Non-Tipped Employees Can Now Be Included in Tip Pooling

By Alyssa L. Levy

UPDATE: On January 26, 2021, the DOL withdrew multiple Opinion Letters. Read the latest DOL developments here.

On January 15, 2021, the Department of Labor (DOL) issued Opinion Letter FLSA2021-4 concerning changes to tip pooling when the pool includes both tipped and non-tipped employees. The Opinion Letter focuses its analysis on servers and hosts/hostesses when discussing these changes.  

If an employer takes a tip credit (up to $5.12 per hour)—meaning that employees’ tips and hourly wages together equal at least minimum wage—the employer can require employees to contribute to a traditional tip pool, which is limited to employees who “customarily and regularly receive” $30.00 or more in tips per month from customers. The Wage and Hour Division (WHD) of the DOL found that servers fit this description (using the example analyzed in the Opinion Letter). The Opinion Letter reminds readers, however, that the WHD has recognized that hosts/hostesses may be regarded as tipped employees as well, but only when “it is demonstrated that hosts and hostesses in similar establishments in the area have received and are now receiving tips, either directly or from a tip pool.” As a result of this extra “demonstration” needed for hosts and hostesses, usually only servers (for whom the employer takes a tip credit) participate in a traditional tip pool. 

Effective March 1, 2021, the WHD’s Final Rule will allow hosts/hostesses to participate in a nontraditional tip pool comprised of both tipped and non-tipped employees, without having to demonstrate similar employees in similar establishments receive tips as well. The new rule revises the requirements for tip pooling based on a change in the regulations. (29 U.S.C. 203(m)(2)(A) is substantively the same but must be read in conjunction with revised 29 C.F.R. § 531.54.) The WHD’s new rule will allow an employer that does not take a tip credit to institute a nontraditional tip pool that includes employees in both tipped and non-tipped occupations (except managers and supervisors). In this new scenario, the employer must pay the full minimum wage (with no tip credit) to both the tipped employees who contribute to the pool and the non-tipped employees who receive tips from the pool. Regardless of whether an employer takes a tip credit, the employer (and its supervisors/managers) may not participate in a tip pool under federal law. This federal change to tip pooling is years in the making, and the WHD projects their efforts will create wage increase opportunities for both tipped and non-tipped employees.

Colorado state wage law changes in the past few years also address tip pooling and allow non-tipped employees to be part of a tip pool. Under COMPS Order #37 (Rule 1.10), similar to federal law, an employer may take a tip credit (up to $3.02 per hour), tipped employees must make minimum wage, and “tipped employee” is defined as a person “engaged in an occupation in which he or she customarily and regularly receives more than $30.00 per month in tips.” Tips include amounts designated by credit card customers on their charge slips. Also similar to federal law, a Colorado employer may not take a tip credit if employees are required to share tips with employees who do not customarily receive tips. A difference between state and federal law is that employers requiring tip pooling with non-tipped employees must explain this to employees prior to implementation, and the employer must notify each patron of its use of tip pooling in writing, a particularly onerous requirement when most customers are using delivery or pickup to dine off-site due to the pandemic, as this is usually accomplished through a note to customers on a menu, table tent, or receipt. Another key difference is that, unlike federal law, Colorado does not bar employers from requiring tip pooling (sharing) with management.  As a reminder, some cities and other localities set their own minimum wage. Employers must comply with federal, state, and local wage laws, so it is important to keep an eye on evolving more stringent requirements, as well as increasing minimum wages in order to calculate changes in the tip credit.