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2018 Budget Bill Limits Tip Pooling

    Client Alerts
  • March 27, 2018

Last week, President Trump signed into law an omnibus federal budget for fiscal year 2018. Among the bill’s provisions is a compromise intended to end litigation and regulatory uncertainty over employers requiring mandatory tip pooling. The budget bill contains an amendment to the Fair Labor Standards Act that spells out the circumstances under which tipped employees can be required to share or pool their tips for distribution to non-tipped staff.

Under current law, tip pooling is prohibited. A proposed federal rule consistent with most federal appellate decisions would allow employers to require tip pooling if they do not claim the federal sub-minimum wage for tipped employees and the corresponding tip credit to reach full legal minimum requirements. Critics of the proposed rule claimed that it would allow employers to “steal” employees’ tips by allowing employers to divert them for other purposes. The measure was given an additional boost based on claims that the Secretary of Labor suppressed internal DOL estimates of diverted tips if the tip pooling ban is limited to employers that claim the tip credit.

Under the compromise contained in the budget bill, employers that claim the tip credit would be prohibited from requiring any tip pooling. If an employer does not claim the tip credit and pays the full federal minimum wage ($7.25), it can require tip pooling but only for the purpose of sharing tips with certain non-managerial employees such as cooks and bussers. Supervisors and managers are prohibited from participating in the pooled tip system.

Employers with tipped employees should assess the impact on their operations and change their pay practices as necessary to remain in compliance with FLSA requirements. In addition, some states such as North Carolina limit tip pooling to a certain percentage of gratuities received. The new FLSA amendment does not affect these state law limits.