Tip Pools Still Too Cold for Swimming Out West: Best Practices in Light of DOL Changes

The U.S. Department of Labor (DOL) recently announced plans to rescind the 2011 regulation that prohibited employers from distributing tips through mandatory tip pools that include back-of-the-house employees like dishwashers, cooks, chefs and others. This announcement is a welcome sign for restaurant owners, but employers should not change their tip pooling policies just yet. For now, restaurants – particularly those in the 9th Circuit (which includes Alaska, California, Nevada, Montana, Oregon, and Washington) – must continue to comply with existing laws until the rulemaking process is finalized.

In 2011, the DOL announced that employers could not distribute tips through a mandatory tip pool to employees who do not “customarily and regularly receive tips” from guests, typically referred to as back-of-the-house employees. The 9th Circuit upheld this rule in 2016. For additional information on the tip-pooling restrictions and the 2016 9th Circuit decision, see our previous advisories here and here. Earlier this year, the 10th Circuit (which includes Colorado, Kansas, Oklahoma, Utah, Wyoming and New Mexico) disagreed with the 9th Circuit and concluded that the 2011 regulation was invalid. This created "circuit split," increasing the chances that the U.S. Supreme Court will decide to hear the issue. However, any resolution in the Supreme Court could take years.   

The DOL’s proposal to rescind the 2011 regulation is expected to be heard in August 2017. If the regulation is rescinded, employers who do not take a tip credit would be permitted to re-institute mandatory tip pools that include back-of-the-house employees. But employers should not start celebrating yet. The DOL’s proposal is not final and, even assuming it moves forward with no changes, the process may take several months to complete. Here is what employers should do now.

Best Practices

• Unless and until the 2011 regulation is rescinded employers - particularly those in the 9th Circuit - should continue to restrict tip pools to employees who "customarily and regularly receive tips."  
• Employers should not encourage or require employees to share tips with back-of-the-house employees. Although the DOL has announced that it will no longer enforce the 2011 regulations, employees still have the right to file a lawsuit if forced to share tips with non-tipped employees.
• Even if the DOL successfully rescinds the 2011 regulation, state or local law may prohibit or restrict mandatory tip pooling policies. For example, California Labor Code § 351 has been interpreted to permit mandatory tip pooling so long as: (i) tip pools only include employees who provide "direct table service" or who are in the "chain of service" and are customer facing; and, (ii) no owner, manager or supervisor of the business participates in the tip pool (even if these individuals are in the chain of service to a guest).
• Even though front-of-the-house tip pools are generally lawful under current regulations, employers seeking to impose a mandatory tip pool should prepare a clear written plan so that employees understand what happens to the tips left by guests, and to ensure compliance with federal and state law. Because of the nuances and shifting legal landscape on this issue, employers should consult legal counsel prior to implementing a mandatory tip pool for employees.