Tip Pooling: Department of Labor Reverses Stance on Controversial Practice

In the U.S., tips are an enormous part of how some people make a living. This is because tipping, and a practice of tip credits, is a common way employers can pay less than minimum wage to their employees. Tip pooling is a practice where an employer requires tipped employees to share those tips. Sometimes employers will even require that these tipped employees put their tips in a pool including the “back of the house”-employees such as cooks who don’t get tips. Tip pooling with employees that aren’t normally tipped was made illegal at a federal level back in 2011 after an Obama administration ruling. The ruling was primarily in response to a 9th Circuit ruling that allowed employers to implement a tipping pool including back-end employees if they did not take a tip credit-the credit which allows employers to pay a tipped employee less than minimum wage. The theory behind the DoL decision was that tips are essentially gifts to employees and become the property of that employee when given. While a tipping pool with all tipped employees isn’t a huge issue as they are all contributing, forcing employees to participate in a tipping pool with non-tipped employees is a bit like forcing them to give away part of their tips.

However, just last week Trump’s Department of Labor (DoL) issued a statement reversing this position on tip pooling. This move certainly allows more leeway to employers but has the potential to leave employees normally relying on tips seeing much less money. Once fully enacted, it could even allow an employer who pays their employees minimum wage and doesn’t take a tip credit to outright keep all tips customers give employees.

The rule change isn’t going to take effect immediately. While the DoL won’t be enforcing the tip pooling rule, it’s new rules on the practice are expected to take around a year to see light. In some states it won’t take effect at all due to state law (California and New York especially) or case law making the practice illegal regardless of the position of the federal government.

With tipping such a huge part of how some people make a living, as well as something which can leave a misinformed employer in hot water, it’s important to fully understand how our laws on tipping work. Let’s take a look at federal tipping laws so you can best know your rights and protect your business.

Tips on Tipping

Most federal law on tips is fairly well defined and easily explained. However, at a state level things can get a bit more complicated. As usual, the federal standard is a minimum standard that states can apply additional restrictions on top of. There’s too much there in state law to get into in a single article but the most common one to keep in mind is that minimum wage varies from state to state and even city to city, so where minimum wage comes up in the federal laws you can assume the state or city minimum wage where you live applies to this standard.

A tipped employee, those who would normally be easily added to a tip pool, must regularly make more than $30 a month in tips. Where this is the case, under federal law, an employer can pay these tipped employees as little as $2.13 an hour. However, this doesn’t override minimum wage laws. The tips a given employee is given are taken as a tip credit. This credit is put towards the minimum wage. If the wages an employer pays plus this tip credit leave an employee earning the equivalent or more than minimum wage, the employer is in the clear. If this is not the case, the employer is required to make up the difference. For instance, if an employee worked 10 hours at the federal minimum wage of $7.25 and was tipped ten times that wage ($72.50) then the employer would only have to pay that tipped employee a hourly rate of $2.13 because their tips create a tax credit easily surpassing federal minimum wage. Even if the employee only was given $51.20 in tips over those ten hours, the difference between the $2.13 per hour number and the federal minimum wage, the employer could still get away with paying only $2.13 per hour.

As of now, tips are the sole property of the tipped employee who was given the tip–no matter how much they add up to. It is illegal for an employer to require an employee to hand over any part of their tips or even to make an employment agreement with terms requiring that employee to give them some or all of their tips. The exception to this, at least now, is a valid tip pool-pooling tips and redistributing them equally among employees. However, the tip pool is not an exception to the tip credit rules. If the amount you take out of a tip pool leaves you below minimum wage when your hourly wages are added, your employer still needs to make up the difference.

There a few corner cases that change how these general rules work. First, if you work more than 20% of your hours in a workweek on non-tipped duties then an employer cannot take a tip credit for these hours. Instead, they need to pay at least minimum wage for all these non-tipped hours and the tip credit formula is only applied to your tipped hours.

When you tip with a credit card, an employer can take the percentage charged by the credit card company on each sale out of an employee’s tips. However, this reduced amount and not the full amount is what is used as a tip credit when calculating whether tips take an employee up to or over minimum wage. Also, compulsory charges (think required tips when you have a lot of people eating at once) don’t count towards tips received for a tip credit unless the amount is actually given to the employeee.

Finally, as of 1996, there’s a bit of a boon for the high school and college summer workers. If you are under 20 years old, the minimum wage if you work as a tipped employee is boosted to $4.25 per hour in the first 90 days after you start work. The tip credit still only requires employers to pay the minimum wage of where you live, but no matter what tips you earn you’ll always get at least $4.25 per hour.

Change Is Coming, But Not Here Yet

As mentioned above, the changes to tip pooling are not officially in effect yet. However, with the DoL not enforcing the tip pooling rules the only thing stopping employers is state law on the issue. If you make a large portion of your living from tips, you may see yourself being forced to tighten the belt a little bit in the coming days. New York has laws preventing tip pooling with non-tipped employees. California doesn’t allow employers to take a tip credit whatsoever-requiring full minimum wage on top of any tips earned. However, California does allow for tip pooling.

So the big elephant in the room came from the second paragraph of this article-will employers be able to take your tips outright if they don’t take a tax credit? In theory yes, but it’s far too soon to tell. Not only are the laws not finalized, there are enormous employee morale and publicity issues to think about. Even beyond that, the patchwork of state law and the uncertainty of the current DoL’s eventual position on the issue make any decision to take such action incredibly risky for an employer. So for now, it seems unlikely. However, Trump’s DoL has still dealt a blow to the tipped worker. You may still need to prepare yourself to see less out of your tips each month.