DOL Gets Its Hand Caught in the Tip Jar

“People say that nothing is impossible, but I do nothing every day.”

--Alan Alexander Milne

As part of a flurry of action regarding the Department of Labor’s (“DOL”) employee tip regulations, the Department of Labor’s (“DOL”) Office of the Inspector General (“OIG”) investigated the rule making process taken by DOL leading up to the 2017 Tip Rule Notice of Proposed Rule Making (“NPRM”) . The Tip Rule was a point of focus this past year as DOL published a new NPRM regarding the Tip Rule which withdrew the 2017 NPRM which was the subject of the OIG investigation. Abrahams Wolf-Rodda Covered this NPRM here: https://www.awrcounsel.com/blog/2019/11/11/tip-credit-proposed-rules-are-out-for-comment?rq=Tip. DOL announced this past week (December 22, 2020) that they planned to publish the Final Rule regarding the same subject matter on December 30, 2020 (i.e., today).  And the published rule hot off the press is now set forth in the Federal Register and becomes effective March 1, 2021.

The Final Rule revises DOL’s regulations regarding tip pooling after considering the 2018 amendments to the Consolidated Appropriations Act (“CAA”). The CAA  was focused in part on the tip credit that the employers can take against their FLSA minimum wage obligations for employees who are customarily tipped for their services. Generally, an employer can only receive a credit for the tips customers give to the employees if the employee is able to keep all of the tips they receive. 29 U.S.C. 206(a); 203(m)(2)(a). The Final Rule clarifies three things: (1) how much control a manager or supervisor can exert over the tips without “keeping” them as prohibited by Section (3)(m)(2)(B), (2) which employees qualify as a manager or supervisor who is prohibited from “keeping” tips, and (3) the requirements for managers and supervisor when they redistribute tips as part of a tip pool. The Final Rule also removes the regulations that prohibited employers from instituting “non-traditional” tip pools if they do not take a tip credit.  Regardless of the type of tip pool, the Final Rule also prohibits keeping an employee’s tips for any reason, even if the employer does not take a tip credit. Finally, the Final Rule states that an employer can only create a mandatory tip pool if those employees involved are employees who customarily and regularly receive tips.  

Commenters in the field were concerned about the control exerted by managers over an employee’s tips triggering the “keeping’ language in the previous regulations. The Final Rule assuages their fears to state that employers who (1) take control of tips to promptly redistribute them, (2) require the sharing of tips among other eligible employees, or (3) controls them for the purpose of facilitating a tip pooling scheme and promptly redistributes them are not “keeping” tips.  There was some ambiguity regarding the Section (3)(m)(2)(B) as to who exactly is a manager for purposes of the act. For example, if an assistant manager at a restaurant regularly acts as a waiter or waitress, should they be prohibited from involving themselves in a tip pool or receiving tips for their work? The Final Rule defines a manager or supervisor as any employee whose primary duty is managing the enterprise or division of the enterprise, customarily directs the work of two or more other full-time employees, and has the authority to hire and fire other employees or whose advice is given particular weight towards the hiring and firing of other employees. The definition also includes as a manager any individual who owns a 20% interest in the enterprise they are employed by and that they are actively engaged in the management of. Regardless of whether the employer takes a tip credit, they may not include managers and supervisors in a tip pool. The definition parallels the executive exemption test under the Fair Labor Standards Act, and thus clarifies that nonexempt assistant managers can share in tip pools. 

The Final Rule makes several changes in the already confusing tip regulation scheme. The rule making process for DOL usually involves a Notice of Proposed Rule Making as well as an analysis of the different benefits the proposed rules. This was the topic of the OIG report that was published December 11, 2020. The OIG found that DOL did not demonstrate that it followed a sound process during the promulgation of the 2017 NPRM. The 2017 NPRM acted to rescind portions of the 2011 tip regulations. OIG’s report found that after an economic analysis of the potential costs and benefits, DOL determined that a 2017 NPRM was unnecessary. However, at the insistence of the Department of Justice’s (“DOJ’s”) Office of the Solicitor General (“OSG”), DOJ reversed its decision. According to OIG, this was inappropriate. In addition, while stating that DOL had not performed a qualitive analysis of the potential costs, it turns out that DOL conducted one but decided not to include it in the NPRM. Accordingly, the OIG concluded that DOL did not follow a sound process in promulgating the notice of proposed rulemaking.  

The OIG report itself is an interesting read. The OIG discusses the rulemaking process and the different obligations that each agency has to fulfill, such as justifying absent information that they had access to. The report also shows the interagency politics that were on display when DOL and the Office of the Solicitor General (“OSG”) are at odds. Two senior officials at DOL said that they were essentially overruled by the OSG and told to promulgate the rule regardless even though they opined that the action was unnecessary. While not exactly surprising that this happens behind the scenes, DOL should be making these decisions as it has the requisite experience, not OSG, and it has been delegated the rulemaking authority, not OSG.  

The December 11, 2020 OIG report can be found here: https://www.oig.dol.gov/public/reports/oa/2021/17-21-001-15-001.pdf. For more information on the Final Rule, visit DOL’s website at https://www.dol.gov/agencies/whd/flsa/tips, or view the published rule in the Federal Register at https://www.federalregister.gov/public-inspection/2020-28555/tip-regulations-under-the-fair-labor-standards-act.