Following an investigation, a Texas-based restaurant group has been ordered to pay more than $230,000 in back wages to workers who were required to share their tips, by company policy, with restaurant managers.

While the Fair Labor Standards Act (FLSA) permits both tipped and nontipped employees to share in tips, it prohibits employers, managers, and supervisors from keeping any portion of an employee’s tips. This is a fairly recent change in the law. In 2018, as we previously advised, President Trump signed a $1.3 trillion spending bill in an effort to avoid a government shutdown, but the bill also revised some provisions of the FLSA regarding tipped employees. Namely, permitting tip pooling between tipped and nontipped employees. In 2020 and 2021, the DOL completed a series of rulemakings to provide further clarification regarding those changes.

The FLSA permits tip pooling and permits all employees regardless of status to contribute to a tip pool, including managers and supervisors. However, when it comes to distributing tips from the tip pool, only employees — not managers or supervisors — can receive the tips. Managers and supervisors can keep any tips that they receive directly from customers for services they directly and solely provide.

For purposes of tip pooling, “manager” or “supervisor” is defined as any employee (1) whose primary duty is managing the enterprise or a customarily recognized department or subdivision of the enterprise; (2) who customarily and regularly directs the work of at least two or more other full-time employees or their equivalents; and (3) who has the authority to hire or fire other employees, or whose suggestions and recommendations as to the hiring or firing are given particular weight. If that sounds familiar to you, it’s because it aligns with the duties test for executive employee exemption under another part of the FLSA.

So, how did this employer go wrong? According to one of the owners, they had outsourced their payroll and were not aware of the revision to the rules regarding tips. “We’re barbecue experts, we’re not payroll experts,” he said. “We weren’t closely following that, and apparently our payroll company did not pick up on that.” Unfortunately, that doesn’t negate responsibility for the mistake.

This Texas-based restaurant group is certainly not alone. In fiscal year 2021, the wage and hour division of the U.S. Department of Labor (DOL) recovered nearly $35 million in back wages for workers in the food services industry alone. Violations ranged from retaining tips, failing to pay overtime, and not paying for pre- and post-shift work.

How can other employers learn from this situation?

First, employers who have tip pooling arrangements need to verify that none of their managers or supervisors, as defined above, are receiving distributions from the tip pool. However, any tips that they received directly from customers for services they directly and solely provided may be retained. Keeping good records of contributions and distributions will ensure everything is done appropriately and in compliance.

Second, employers need to ensure they have a clear, written policy in place outlining the tip pooling arrangement and have any participating employees sign an acknowledgement confirming their understanding of the policy. Allocation of tips among participants in the tip pooling arrangement should be reasonable and equitable, reflecting the amount of service provided.

Lastly, employers need to stay up-to-date on the law. While outsourcing payroll or leave administration can save time and money for a business, outsourcing does not relieve an employer from their obligations to know and comply with the law. As this situation shows, staying informed is important and can prevent a costly mistake.

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