By Peter M Langdon

The United States Department of Labor (“DOL”) has released updated regulations affecting tipped employees.  The new regulations go into effect March 1, 2021.

The Fair Labor Standards Act (“FLSA”) governs how employers compensate employees.  The FLSA mandates employees receive at least a minimum wage of $7.25 per hour for all hours worked.  State law may require a higher minimum wage, for example, Nebraska’s minimum wage is $9.00 per hour.  The applicable minimum wage used must be the higher of the federal or state minimum wage.

Under the FLSA, however, tipped employees may be paid a special minimum wage of $2.13 per hour.  State law may require a higher direct wage for tipped employees, for example, Iowa requires a special minimum wage of $4.35 per hour for tipped employees.  A tipped employee is an employee that regularly and customarily receives more than $30 in tips per month.  A tipped employee’s tips must raise his or her total wages to at least the applicable minimum wage.  If a tipped employee’s compensation, inclusive of the special minimum wage and tips, amounts to less than the applicable minimum wage, then the employer must make up the short fall.

As part of compensating tipped employees with the special minimum wage and tips, an employer is permitted to take a tip credit for the amount of tips paid to an employee to satisfy the applicable minimum wage requirement.  Importantly, tipped employees must retain their tips unless those tips are distributed through a valid tip pool.  A tip pool aggregates tips received by tipped employees and redistributes the tips based on a formula, agreement, or understanding created by the employer.

Under the new rules, employers with a tip pool that do not utilize a tip credit can now include “back of the house” workers, such as cooks and dishwashers, in the tip pool.  Additionally, employers may apply a tip credit to employees’ tips despite the extent to which tipped employees perform non-tip generating work, provided such work is performed contemporaneously with or for a reasonable time immediately before or after the performance of tipped duties.  The DOL reiterated that employers are prohibited from keeping tips earned by their employees.  Finally, as before, managers and supervisors cannot participate in tip pool distributions.

The tip credit and tip pooling rules are complicated.  To stay compliant and up to date on changes in employment law, contact Peter Langdon or Harvey Cooper at 402-392-1250 or by email at plangdon@akclaw.com or hcooper@akclaw.com