Do Tips Belong to Employees or Bosses?

Update: New Rules under the Trump Administration

Since the Trump administration’s proposed rules would have allowed employers who did not take a tip credit to retain all employee tips, Congress chose to amend the Fair Labor Standards Act in the 2018 Appropriations Act to prevent this.  The amendment bars employers from keeping employees tips.  However, it also states that employers who pay the full minimum wage to their tipped employees can force these employees to share their tips with non-tipped employees, such as dishwashers and cooks.  Managers and supervisors are still prohibited from participating in tip pools.

A Proposed Law Change for Overtime Pay

In another attempt to undo worker friendly Obama administration labor rules, the Trump Labor Department, along with restaurant industry groups, is now proposing a wage law change that could result in employers having the ability to legally keep some or all of the tips left by customers.

This change to overtime pay laws could take significant amounts of hard-earned money out of the pockets of over 14 million restaurant workers…and deposit it into their bosses’ bank accounts.  The Economic Policy Institute has estimated that tipped waiters, waitresses, and bartenders could lose approximately $5.8 billion per year in tips that could be kept by their employers.

The big issues at stake include:

  • The ability of an employer to pocket any tips left by customers once the employee has earned minimum wage for all hours worked (currently $7.25/hour under federal law); and
  • Tip pooling and sharing between “front of house” and “back of house” employees, a practice not allowed under current wage laws.

What are The Proposed Law Changes?

The proposed regulations take out language stating that “tips are the property of the employee”.

The federal Fair Labor Standards Act provides employers with two options:

  1. pay service employees at least minimum wage for all hours worked, or
  2. take a tip credit and pay as little as $2.13 per hour, using tips make up the difference.

But what if an employer pays wait staff and service workers the full minimum wage?

Can the employer then keep all the tips left by customers?

This issue was litigated (with most courts siding with the restaurants) and the Obama DOL issued a specific regulation making clear that tipped employees were legally entitled to keep all tips, whether as individuals or as part of a valid “pool” in which only tipped workers could participate.

State Laws on Employee Tips

On the state level, things may be a bit more favorable for protecting tips earned by workers.  Several states, including California and New York have specific wage laws that make clear that tips left by customers are the property of the employee and cannot be taken away from them.

New York State in particular has been a hotbed for lawsuits against restaurants for both violating the rules on tip pooling/sharing and failing to pay and/or calculate overtime pay correctly.

A Closer Look at The Proposed Law Regarding Tips

Currently, restaurant owners may only require tipped employees to participate in tip pools if the pool is shared only between traditionally tipped “front of house” workers such as servers, bussers, and bartenders, or staff. The administration and business groups argue that the proposed changes to the tip sharing rules will result in an increase in pay for “back of house” workers such as cooks, expediters and dishwashers – downplaying the fact that this is achieved by taking away and redistributing tips earned by waiters, waitresses, bar tenders and other tipped workers.

“The proposal allows — but does not require — restaurants to pool tips between the front and back of the house. Both front-of-the-house and back-of-the-house employees contribute to the overall customer experience — yet the current rule bars sharing any tips with back-of-the-house employees in establishments that pay the minimum wage, contributing to wage disparities among employees,this proposal would give workplaces the freedom to share tips among more employees if they choose to do so.”
DOL Spokesman

There is, however, no apparent guarantee or requirement that the tip monies being kept and redistributed be used to pay wages. A major question remains as to whether the money could be used for anything the company decides is in its owners’ best interests, leading some to label the new rule as the “tip-stealing rule”.

Allowing restaurants to share the waitstaff tips with non-tipped workers may sound like a nice thing to do, but the reality is likely to be fewer dollars in employees’ pockets and more in the bank accounts of the owners. Wage theft has long been a serious problem for restaurant workers, with literally hundreds of cases a year being brought to recover tips and/or overtime wages owed.  More should be done to protect the wages and rights of tipped workers, not the ability of those who have historically profited from denying them full and fair compensation to continue to do so.

For more information regarding tip sharing and overtime pay laws, get a quick evaluation or call 866-559-0400.  All inquiries are confidential and free of charge.

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Michael Lore is the founder of The Lore Law Firm. For over 25 years, his law practice and experience extend from representing individuals in all aspects of labor & employment law, with a concentration in class and collective actions seeking to recover unpaid back overtime wages, to matters involving executive severance negotiations, non-compete provisions and serious personal injury (work and non-work related). He has handled matters both in the state and federal courts nationwide as well as via related administrative agencies. If you have any questions about this article, you can contact Michael by using our chat functionality.