standards Act that prohibits employers from requiring tipped employees to share a portion of their gratuities with other employees, even if the employer does not claim the underlying tip credit.

To provide some background, the FLSA provides a reduced minimum wage ($2.13 per hour) for tipped employees. Employers are permitted to count the employees’ tips to make up the difference between this minimum and the full federal wage ($7.25). Employers that use this tip credit have long been prohibited from requiring subject employees to share or pool their tips for distribution to non-tipped employees. However in 2011, the Obama administration’s DOL amended the tip pooling prohibition to cover all employers, even if they pay the full $7.25 minimum wage and therefore do not claim the tip credit.

When challenged in court, a Ninth Circuit panel upheld the rule in a 2-1 decision. Over the objections of 10 circuit judges, the full Ninth Circuit refused to reconsider that decision. That case is currently on appeal to the U.S. Supreme Court. In June, the Tenth Circuit declared the rule invalid, limiting the tip pooling prohibition to employers that claim the tip credit.

In proposing repeal, DOL noted these decisions as well as the contradiction between the current rule and the tip credit’s statutory language. After a 30-day notice period, DOL will make a final decision regarding the fate of the current regulation. A number of states, including North Carolina, limit or prohibit tip pooling arrangements, and the proposed FLSA rule change would not affect employers in those states.