Murtha Means More

US Department of Labor Suffers Defeat In Tip Pooling Case

June 13, 2013

Employers who use the "tip credit" under both federal and state law are (or should be) aware of the various requirements they must meet in order to use tips to meet their minimum wage obligations. Among these obligations is the rule that employees must retain all the tips they receive. One exception to this general rule is that tips may be pooled among employees who customarily and regularly receive tips without endangering the tip credit.

The United States Department of Labor (USDOL) has asserted that even when employers are paying employees the full minimum wage or more, that tip pooling arrangements are illegal if they involve employees who do not customarily and regularly receive tips. The USDOL issued regulations in 2011 that announced that ALL tips received by employees were required to either be retained by the individual employee or shared only among employees who were customarily and regularly tipped.

While most tips, and therefore most potential tip pools, occur in circumstances in which the employer is taking advantage of the tip credit, there are several situations in which this is not the case. For example, coffee shop employees may not generally receive sufficient tips to justify the administrative costs associated with maintaining the tip credit system, and thus the employer may pay full minimum wage or more. But such employees may receive tips, either directly or in a "tip jar" by the cash register. Under the USDOL’s rules, such tips could only be shared among service employees, but not with the bakers in the back of the store.

The National Restaurant Association and other industry groups challenged this regulation as beyond the scope of USDOL’s authority. On Friday June 7, 2013, a federal district court in Oregon held that the regulation went beyond the USDOL’s authority and that the regulations were invalid to the extent that they purported to address tips where there was no tip credit being claimed. Thus, according to this court, USDOL would have nothing to say about distribution of the tips in the coffee house tip jar described above.

The USDOL will likely appeal the decision, and courts in other parts of the country may well disagree with this court. More importantly, however, several states have their own laws that regulate tip pooling. Massachusetts, for example, has a specific statute (Mass. Gen. Laws ch. 149 sect. 152A) that prohibits pooling tips with non-service employees regardless of whether the employer is paying full minimum wage or not. Connecticut does not have a specific tip pooling statute, but does have different rules for pooling tips in order to take a tip credit.

Ultimately, this recent ruling should not change the way an employer does business in the short-term. An employer who administers a tip pool that includes non-service employees violates Massachusetts law and risks being involved in a lawsuit by the USDOL until the issue of the regulation’s validity is resolved on a nationwide basis. This is, however, a good opportunity for employers to review their tip policies and ensure that they are in compliance with both state and federal regulations on the issue.

If you have any questions about the issues addressed here, or any other matters involving Labor & Employment Law, please contact your usual Murtha Cullina attorney, or Hugh F. Murray at hmurray@murthalaw.com or 860.240.6077.

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