Recently, the FRLA has received several inquiries regarding tip outs and tip pooling. The following information comes from the National Restaurant Association and is online at http://www.restaurant.org/profitability/support/legal/lps/
The most important aspect to keep in mind is that the employee receiving the tip out must be in an occupation that customarily participates in tip pools.
DOL policies also clarify the following regarding management-supervised tip pools: Tipped employees may not be required to share their tips with employees who are not in an occupation that customarily and regularly participated in tip-pooling arrangements, including, for example, janitors, dishwashers, chefs, cooks and laundry-room attendants.
MANAGEMENT-RUN TIP POOLS
Employers often ask whether it is possible for management to run a tip pool or participate in operating one. The answer is a qualified yes. Here are the DOL guidelines for tip pooling:
1. The requirement that an employee retain all tips does not prevent tip-splitting or tip-pooling arrangements among employees who customarily receive tips. The following occupations have been recognized by DOL as falling within the eligible category: bellhops, waiters and waitresses (including cocktail servers), counter personnel who serve customers, busers, and service bartenders. The DOL construes the FLSA as precluding employers from pooling tips among occupations that do not customarily and regularly participate in tip pooling, including dishwashers, chefs or cooks. However, in a 2008 opinion letter to the National Restaurant Association, DOL ruled that itamae-sushi and teppanyaki chefs may participate in tip pools since they had direct contact and interaction with customers since they prepared the customer meals on teppanyaki tables and served meals to customers. W-H Op. Ltr. December 19, 2008. Also see Ash v. Sambodrono, LLC, 2009 WL 3856367 (S.D. Fla. Nov. 17, 2009). It is not required that busers or others who share in tips receive tips directly from customers. Both the amounts retained by the servers and those given to busers are considered the tips of the individual who retains them.
2. A valid employer-operated tip-pooling arrangement cannot require servers to contribute a greater percentage of their tips than is customary and reasonable. For enforcement purposes, the DOL will not question pool contributions that do not exceed 15 percent of the employee’s tips. It should be noted that the DOL rules on tip pooling have at various times been challenged in court. In Kilgore v. Outback Steakhouse, Inc., 160 F.3d 294 (6th Cir. 1998), a federal appeals court found no statutory support for the DOL’s 15 percent rule. Nevertheless, the DOL stands by its rule, except in jurisdictions where an appellate court has struck down the rule. However, only tips in excess of the tip credit may be taken for the pool.
If the conditions above are met, the tip pool may be established and supervised by the employer; it does not require the voluntary consent of the employees involved. DOL policies also clarify the following regarding management-supervised tip pools:
• Tipped employees may not be required to share their tips with employees who are not in an occupation that customarily and regularly participated in tip-pooling arrangements, including, for example, janitors, dishwashers, chefs, cooks and laundry-room attendants.
• In the case of hosts/hostesses, headwaiters and seaters/greeters, the type of establishment and local practices will determine whether or not such persons can participate in a tip pool.
• In requiring even as a general principle that tipped employees retain all their tips, it does not appear that Congress intended to prevent tipped employees from exercising a free choice in deciding what to do with their tips. This includes sharing tips with co-workers of their choice in any amount they please, using tips to make payments to a 401(k) retirement plan or asking their employer to withhold federal and state taxes from their tips, as long as such decisions by the employee are entirely voluntary.
• Since tipped employees may not be required to share their tips with other employees under the FLSA except as specified above, this means that an employer cannot retain any portion of the tips. “Employer” is defined under the FLSA to mean “any person acting directly or indirectly in the interest of an employer in relation to an employee.” 29 U.S.C. § 203
Employees who act in a managerial or supervisor capacity are considered by DOL to be employer agents for purposes of the FLSA. See, for example, Chung v. the New Silver Palace Restaurant, 246 F. Supp, 2nd 220 (S.D. NY 2002). When an employer-established tip pool includes any ineligible employees, including supervisors, the employer must reimburse those who contributed to the pool in an amount equal to the tips turned over to the ineligible employees, and the employer may lose its eligibily to apply a tip credit against the wages paid to employees. See, e.g., Chan v. Triple 8 Palace, Inc., 2006 U.S. Dist. LEXIS 15780 at 46 (S.D. NY 2006). The employer may also not seek reimbursement from ineligible employees.
A recent court ruling from the U.S. Court of Appeals for the 9th Circuit (which covers the states of Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington), however, raises questions under federal law (Note: does not apply to any state law tip pooling restrictions) as to the scope of the DOL restrictions on tip pools where the employer takes no tip credit and pays the employees the full minimum wage in cash. In Cumbie v. Woody Woo, Inc., d/b/a Vita Café, No. 08-35718 (9th Cir., Feb. 23, 2010), the court concluded that nothing in the FLSA restricts tip pooling arrangements where no tip credit is taken and the employer pays the participants the full minimum wage, even if the tip pool includes employees who do not “customarily and regularly” receive tips (back-of-the-house staff such as dishwashers and cooks) or where servers were asked to contribute a far greater amount than the limit set in the DOL regulation.