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The Department of Labor (DOL) issued new guidance in a memo called a “Field Assistance Bulletin,” addressing Congress’ amendment to the Fair Labor Standards Act (FLSA) regarding tip pooling.

On March 23, Congress passed their omnibus spending bill for Fiscal Year 2018 with language that amended the FLSA to clarify that tips belong to the workers who receive them and cannot be taken by their employers, managers, or supervisors. The amendment came from a budgetary compromise to shut down DOL’s controversial proposal that would have made those groups eligible to be included in tip pooling.

However, attorneys for workers and businesses instantly jumped on ambiguities in the omnibus language. Chief among them was that the newly amended FLSA does not define the terms “manager” and “supervisor.” This sparked debate and concern across industries on how the DOL would consider who was eligible to be included in tip pooling.

In the memo sent to DOL administrators and directors on April 6, the agency’s Wage and Hour Division (WHD) instructed them to begin enforcing the statutory changes by applying new and existing rules.

For instance, the guidance acknowledges that employers who pay the full FLSA minimum wage to all employees are no longer barred from allowing back-of-staff employees, like cooks and dishwashers, to participate in tip pools. This also means that employers are now allowed to lift front-of-house employees’ pay to the minimum wage ($7.25) in order to require them to share tips with back-of-house employees.

The memo also explains that Congress has given WHD the discretion to impose civil money penalties, not to exceed $1,100, on employers who unlawfully keep employee tips.

The guidance also instructs DOL investigators to apply the existing “duties test” when determining who qualifies as a manager or supervisor. This refers to the rules governing which workers perform duties of an “exempt manager” under the FLSA’s executive exemption regulation. According to DOL regulations, to pass the duties test for the executive exemption, three requirements must be met:

  1. The employee’s primary duty must be management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof;
  2. The employee must customarily and regularly direct the work of two or more other employees; and
  3. The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees are given particular weight.

However, under the DOL guidance, salary is not a relevant factor to whether an employee can participate in tip pooling, which could be troubling for employees who are not salaried but perform some managerial duties.

As background, in order to be exempted from overtime pay, an employee must pass the “duties test,” as explained earlier, the “salary test,” and “salary basis test.” The salary tests are in regard to an employee’s annual salary amount and weekly salary amount, respectively. If the employee meets the DOL’s particular annual and weekly salary levels, while also satisfying the duties test, then the employee would be exempted from overtime pay.

In 2016, the DOL made new overtime regulations to expand access to overtime pay for low-salary workers that work over 40 hours per week but have been treated as exempt (from overtime pay) because they perform some exempt duties. In that particular case, the DOL made no changes to the duties test but more than doubled the amounts for the salary tests so that the employer would increase their employee’s salary lest they provide them the appropriate overtime pay.

In the case of tip pooling, if an employee performs the duties of an “exempt manager” under the executive exemption but is not paid on a salary basis, the individual still could not share in the tips received by employees, even though they may be “non-exempt” because they fail to pass the salary tests.

The DOL has stated its intention to “proceed with rulemaking in the near future to fully address the impact of the 2018 [FLSA] amendments.” The DOL may soon provide further clarification as to how the executive exemption salary tests will be applied to the context of tip-pooling.

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