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Rainville Weighs In On New Federal Law’s Impact on Vermont Employers in VTDigger

Reprinted with permission from VTDigger

Rainville: Managers who dip into employees’ tips are breaking the law

Editor’s note: This commentary is by Christina Rainville, senior counsel at Ellis Boxer & Blake in Springfield[...]. This commentary is for education and information purposes only and is not intended as legal advice.

When you leave a tip for your server in a restaurant, bar, hotel, or tourist industry, can the owner of the business take your tip and use it to pay kitchen staff, managers and supervisors who do not receive tips? Do tips belong to the employee who was given the tip, or do the tips belong to the employer?

The latest answer to this question, which affects tens of thousands of employees in Vermont’s service industries, lies buried at page 2025 of the 2232-page federal budget law that went into effect in March.

The new law has nothing to do with the federal budget, but it will have an important impact on employers and employees in the service industry regarding the use of “tip pools.” Many Vermont employers in service industries collect all of the tips provided to their employees, and then distribute the tip funds to a pool of designated employees.

Under Vermont and federal law, all employees must be paid a minimum wage (now $10.50/hour in Vermont as of January 1, 2018), but employers in service industries can pay that minimum wage to employees who receive more than $120/month in tips through a combination of a “sub-minimum” “cash wage” ($5.25/hour in Vermont) and a credit for the tips that the employee is presumed to retain.

Federal law has long prohibited the practice of using tip pool funds to pay the federal minimum wage of non-tipped workers, such as kitchen staff. However, employers were traditionally allowed to use tip pool funds to provide additional compensation to non-tipped employees when the employer was already paying the full federal minimum wage ($7.25) to its employees and not using the tip credit.

In 2011, the U.S. Department of Labor issued a new rule that limited the distribution of tip pool funds to employees who “customarily and regularly receive tips,” regardless of whether the employer was paying the full federal minimum wage to its employees. As a result, the employees who received tips got to keep them, although the tips could be pooled and divided among tipped employees.

The 2011 rule was found to be invalid by several courts for going too far. The rule precluded employers from using tip pool funds to provide additional compensation above the minimum wage to kitchen staff and other employees who did not regularly receive tips.

In March 2017, after the change in the administration in Washington, the Department of Labor issued a new policy statement, announcing the department would no longer enforce the 2011 rule in cases where the employer was paying at least the full federal minimum wage ($7.25/hour) and not taking a tip credit to meet the minimum wage obligations.

In December of 2017, the Department of Labor announced a proposed rule that would allow employers who paid the full federal minimum wage of $7.25 to its employees to distribute tip pool money to all employees, including management employees.

Which brings us to March of 2018. On page 2025 of the 2018 Consolidated Appropriations Act, Congress reached a compromise. Managers and supervisors are no longer allowed to participate in tip pools, because the act equates such participation with the employer keeping the tips. However, non-management employees, like cooks and dishwashers, can be included in tip pools, as long as the employer pays its employees the federal minimum wage of $7.25/hour and does not use tip credits toward payment of that wage.

Meanwhile, the U.S. Department of Labor has revised its policy of no enforcement of the 2011 rule. The Department will not seek action against employers who violated the rule between July 20, 2017 and March 23, 2018, unless the employer failed to pay the employee(s) in the tip pool less than the full federal minimum wage. However, going forward, under the new law, employers who include managers and supervisors in tip pools are subject to enforcement penalties, which include civil penalties not to exceed $1,100 for each violation, in addition to being liable to the employee(s) affected for the sum of any tip credit taken by the employer and all tips unlawfully kept by the employer, plus an additional equal amount as liquidated damages.

The tip pool rules remain complicated, and employers should be careful to make sure that they are in full compliance. However, one issue is now clear: managers and supervisors are barred from participating in tip pools as of March 23, 2018.

Oliver Abbott