Employers Must Mesh New Federal Tip-Pool Rules With State Laws

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By Christine Pulfrey

A new federal rule intended to prevent employers from pocketing employee tips brings with it Labor Department guidance aimed at resolving ambiguities in the law. For employers, that means ensuring compliance in states that may have additional or somewhat different tip-related rules.

Under a Fair Labor Standards Act amendment contained in the recent budget measure, employers must not keep employee tips, must prohibit managers and supervisors from participating in tip pools, and may allow back-of-the-house workers to participate in tip pools as long as all workers are paid at least the federal minimum wage of $7.25 an hour. The legislation, better known as the Consolidated Appropriations Act, 2018 ( Pub. L. 115-141), was signed into law March 23 by President Donald Trump.

Employers have to comply with federal and state laws but must factor the law that better protects employees and comply with its requirements. “You have to comply with the more employee-friendly law on all levels,” said Aaron Colby, a lawyer specializing in California wage and hour law at the Los Angeles office of the firm Davis Wright Tremaine LLP.

The Labor Department clarified what constitutes a manager or supervisor for purposes of tip-pool requirements, definitions that were lacking in the FLSA amendment, in a Field Assistance Bulletin ( FAB 2018-3). A worker qualifies as a manager or supervisor if the position comes with the authority to hire and fire, to have management as a primary duty, and to supervise at least two employees, the April 6 bulletin said.

However, states may have different standards for defining a manager or a supervisor. States also may have requirements that differ from federal rules in other respects.

In California, where tip credits are not mandatory, back-of-the-house employees may participate in tip pools but only for workers who provide table service or who are in the chain of service to guests, according to an advisory that Colby provides to employers he counsels on various wage and hour matters. Under the federal law, other back-of-the-house employees also may participate, such as dishwashers and line cooks, but still not supervisors or managers.

Additionally, employers in California must use the state’s test to determine if a worker is a manager or supervisor prohibited from participating in tip pools, as well as the federal test, as identified in the Labor Department field bulletin.

The state test in California forbids employees who qualify as agents of the employer to participate in tip pools. An agent of an employer is determined by factors that include job title and duties, and whether customers and co-workers perceive them to be managers, the client advisory said. Agents’ input also would be regarded in the hiring, training and discipline of workers, along with reports on shift-related issues.

Employers “have to not just look at the federal law and redo policy,” Colby said, but also look at the state law and see how it “meshes with the federal law, and then redo policy.”

In New York, the state’s ban on back-of-the-house employees participating in tip pools was unaffected by the FLSA amendment of the federal budget legislation, Colby and several colleagues said April 5 in an article for the law firm Davis Wright Tremaine. New York’s hospitality industry wage orders limit the employees eligible to participate in a tip pool to those who provide or help to provide personal service to customers as a regular part of their duties. Only food-service workers, as defined by the state, may receive pooled tips, according to the article.

Although federal law allows sharing tips with back-of-the-house workers, New York state law does not allow the practice, Colby said.

Whether state law would be preempted by federal tip-pooling requirements that are not directly tied to minimum wage or overtime, such as the definition of manager, may have to be resolved in court, said Jeffrey Brecher, a wage and hour lawyer with the firm Jackson Lewis P.C. in Melville, N.Y.

In a real-world scenario, New York Gov. Andrew Cuomo (D) said in his State of the State address in January that the state labor department was pursuing the elimination of the minimum-wage tip credit. Hearings to solicit input started in March and are to continue until late June. The deadline for written testimony is July 1.

If New York eliminates the tip credit, then there would be no prohibition under the FLSA against sharing tips among front-of-the-house and back-of-the-house workers, Brecher said, adding that under New York Labor Law 196(d) the state still would prohibit the practice. “But the question then becomes whether 196(d) is preempted by the recent amendment to the FLSA because they now conflict,” he said.

Other states, including Oregon and Washington, do not have regulations governing tip pooling. In these states, employers may allow participation in tip pools by back-of-the-house employees, including dishwashers and line cooks, but not managers and supervisors, the Davis Wright Tremaine article said.

Employers should develop clearly written tip-pooling policies, wage and hour experts said. In implementing mandatory tip-pooling that includes back-of-the-house employees, employers should ensure that all employees receive the full federal minimum wage and comply with local and states laws.

“All on-boarding documents and the tip-pooling policy need to consciously decide what job descriptions are going to fit in the tip pool,” Colby said. For shift leaders, employers should look beyond the job title to the workers’ duties. “You don’t want someone participating in tip pools where the job description clearly says ‘supervises employees,’” he said.

“You look at the standard,” Colby said. “If they come close to it, you have to make a risk assessment” and identify if there are other ways to compensate the person without the risk of putting them in a tip pool or you consider changing the job description, he said.

To contact the reporter on this story: Christine Pulfrey in Washington at cpulfrey@bloombergtax.com. To contact the editor responsible for this story: Michael Baer at mbaer@bloombergtax.com.

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