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U.S. Labor Department Adopts Final Tip Credit Regulations

    Client Alerts
  • January 08, 2021

On December 22, the U.S. Department of Labor’s Wage and Hour Division issued final regulations effective February 21, 2021, implementing changes to its policies regarding tipped employees. The rules expand circumstances under which employers can require tipped employees to share (or pool) tips with non-tipped employees such as cooks and dishwashers. Under the prior DOL interpretations of the tipping rules, employers could not require employees to pool tips for distribution to non-tipped employees.

Under the new regulations, employers that do not claim the federal minimum wage tip credit are not bound by these pooling restrictions. The tip credit allows employers to pay tipped employees a reduced minimum wage ($2.13 per hour) if they make up the difference between this and regular minimum wage ($7.25 per hour) in tips. Employers that claim the tip credit may not require sharing of tips with non-tipped workers. If employers do not claim this tip credit and pay tipped employees the regular minimum wage, they may require that the tipped employees share gratuities with non-tipped employees.

These new rules have proven unusually contentious. Democratic members of Congress have argued that employers will use the tip money to reduce the regular wages of non-tipped staff. A DOL watchdog faulted the process used by the agency to calculate this wage transfer. These findings make it almost certain that the final rules will be challenged in court. The incoming Biden administration may also seek to change the rules based on concerns over this potential wage transfer.

A number of states, including North Carolina, limit or prohibit tip pooling systems. These state law restrictions are not affected by the new federal rules.