Tip Regulations Under the Fair Labor Standards Act (FLSA)
| Published date | 08 October 2019 |
| Citation | 84 FR 53956 |
| Record Number | 2019-20868 |
| Section | Proposed rules |
| Court | Wage And Hour Division |
Federal Register, Volume 84 Issue 195 (Tuesday, October 8, 2019)
[Federal Register Volume 84, Number 195 (Tuesday, October 8, 2019)]
[Proposed Rules]
[Pages 53956-53980]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20868]
[[Page 53955]]
Vol. 84
Tuesday,
No. 195
October 8, 2019
Part IVDepartment of Labor-----------------------------------------------------------------------Wage and Hour Division-----------------------------------------------------------------------29 CFR Parts 10, 516, 531, et al.Tip Regulations Under the Fair Labor Standards Act (FLSA); Proposed
Rule
Federal Register / Vol. 84 , No. 195 / Tuesday, October 8, 2019 /
Proposed Rules
[[Page 53956]]
-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Wage and Hour Division
29 CFR Parts 10, 516, 531, 578, 579, and 580
RIN 1235-AA21
Tip Regulations Under the Fair Labor Standards Act (FLSA)
AGENCY: Wage and Hour Division, Department of Labor.
ACTION: Notice of proposed rulemaking; withdrawal of proposed
rulemaking; request for comments.
-----------------------------------------------------------------------
SUMMARY: In the Consolidated Appropriations Act, 2018 (CAA), Congress
amended section 3(m) of the Fair Labor Standards Act (FLSA) to prohibit
employers from keeping tips received by their employees, regardless of
whether the employers take a tip credit under section 3(m). In this
Notice of Proposed Rulemaking (NPRM), the Department proposes to amend
its tip regulations to address this Congressional action. The
Department also proposes to codify policy regarding the tip credit's
application to employees who performed tipped and non-tipped duties.
This NPRM also withdraws the Department's December 5, 2017 NPRM
proposing changes to the Department's tip regulations, as the CAA has
superseded it.
DATES: Comments must be received on or before December 9, 2019.
The proposed rule Tip Regulations under the Fair Labor Standards
Act, published December 5, 2017 at 82 FR 57395, is withdrawn as of
October 8, 2019.
ADDRESSES: To facilitate the receipt and processing of written comments
on this NPRM, the Department encourages interested persons to submit
their comments electronically. You may submit comments, identified by
Regulatory Information Number (RIN) 1235-AA21, by either of the
following methods:
Electronic Comments: Follow the instructions for submitting
comments on the Federal eRulemaking Portal http://www.regulations.gov.
Mail: Address written submissions to Amy DeBisschop, Acting
Director of the Division of Regulations, Legislation, and
Interpretation, Wage and Hour Division, U.S. Department of Labor, Room
S-3502, 200 Constitution Avenue NW, Washington, DC 20210.
Instructions: This NPRM is available through the Federal Register
and the http://www.regulations.gov website. You may also access this
document via the Wage and Hour Division's (WHD) website at http://www.dol.gov/whd/. All comment submissions must include the agency name
and Regulatory Information Number (RIN 1235-AA21) for this NPRM.
Response to this NPRM is voluntary. The Department requests that no
business proprietary information, copyrighted information, or
personally identifiable information be submitted in response to this
NPRM. Submit only one copy of your comment by only one method (e.g.,
persons submitting comments electronically are encouraged not to submit
paper copies). Anyone who submits a comment (including duplicate
comments) should understand and expect that the comment will become a
matter of public record and will be posted without change to http://www.regulations.gov, including any personal information provided. All
comments must be received by 11:59 p.m. on the date indicated for
consideration in this NPRM; comments received after the comment period
closes will not be considered. Commenters should transmit comments
early to ensure timely receipt prior to the close of the comment
period. Electronic submission via http://www.regulations.gov enables
prompt receipt of comments submitted as the Department continues to
experience delays in the receipt of mail in our area. For access to the
docket to read background documents or comments, go to the Federal
eRulemaking Portal at http://www.regulations.gov.
FOR FURTHER INFORMATION CONTACT: Amy DeBisschop, Director of the
Division of Regulations, Legislation, and Interpretation, Wage and Hour
Division, U.S. Department of Labor, Room S-3502, 200 Constitution
Avenue NW, Washington, DC 20210, telephone: (202) 693-0406 (this is not
a toll-free number). Copies of this NPRM may be obtained in alternative
formats (Large Print, Braille, Audio Tape or Disc), upon request, by
calling (202) 693-0675 (this is not a toll-free number). TTY/TDD
callers may dial toll-free (877) 889-5627 to obtain information or
request materials in alternative formats.
Questions of interpretation and/or enforcement of the agency's
existing regulations may be directed to the nearest WHD district
office. Locate the nearest office by calling the WHD's toll-free help
line at (866) 4US-WAGE ((866) 487-9243) between 8 a.m. and 5 p.m. in
your local time zone, or log onto WHD's website at http://www.dol.gov/whd/america2.htm for a nationwide listing of WHD district and area
offices.
SUPPLEMENTARY INFORMATION:
I. Executive Summary
The FLSA generally requires covered employers to pay employees at
least a Federal minimum wage, which is currently $7.25 per hour. See 29
U.S.C. 206(a)(1). Section 3(m) of the FLSA allows an employer that
meets certain requirements to count a limited amount of the tips its
``tipped employees'' receive as a credit toward its Federal minimum
wage obligation (known as a ``tip credit''). See 29 U.S.C.
203(m)(2)(A). An employer may take a tip credit only for ``tipped
employees'', and only if, among other things, its tipped employees
retain all their tips. Id. This requirement, however, does not preclude
an employer that takes a tip credit from implementing a tip pool in
which tips are shared only among those employees who ``customarily and
regularly receive tips.'' Id.
In 2011, the Department revised its tip regulations to reflect its
view at the time that the FLSA required that tipped employees retain
all tips received by them, except for tips distributed through a tip
pool limited to employees who customarily and regularly receive tips,
regardless of whether their employer takes a tip credit. See, e.g., 29
CFR 531.52. On December 5, 2017, the Department published an NPRM, 82
FR 57,395, which proposed to rescind the parts of its tip regulations
that applied to employers that pay a direct cash wage of at least the
full Federal minimum wage and do not take a tip credit.
On March 23, 2018, Congress amended section 3(m) of the FLSA in the
CAA, Public Law 115-141, Div. S., Tit. XII, Sec. 1201, 132 Stat. 348,
1148-49 (2018). Among other things, the CAA revised section 3(m) by
renumbering the existing tip credit provision as section 3(m)(2)(A).
Significantly, the CAA added a new section 3(m)(2)(B), which prohibits
employers, whether or not they take a tip credit, from keeping their
employees' tips ``for any purposes, including allowing managers or
supervisors to keep any portion of employees' tips.'' The CAA amended
sections 16(b) and 16(c) of the FLSA to permit private parties and the
Department to recover any tips unlawfully kept by an employer in
violation of section 3(m)(2)(B), in addition to an equal amount of
liquidated damages. The CAA also amended section 16(e) of the FLSA to
provide the Department discretion to impose civil money penalties
(CMPs) up to $1,100 when employers unlawfully keep employee's tips.
Congress specified in the CAA that the portions of the 2011 final
rule that ``are not addressed by section 3(m) . . .
[[Page 53957]]
(as such section was in effect on April 5, 2011), shall have no further
force or effect until any future action taken by [the Department of
Labor].'' As the Department explained in a Field Assistance Bulletin
(FAB) published shortly thereafter, that statement applies to those
portions of the Department's regulations at Sec. Sec. 531.52, 531.54,
and 531.59 that restricted tip pooling when employers pay tipped
employees a direct cash wage of at least the full FLSA minimum wage and
do not claim a tip credit. FAB No. 2018-3 (Apr. 6, 2018), available at
https://www.dol.gov/whd/FieldBulletins/fab2018_3.pdf.
Because the Congressional amendments to the FLSA directly impacted
the subject of the Department's 2017 NPRM, this document withdraws that
proposal. This document also explains the impact of the 2018 CAA
amendments on the Department's current tip pooling regulations. The CAA
did not change the existing rules that apply to employers that take a
tip credit, now in section 3(m)(2)(A) of the FLSA, which provide that
such employers may institute a mandatory, ``traditional'' tip pool that
is limited to employees who ``customarily and regularly'' receive tips.
But the CAA did eliminate the regulatory restrictions on an employer's
ability to require tip pooling when it does not take a tip credit: Such
employers may now implement mandatory, ``nontraditional'' tip pools in
which employees who do not customarily and regularly receive tips, such
as cooks and dishwashers, may participate.
The CAA also created a new statutory provision, 3(m)(2)(B), which
applies to all employers regardless of whether they take a tip credit,
and provides that employers may not keep employees' tips and may not
allow managers or supervisors to keep employees' tips. Among other
things, this new statutory provision prohibits employers, managers, and
supervisors from receiving employees' tips from any tip pooling
arrangement. As explained further herein, section 3(m)(2)(B) also
prohibits employers from operating tip pools in a manner such that they
``keep'' tips.
The Department is proposing to update its tip regulations to
incorporate the CAA's amendments to the FLSA. Although the CAA
renumbered the FLSA's existing tip credit provision as section
3(m)(2)(A), it did not substantively change that provision. Therefore,
this rulemaking does not address the Department's existing regulations
and guidance implementing 3(m)(2)(A) that apply to employers that take
a tip credit unless it is necessary to clarify how those provisions
relate to the statutory amendment. The Department is proposing to
incorporate the new statutory provision, section 3(m)(2)(B)--which
applies regardless of whether the employer takes a tip credit--into its
existing regulations and is proposing to incorporate a new
recordkeeping provision to assist the Department with its
administration of that provision. The Department is additionally
proposing, consistent with Congressional action, to remove the portions
of its regulations that prohibited employers that pay their tipped
employees a direct cash wage of at least the full Federal minimum wage
and do not take a tip credit against their minimum wage obligations
from including employees who do not customarily and regularly receive
tips, such as cooks and dishwashers, in mandatory tip pooling
arrangements. The Department is also proposing to amend its tip
regulations to reflect recent guidance explaining that an employer may
take a tip credit for any amount of time that an employee in a tipped
occupation performs related, non-tipped duties contemporaneously with
his or her tipped duties, or for a reasonable time immediately before
or after performing the tipped duties. The proposed regulation would
also address which non-tipped duties are related to a tip-producing
occupation.
The Department is also proposing to incorporate the FLSA's new CMP
provision into its existing regulations. Since the Department is
proposing to revise its CMP regulations to reflect the statutory
amendments, the Department also proposes to revise portions of its CMP
regulations to address courts of appeals' decisions that have raised
concerns that some of the regulations' statements regarding willful
violations are inconsistent with Supreme Court authority and how the
Department actually litigates willfulness.
Finally, the Department is proposing to amend the provisions of its
regulations that address the payment of tipped employees under
Executive Order 13658 (Establishing a Minimum Wage for Contractors) to
reflect the rescissions proposed in the FLSA regulations for tipped
employees, to incorporate the Department's guidance on when an employee
performing non-tipped work is a tipped employee, and to otherwise align
those regulations with the authority provided in the Executive Order.
The Department estimates the rule updating WHD's regulations to
reflect the CAA amendments, if finalized as proposed, could result in a
potential transfer of $107 million, as tip pools are expanded to share
tips among both front-of-the-house and back-of-the-house employees. The
directly-observable transfer would only occur among employees because
section 3(m)(2)(B) prohibits employers from participating in these tip
pools or otherwise keeping employee's tips. However, because back-of-
the-house workers may now be receiving tips, employers may offset this
increase in total compensation by reducing the direct wage that they
pay back-of-the-house workers (as long as they do not reduce their wage
below the applicable minimum wage). This could allow employers to
capture some of the transfer. The Department estimates that regulatory
familiarization costs associated with this proposed rule would be $3.86
million in the first year. For purposes of Executive Order 13771, it is
expected that this proposed rule would, if finalized as proposed,
qualify as a deregulatory action.
II. Background
A. Section 3(m)
As explained above, the FLSA generally requires covered employers
to pay employees at least the Federal minimum wage, which is currently
$7.25 per hour. Section 3(m) (now 3(m)(2)(A)) of the FLSA, however,
permits an employer to count a limited amount of an employee's tips (up
to $5.12 per hour) as a partial credit, called a ``tip credit,'' to
satisfy the difference between the direct cash wage paid and the
Federal minimum wage. This partial credit is known as a tip credit. An
employer may take a tip credit only for a ``tipped employee,'' which
section 3(t) of the FLSA defines as ``any employee engaged in an
occupation in which he customarily and regularly receives more than $30
a month in tips.'' In addition, an employer may take a tip credit under
section 3(m)(2)(A) only if, among other things, the tipped employees
retain all the tips they receive. An employer taking a tip credit is
allowed, however, to implement a mandatory tip pool in which tips are
shared only among employees who ``customarily and regularly receive
tips.''
Section 3(m)(2)(B) of the FLSA, added through the CAA, provides
that ``an employer may not keep tips received by its employees for any
purposes, including allowing managers or supervisors to keep any
portion of employees' tips.'' See Div. S., Tit. XII, Sec. 1201.
Importantly, section 3(m)(2)(B) applies regardless of whether an
employer takes a tip credit.
[[Page 53958]]
B. Statutory and Regulatory History
i. 1966 and 1974 Amendments to the FLSA \1\
---------------------------------------------------------------------------
\1\ Congress amended section 3(m)'s tip credit provision three
times between 1974 and 2018, in 1977, 1989, and 1996. These
amendments changed only the applicable amount of tips received by
employees that could be used as a credit against an employer's
minimum wage obligations. See Public Law 95-151, 3(b), 91 Stat. 1245
(1977); Public Law 101-157, 5, 103 Stat. 938 (1989); Public Law 104-
188, 2105(b), 110 Stat. 1755 (1996).
---------------------------------------------------------------------------
Congress created the FLSA's tip credit provision within the
definition of ``wages'' in section 3(m) in 1966. See Public Law 89-601,
101(a), 80 Stat. 830 (1966). In 1974, Congress amended section 3(m) to
provide that an employer could not credit tips received by its
employees toward its Federal minimum wage obligation unless, among
other things:
all tips received by such employee have been retained by the
employee, except that this subsection shall not be construed to
prohibit the pooling of tips among employees who customarily and
regularly receive tips.
Public Law 93-259, 13(e), 88 Stat. 55 (1974). As a result of the
amendment, an employer that takes a tip credit can require a tipped
employee to share tips with other employees in occupations in which
they customarily and regularly receive tips, but it cannot use
employees' tips for any other purpose or require tipped employees to
share them with employees who do not customarily and regularly receive
tips. As the text of the statute makes plain, Congress only intended to
regulate employers who take a tip credit, stating that those employers
cannot take employees' tips except to pool them among employees who
customarily and regularly receive them. The text contains no indication
that Congress intended to regulate employers who do not take a tip
credit and who use tip pools for other purposes, such as by sharing
tips with ``back of the house'' employees like cooks and dishwashers.
The Department promulgated its initial tip regulations in 1967, one
year after Congress created the tip credit. See 32 FR 13,575 (Sept. 28,
1967). Consistent with the Department's understanding of the 1966
amendments, the 1967 tip regulations permitted agreements under which
tips received by employees would be transferred to the employer.
Immediately after the 1974 amendments, the Department's WHD stated in a
number of opinion letters that its 1967 regulations were superseded to
the extent they conflicted with those amendments. See, e.g., WHD
Opinion Letter WH-310, 1975 WL 40934 (Feb. 18, 1974), at *1.
In 2010, the Ninth Circuit analyzed section 3(m) and observed that
``nothing in the text of the FLSA purports to restrict employee tip-
pooling arrangements when no tip credit is taken.'' Cumbie v. Woody
Woo, Inc., 596 F.3d 577, 583 (9th Cir. 2010). The Ninth Circuit
reasoned that section 3(m)'s ``plain text'' merely ``imposes conditions
on taking a tip credit and does not state freestanding requirements
pertaining to all tipped employees.'' Id. at 580-81. The contrary
position, the court concluded, would render Section 203(m)'s
``reference to the tip credit, as well as its conditional language and
structure, superfluous.'' Id. at 581. The court thus held that the
employer, which did not take a tip credit, did not violate section
203(m) by requiring its tipped employees to contribute to a tip pool
that included employees who were not customarily and regularly tipped.
See id.
ii. 2011 Regulations
In 2011, however, the Department revised its 1967 tip regulations
to reflect its view of the 1974 amendments to the FLSA. See 76 FR
18,832, 18,854-56 (Apr. 5, 2011). Notwithstanding the Cumbie decision,
the 2011 regulations prohibited employers from, among other things,
establishing mandatory tip pools that include employees who are not
customarily and regularly tipped--regardless of whether employers took
a tip credit. See 29 CFR 531.52 (2011) (``The employer is prohibited
from using an employee's tips, whether or not it has taken a tip
credit, for any reason other than that which is statutorily permitted
in section 3(m): As a credit against its minimum wage obligations to
the employee, or in furtherance of a valid tip pool.''); see also Sec.
531.54 (providing that ``an employer . . . may not retain any of the
employees' tips''); Sec. 531.59 (``With the exception of tips
contributed to a valid tip pool as described in Sec. 531.54, the tip
credit provisions of section 3(m) also require employers to permit
employees to retain all tips received by the employee.''). The
Department acknowledged that section 3(m) did not expressly address the
use of an employee's tips when an employer does not take a tip credit
and pays a direct cash wage equal to or greater than the Federal
minimum wage, but stated that the regulation would fill a ``gap'' that
the Department then believed to exist in the statutory scheme. 76 FR at
18,841-42.
Multiple lawsuits have involved challenges to the Department's
authority under section 3(m) to regulate employers that pay a direct
cash wage of at least the Federal minimum wage. The parties challenging
the validity of the 2011 regulations argued, and courts ruling in favor
of such parties have held, that the text of section 3(m) reflected
Congress' intent to impose conditions only on employers that take a tip
credit. See, e.g., Trinidad v. Pret A Manger (USA) Ltd., 962 F. Supp.
2d 545, 562 (S.D.N.Y. 2013) (``Although the Court need not resolve this
issue definitively . . . [it] finds Pret's argument more persuasive:
The DOL regulations are contrary to the plain language of Sec.
203(m).'').
On February 23, 2016, a divided Ninth Circuit panel upheld the
validity of the 2011 regulations. See Oregon Rest. & Lodging Ass'n
(ORLA) v. Perez, 816 F.3d 1080, 1090 (9th Cir. 2016). Although the
Ninth Circuit declined en banc review of the decision, ten judges
dissented on the ground that the FLSA authorized the Department to
address tip pooling and tip retention only when an employer takes a tip
credit. See ORLA, 843 F.3d 355, 356 (9th Cir. 2016) (O'Scannlain, J.,
dissenting from denial of reh'g en banc). The dissent noted the Ninth
Circuit's decision in Cumbie that the FLSA ``clearly and unambiguously
permits employers who forgo a tip credit to arrange their tip-pooling
affairs however they see fit.'' Id. at 358 (citing Cumbie, 596 F.3d at
579 n.6, 581, 581 n.11, 582, 583). The dissent therefore concluded that
``because the Department has not been delegated authority to ban tip
pooling by employers who forgo the tip credit, the Department's
assertion of regulatory jurisdiction is manifestly contrary to the
statute and exceeds its statutory authority.'' Id. at 363 (internal
quotation marks omitted). On January 19, 2017, the National Restaurant
Association, on behalf of itself and other ORLA plaintiffs, sought
Supreme Court review. See Pet'n for Writ of Cert., ORLA sub nom. Nat'l
Rest. Ass'n v. U.S. DOL, (Jan. 19, 2017) (No. 16-920).
On June 30, 2017, the Tenth Circuit ruled that the Department's
2011 tip regulations were invalid to the extent they barred an employer
from using or sharing tips with employees who do not customarily and
regularly receive tips when the employer pays a direct cash wage of at
least the Federal minimum wage and does not take a section 3(m) tip
credit. See Marlow v. New Food Guy, Inc., 861 F.3d 1157, 1159 (10th
Cir. 2017). The Tenth Circuit held that the text of the FLSA limits an
employer's use of tips only when the employer takes a tip credit,
``leaving [the Department] without authority to regulate to the
contrary.'' See Marlow, 861 F.3d at 1163-64.
[[Page 53959]]
On July 20, 2017, the Department adopted a nationwide
``nonenforcement policy'' under which the Department would ``not
enforce'' the 2011 regulations in any context in which an employer pays
its employees a direct cash wage of at least the Federal minimum wage.
See 82 FR 57395, 57399 (Dec. 5, 2017).
On May 22, 2018, the government responded to the petition for
certiorari in ORLA, then captioned as Nat'l Rest. Ass'n (NRA) et al. v.
Dept. of Labor et al, explaining that the Department had reconsidered
its defense of the 2011 regulations in light of the ten-judge dissent
from denial of rehearing in ORLA and the Tenth Circuit's decision in
Marlow, and that it believed that it had exceeded its statutory
authority in promulgating the 2011 regulations as they apply to
employers that do not take a tip credit against their Federal minimum
wage obligations. The government explained that ``until the 2018
[congressional] amendments, Section 203(m) placed limits only on
employers that took a tip credit,'' and that ``[n]either Section 203(m)
nor any other provision of the FLSA prevents an employer that pays at
least the minimum wage from instituting a nontraditional tip pool [that
includes back-of-the-house employees like cooks and janitors] for
employees' tips.'' Br. for the Respondents at 26-27, NRA (No. 16-920).
On June 25, 2018, the Supreme Court denied the petition for certiorari.
iii. 2017 Notice of Proposed Rulemaking
On December 5, 2017, the Department published an NPRM proposing to
rescind the portions of its 2011 tip regulations that imposed
restrictions on employers that pay a direct cash wage of at least the
full Federal minimum wage and do not take a tip credit against their
minimum wage obligations. See 82 FR 57395 (Dec. 5, 2017). The
Department issued the 2017 NPRM in part because of its concerns, in
light of the ORLA rehearing dissent and the Tenth Circuit's decision in
Marlow, that it had misconstrued the statute when it promulgated the
2011 regulations. 82 FR 57399. The Department stated that where ``an
employer has paid a direct cash wage of at least the full Federal
minimum wage and does not take the employee tips directly, a strong
argument exists that the statutory protections of section 3(m) do not
apply.'' 82 FR 57402. The Department also proposed allowing these
employers to establish tip pools that include employees who contribute
to the customers' experience but do not customarily and regularly
receive tips--such as dishwashers or cooks. See, e.g., 82 FR 557399.
A number of commenters on the NPRM supported allowing employers to
establish these tip pools. Several commenters pointed out that these
workers contribute to each customer's overall service, which directly
affects the size of the customer's tip. Many commenters, however,
expressed concern that without regulatory protections in place, an
employer would take tips received by employees for its own purposes.
During a hearing on March 6, 2018, before the Subcommittee on
Labor, Health and Human Services, and Education of the U.S. House of
Representatives Committee on Appropriations, Secretary of Labor R.
Alexander Acosta was asked about the proposed rulemaking. The Secretary
explained that the Tenth Circuit had made clear in Marlow, in reasoning
the Secretary found persuasive, that the Department lacked statutory
authority for its 2011 regulations at issue, and that the Secretary had
concluded that Congress has not authorized the Department to fully
regulate in this space. The Secretary, however, explained that Congress
had the authority to implement a solution, and he suggested that
Congress enact legislation providing that establishments, whether or
not they take a tip credit, may not keep any portion of employees'
tips.\2\
---------------------------------------------------------------------------
\2\ A recording of the testimony is available at: https://www.congress.gov/committees/video/house-appropriations/hsap00/6Weo1vfNM1k.
---------------------------------------------------------------------------
C. The CAA's Amendments to the FLSA
On March 23, 2018, Congress amended the FLSA through the CAA to
further address employers' practices with respect to their employees'
tips. Public Law 115-141, Div. S., Tit. XII, sec. 1201. The Department
issued a FAB that provided guidance concerning WHD enforcement of the
CAA amendments on April 6, 2018. See FAB No. 2018-3 (Apr. 6, 2018).
i. Amendments to Section 3(m) of the FLSA
The CAA left unchanged the existing text of section 3(m), but
recodified it as section 3(m)(2)(A). Thus, the CAA did not alter the
FLSA's longstanding requirements that apply to employers that take a
tip credit.
The CAA did, however, add new requirements for all employers. The
CAA added a new section to the FLSA, 3(m)(2)(B). This provision
expressly prohibits employers--regardless of whether they take a tip
credit under section 3(m)--from keeping tips received by their
employees, including by distributing them to managers or supervisors:
``An employer may not keep tips received by its employees for any
purposes, including allowing managers or supervisors to keep any
portion of employees' tips, regardless of whether or not the employer
takes a tip credit.'' CAA, Div. S, Tit. XII, Sec. 1201(a) (codified as
amended at 29 U.S.C. 203(m)(2)(B)); see FAB No. 2018-3.
ii. Effect on Regulations
The CAA amendments also expressly addressed the portions of the
Department's 2011 regulations that restricted tip pooling when
employers pay tipped employees a direct cash wage of at least the full
FLSA minimum wage and do not take a tip credit. CAA, Div. S, Tit. XII,
Sec. 1201(c). Section 1201(c) of the CAA provides that the portions of
WHD's regulations at 29 CFR 531.52, 531.54, and 531.59 that were ``not
addressed by section 3(m) . . . (as such section was in effect on April
5, 2011), shall have no further force or effect until any future action
taken by [the Department of Labor].'' The Department explained in a FAB
that this statutory language had the effect of depriving of any further
force or effect the Department's existing regulations prohibiting
employers that pay tipped employees the full Federal minimum wage from
including back-of-the-house workers, such as cooks and dishwashers, in
a tip pool. See FAB No. 2018-3.
iii. Amendments to Section 16 of the FLSA
The CAA also amended section 16(b) of the FLSA, which provides in
part that an employee may sue for unpaid minimum wages or overtime
compensation. The amendment to this provision states that ``[a]ny
employer who violates section 3(m)(2)(B) shall be liable to the
employee or employees affected in the amount of the sum of any tip
credit taken by the employer and all such tips unlawfully kept by the
employer, and in an additional equal amount as liquidated damages.''
CAA, Div. S, Tit. XII, sec. 1201(b)(1). The amendment thus permits
employees to sue for double the sum of any tips illegally kept by their
employer and the amount of any tip credit taken by such employer.
Section 16(c) of the FLSA authorizes the Department to enforce the
proper payment of unpaid minimum wages and/or unpaid overtime
compensation. The CAA amended section 16(c) by adding to the
Department's enforcement authority: ``The authority and
[[Page 53960]]
requirements described in this subsection shall apply with respect to a
violation of section 3(m)(2)(B), as appropriate, and the employer shall
be liable for the amount of the sum of any tip credit taken by the
employer and all such tips unlawfully kept by the employer, and an
additional equal amount as liquidated damages.'' CAA, Div. S, Tit. XII,
sec. 1201(b)(2). Accordingly, when an employer unlawfully keeps an
employee's tips in violation of section 3(m)(2)(B), the Department may
recover on behalf of the employee the same doubled sum of any tips kept
and tip credit taken by the employer.
Section 16(e)(2) provides that any person who repeatedly or
willfully violates the minimum wage or overtime provisions of the FLSA
shall be subject to a civil money penalty not to exceed $1,100 for each
such violation.\3\ The CAA amended this section to add: ``Any person
who violates section 3(m)(2)(B) shall be subject to a civil penalty not
to exceed $1,100 for each such violation, as the Secretary determines
appropriate, in addition to being liable to the employee or employees
affected for all tips unlawfully kept, and an additional equal amount
as liquidated damages[.]'' CAA, Div. S, Tit. XII, sec. 1201(b)(3). The
amendment thus added a new civil money penalty for violations of
section 3(m)(2)(B).
---------------------------------------------------------------------------
\3\ The Federal Civil Penalties Inflation Adjustment Act of 1990
(Pub. L. 101-410), as amended by the Debt Collection Improvement Act
of 1996 (Pub. L. 104-134, sec. 31001(s)) and the Federal Civil
Penalties Inflation Adjustment Act Improvement Act of 2015 (Publ. L.
No. 114-74, sec. 701), requires that inflationary adjustments be
made annually in these civil money penalties according to a
specified cost-of-living formula.
---------------------------------------------------------------------------
III. Withdrawal of the 2017 NPRM
As noted above, on December 5, 2017, the Department published an
NPRM which proposed to rescind the parts of its tip regulations that
applied to employers that pay a direct cash wage of at least the full
Federal minimum wage and do not take a tip credit.
The CAA amendments to the statutory text of the FLSA, which were
signed into law on March 23, 2018, directly impacted the subject of the
2017 proposed rulemaking--employers that pay at least the full Federal
minimum wage and do not take a tip credit under section 3(m). For that
reason, the Department is withdrawing the 2017 NPRM and is addressing
the 2018 CAA amendments through this rulemaking.
IV. Section-by-Section Analysis of Proposed Regulatory Revisions
This section describes in detail the Department's proposed changes
to its tip regulations to implement the CAA amendments and address
other issues. As discussed above, the CAA amendments deprived of any
further force or effect the portions of the Department's 2011
regulations that restricted tip pooling when employers pay tipped
employees a direct cash wage of at least the full FLSA minimum wage and
do not take a tip credit, until future action by the WHD Administrator.
At the same time, the CAA amendments expressly prohibit employers from
keeping tips received by their employees for any purposes, regardless
of whether the employer takes a tip credit. Pursuant to section 1201(c)
of the CAA amendments and consistent with its position articulated in
the 2017 NPRM, the Department proposes to strike the portions of its
current regulations that prohibit employers that pay their tipped
employees a direct cash wage at least equal to the Federal minimum wage
and do not take a tip credit from establishing mandatory tip pools with
employees who do not customarily and regularly receive tips, such as
dishwashers and cooks.
The Department also proposes to amend Sec. 531.52 to implement
newly added section 3(m)(2)(B), which prohibits employers--regardless
of whether they take a tip credit--from keeping employees' tips for any
purposes, including allowing managers and supervisors to keep the tips.
The proposed regulation defines an individual who is a manager or
supervisor, and therefore may not keep employees' tips under section
3(m)(2)(B), as an individual who meets the duties test at Sec.
541.100(a)(2)-(4) or Sec. 541.101.
The Department also proposes to amend Sec. 531.54 to reflect the
new statutory provision, section 3(m)(2)(B). Proposed Sec. 531.54(b)
clarifies that section 3(m)(2)(B)'s prohibition on keeping tips applies
regardless of whether the employer takes a tip credit and precludes
employers from including themselves, managers, and/or supervisors in
employer-mandated tip pools. Proposed Sec. 531.54(b) also explains
that although section 3(m)(2)(B) prohibits employers from sharing
employees' tips with supervisors, managers, and employers, an employer
may institute a mandatory tip pool that requires employees to share or
pool tips with other eligible employees. Proposed Sec. 531.54(b)
further provides that any employer that collects tips to facilitate a
mandatory tip pool must fully redistribute the tips, no less often than
when it pays wages, to avoid ``keep[ing]'' the tips in violation of
section 3(m)(2)(B).
Proposed Sec. Sec. 531.54(c) and (d) would also set forth the
different tip pooling requirements for employers that take a tip credit
and for those that do not. Because the CAA did not substantively amend
the statutory requirements under 3(m)(2)(A) that apply to employers
that take a tip credit, the Department does not propose to change its
existing tip pooling requirements in Sec. 531.54 that apply to those
employers. Those existing requirements, in relevant part, state that
employers can only require tipped employees to contribute tips to a
``traditional'' tip pool, comprised of employees who customarily and
regularly receive tips. In contrast, under the CAA amendments, an
employer that chooses not to take a tip credit may require tipped
employees to contribute tips to a ``nontraditional'' pool that includes
employees, such as dishwashers and cooks, who are not employed in an
occupation in which employees customarily and regularly receive tips.
The proposed regulation clarifies that an employer that requires such a
tip pool must pay a direct cash wage of at least the full Federal
minimum wage to any tipped employee who contributes tips to the pool.
The Department is also proposing to amend Sec. 531.56(e) to
reflect recent guidance that an employer may take a tip credit for time
that an employee in a tipped occupation performs related, non-tipped
duties contemporaneously with or a reasonable time immediately before
or after performing the tipped duties. The proposed regulation would
also address which non-tipped duties are related to a tip-producing
occupation.
The Department additionally proposes incorporating into its
regulations the CAA amendments that provide for civil money penalties
for violations of section 3(m)(2)(B). Since the Department is proposing
to revise its regulations to reflect this new CMP provision, which, as
proposed, would apply only to repeated and willful violations, the
Department also proposes to revise its existing CMP regulations to
address courts of appeals' decisions that have raised concerns that
some of the regulations' statements regarding willful violations are
inconsistent with Supreme Court authority and how the Department
actually litigates willfulness.
Finally, the Department proposes to amend the provisions of Sec.
10.28, which addresses the payment of tipped employees under Executive
Order 13658 (Establishing a Minimum Wage for Contractors), to make them
consistent
[[Page 53961]]
with its proposed rescissions to the FLSA regulations, to remove
similar restrictions on an employer's use of nontraditional tip pools,
to otherwise align those regulations with the authority provided in the
Executive Order, and to incorporate the Department's recent guidance on
when an employee performing non-tipped work is a tipped employee.
The Department seeks public comment on these proposed regulatory
changes. The Department asks commenters to define in their comments any
terms they use to describe practices regarding tips. This NPRM uses the
term ``tip pooling'' to describe any scenario in which a tip provided
by a customer is shared, in whole or in part, among employees. The
Department recognizes, however, that in some workplaces or under state
laws, the term ``tip pooling'' may refer to a narrower set of
practices, and that employers and workers may use other terms--for
example ``tip out,'' ``tip sharing,'' or ``tip jar''--to describe
certain practices regarding tips.
A. Rescission of Portions of Sections 531.52, 531.54, and 531.59
As noted above, section 1201(c) of the CAA provides that the
portions of the Department's regulations at 29 CFR 531.52, 531.54, and
531.59 that were ``not addressed by section 3(m)'' ``shall have no
further force or effect[.]'' CAA, Div. S, Tit. XII, sec. 1201(c). This
statutory language deprives of any further force or effect the portions
of Sec. Sec. 531.52, 531.54, and 531.59 that impose restrictions on an
employer's use of employees' tips when the employer does not take a tip
credit. As the Department explained in its FAB, under the CAA
amendments, employers that do not take a tip credit may now establish
mandatory tip pools that include employees who do not customarily and
regularly receive tips, such as back-of-the-house workers like cooks
and dishwashers. See FAB No. 2018-3. Section 1201(c) of the CAA did not
impact the portions of Sec. Sec. 531.52, 531.54, and 531.59 that apply
to employers that do take a tip credit.
Consistent with the statutory language, as well as the Department's
statements in the 2017 NPRM,\4\ the Department proposes to rescind the
language in Sec. 531.52 that bars employers from establishing
mandatory tip pools that include employees who are not customarily and
regularly tipped, ``whether or not it takes a tip credit,'' and to make
additional minor clarifying edits; to revise Sec. Sec. 531.54 to
clarify that the restrictions and notice requirements for tip pools
apply only to employers that take a tip credit; and to revise Sec.
531.59 to provide that the bar on including employees who are not
customarily and regularly tipped in a mandatory tip pool applies only
to employers that take a tip credit.
---------------------------------------------------------------------------
\4\ As explained above, the government's brief in response to
the petition for certiorari in the NRA litigation explained that the
Department had reconsidered its defense of the 2011 regulations, and
that it believed that it had exceeded its statutory authority in
promulgating the 2011 regulations as they apply to employers that do
not take a tip credit against their Federal minimum wage
obligations.
---------------------------------------------------------------------------
B. Proposed Section 531.52--General Restrictions on an Employer's Use
of Its Employees' Tips
i. An Employer May Not Keep Tips, Regardless of Whether It Takes a Tip
Credit
Section 3(m)(2)(B) prohibits an employer, regardless of whether it
takes a tip credit, from ``keeping'' tips received by its employees
``for any purposes, including allowing managers and supervisors to keep
any portion of employees' tips.'' Under the amended statute, an
employer does not ``keep'' employees' tips in violation of section
3(m)(2)(B) merely by requiring an employee who receives a tip to share
it with other eligible employees who also contributed to the service
provided to the customer. In those circumstances, the employees, not
the employer, keep the tips. Section 3(m)(2)(B), however, prohibits an
employer from using its employees' tips for any other purpose. An
employer would ``keep'' tips, for example, by using tips to cover its
own general operating expenses, using tips to pay for capital
improvements, or directing the tips to an individual who is not an
employee, such as a vendor. This is true for tips provided through a
credit card transaction, as well as for cash tips. The Department
proposes to amend Sec. 531.52 to include the new statutory language
prohibiting an employer from keeping employees' tips, and to clarify
that an employer may exert control over employees' tips only to
distribute tips to the employee who received them, require employees to
share tips with other eligible employees, or, where the employer
facilitates tip pooling by collecting and redistributing employees'
tips, distribute tips to employees in a tip pool.
The statutory language prohibits an ``employer'' from ``keep[ing]
tips received by its employees.'' The term ``employer'' is defined in
section 3(d) of the FLSA to mean ``any person [or entity] acting
directly or indirectly in the interest of an employer in relation to an
employee . . . .'' Therefore, a person or entity that meets the
definition of a section 3(d) employer may not keep or receive tips from
a tip pool.
ii. Managers and Supervisors May Not Keep Tips
As explained above, section 3(m)(2)(B) prohibits employers,
regardless of whether they take a tip credit, from keeping tips,
``including allowing managers or supervisors to keep any portion of
employees' tips.'' 29 U.S.C. 203(m)(2)(B). This prohibition applies to
managers or supervisors obtaining employees' tips directly or
indirectly, such as via a tip pool. The Department's current
enforcement policy under FAB No. 2018-3 is to use the duties test under
the executive employee exemption of FLSA section 13(a)(1), as defined
at 29 CFR 541.100(a)(2)-(4), to determine whether an employee is a
manager or supervisor for purposes of section 3(m)(2)(B).
Proposed Sec. 531.52 would reflect this policy. Because an
employee who satisfies the executive duties test manages and supervises
other employees, the test effectively identifies those employees whom
Congress sought to preclude from keeping tips. The Department does not
propose to use the salary requirements at Sec. 541.100(a)(1) to help
determine whether an employee is a manager or supervisor for purposes
of section 3(m)(2)(B). Accordingly, this proposal would interpret the
terms ``manager'' and ``supervisor'' under section 3(m)(2)(b) more
broadly--and to encompass more employees--than the term ``executive''
as used in Section 13(a)(1).
Sections 541.100(a)(2)-(4) provide that a manager or supervisor
satisfies the duties test of the executive employee exemption if (1)
the employee's primary duty is managing the enterprise, or managing a
customarily recognized department or subdivision of the enterprise (see
Sec. 541.100(a)(2)); (2) the employee customarily and regularly
directs the work of at least two or more other full-time employees or
their equivalent (see Sec. 541.100(a)(3)); and (3) the employee has
the authority to hire or fire other employees, or the employee's
suggestions and recommendations as to the hiring, firing, advancement,
promotion, or any other change of status of other employees are given
particular weight (see Sec. 541.100(a)(4)). In addition, an employee
who owns at least a bona fide 20-percent equity interest in the
enterprise in which she is employed, regardless of the type of business
organization (e.g., corporation, partnership, or other), and who is
[[Page 53962]]
actively engaged in its management, as defined under 29 CFR 541.101,
would be considered a manager or supervisor for purposes of section
3(m)(2)(B). The Department believes that these well-established
criteria would effectively identify employees who manage or supervise
other employees and therefore those whom Congress sought to prevent
from keeping other employees' tips. The Department additionally
believes that employers can readily use these criteria to determine
whether an employee is a manager or supervisor for purposes of section
3(m)(2)(B) because employers are generally familiar with these
longstanding regulations. Moreover, the Department's staff is highly
trained, and has extensive experience, in applying and enforcing these
longstanding regulations.
The Department requests comments regarding whether other criteria
may also be appropriate to determine whether an employee is a manager
or supervisor for purposes of section 3(m)(2)(B), particularly in the
varied situations where tipping is common.
C. Proposed Section 531.54--Tip Pooling
The Department also proposes to amend Sec. 531.54, which generally
addresses tip pooling, to reflect the CAA amendments. Proposed Sec.
531.54 incorporates section 3(m)(2)(B)'s prohibition on employers
keeping tips, including allowing managers or supervisors to keep
employees' tips. This prohibition applies regardless of whether the
employer takes a tip credit, and therefore governs any employer that
facilitates or operates a mandatory tip pool. Proposed Sec. 531.54
also contains other specific requirements for employers that establish
mandatory tip pools, depending on whether they include employees who do
not customarily and regularly receive tips.
i. Requirements When an Employer Collects and Redistributes Tips
The Department recognizes that employers operate a variety of tip
pooling and tip sharing arrangements and that some employers may wish
to pool tips received by one set of employees and redistribute them to
another. Section 3(m)(2)(B) does not prohibit an employer from doing
so, as long as the employer fully redistributes the tips no less often
than when it pays wages. In those circumstances, the employees' tips
are only temporarily within the employer's possession, and the employer
does not ``keep'' the tips. When an employer collects employees' tips
but fails to distribute them within this time period, however, and
instead holds the tips, the employer ``keeps'' them in violation of
section 3(m)(2)(B). For example, an employer may not maintain a reserve
of collected tips from one pay period to pay out in a subsequent pay
period.
Proposed Sec. 531.54(b)(1) provides that an employer that collects
tips to administer a tip pool must fully distribute any tips the
employer collects at the regular payday for the workweek, or when the
pay period covers more than a single workweek, at the regular payday
for the period in which the particular workweek ends. To the extent
that it is not possible for an employer to ascertain the amount of tips
received or how tips should be distributed prior to processing payroll,
the proposed rule requires the distribution of those tips to employees
as soon as practicable after the regular payday. Thus, for a two-week
pay period, an employer must fully distribute any tips the employer
collects during those two weeks on the regular payday for that period,
or to the extent that it is not possible to ascertain the amount or
distribution of the tips, as soon as possible following that payday.
This proposed requirement aligns with the Department's current guidance
on how soon an employer must provide tips charged on credit cards to
tipped employees. See WHD Field Operations Handbook (FOH) 30d05.
Because the proposal defines ``keep'' within the meaning of section
3(m)(2)(B), the proposed requirement that an employer fully and
promptly distribute any tips it collects would apply regardless of
whether the employer takes a tip credit, and regardless of whether the
employer requires employees to participate in a ``traditional'' tip
pool or in a ``nontraditional'' tip pool.
The Department requests comments on this proposed requirement, and
requests information about how this requirement might affect employers'
current practices for administering tip pools and tip distribution.
ii. Additional Requirements for Mandatory Tip Pools When an Employer
Takes a Tip Credit
Current Sec. 531.54 provides that an employer, regardless of
whether it takes a tip credit, may only require its tipped employees to
share tips with other employees who customarily and regularly receive
tips. The employer also must notify its employees of any required tip
pool contribution amount, may only take a tip credit for the amount of
tips each employee ultimately receives, and may not retain any of the
employees' tips for any other purpose. Although, as discussed above,
the CAA amendments deprived of any further force or effect these
regulatory tip pooling requirements as they apply to employers that do
not take a tip credit, the CAA did not affect these requirements as
they apply to employers that do take a tip credit. Therefore, proposed
Sec. 531.54(c) retains these requirements but clarifies that they
apply only to employers that take a tip credit.
iii. Conditions Under Which an Employer May Mandate Participation in a
Nontraditional Tip Pool
As explained above, as a result of the CAA amendments to the FLSA,
employers that do not take a tip credit may now require tipped
employees to participate in nontraditional tip pools that include
employees who do not customarily and regularly receive tips, such as
cooks and dishwashers, so long as the pools do not include employers,
managers, or supervisors. Proposed Sec. 531.54(d) implements these
conditions.
As explained above, the CAA did not substantively amend the FLSA's
existing tip credit provision, which states that employers may only
take a tip credit against their minimum wage obligations to employees
who are employed in an occupation in which they customarily and
regularly receive tips, such as bussers and servers, and that employers
that take a tip credit may only require tip pooling among such
employees. See 29 U.S.C. 203(m)(2)(A). Over the years, the Department
has developed guidance for itself on how to identify customarily and
regularly tipped employees. See, e.g., WHD Opinion Letter FLSA 2009-12,
2009 WL 649014 (Jan. 15, 2009); WHD Opinion Letter FLSA 2008-18, 2008
WL 5483058 (Dec. 19, 2008); WHD FOH 30d04(b), (f) (listing occupations
that do, and do not, meet these criteria). This guidance is based in
large part on the legislative history of the FLSA's tip credit
provision. See S. Rep. No. 93-690, at 43 (1974).\5\ According to this
guidance, employers may not take a tip credit for back-of-the-house
employees who receive tips through a tip pool because those employees
are not employed in an occupation in which they customarily and
regularly receive tips. Similarly, employers may not include those non-
customarily and regularly tipped employees in a traditional section
3(m)(2)(A) tip pool.
---------------------------------------------------------------------------
\5\ Since the CAA did not change the FLSA's existing tip credit
provision, that guidance is still applicable to an employer that
takes a tip credit.
---------------------------------------------------------------------------
[[Page 53963]]
D. Proposed Section 516.28--Recordkeeping Requirements for Employers
That Have Employees Who Receive Tips
The Department is proposing revisions to the recordkeeping
requirements in Sec. 516.28 to provide consistent and effective
administration of section 3(m)(2)(B) of the FLSA. Section 516.28
imposes certain recordkeeping requirements on only those employers that
take a tip credit. Among other things, Sec. 516.28(a) requires that
the employer identify each employee for whom the employer takes a tip
credit (see Sec. 516.28(a)(1)) and maintain records regarding the
weekly or monthly amount of tips received, as reported by the employee
to the employer (see Sec. 516.28(a)(2)). The employer may use
information on IRS Form 4070 (Employee's Report of Tips to Employer) to
satisfy the requirements under Sec. 516.28(a)(2).\6\
---------------------------------------------------------------------------
\6\ For information regarding IRS Form 4070, see https://www.irs.gov/pub/irs-access/f4070_accessible.pdf.
---------------------------------------------------------------------------
The Department proposes to apply similar recordkeeping requirements
for employers that do not take a tip credit but still collect
employees' tips to operate a mandatory tip pool. Proposed Sec.
516.28(b)(1) would require these employers to identify on their payroll
records each employee who receives tips. Proposed Sec. 516.28(b)(2)
would require employers that do not take a tip credit but that collect
tips to operate a mandatory tip pool to keep records of the weekly or
monthly amount of tips received by each employee as reported by the
employee to the employer (this may consist of reports from the
employees to the employer on IRS Form 4070). The proposed recordkeeping
requirements would help the Department determine whether employers are
complying with their tip pooling obligations. The Department requests
comments on these proposed requirements.
E. Proposed Section 531.56(e)--Dual Jobs
The Department proposes to amend Sec. 531.56(e) to reflect recent
guidance, which addresses whether an employer can take a tip credit for
the time that a tipped employee spends performing duties in a tipped
occupation that do not produce tips. Section 3(t) of the FLSA defines a
``tipped employee'' for whom an employer may take a tip credit under
section 3(m) as ``any employee engaged in an occupation in which he
customarily and regularly receives more than $30 a month in tips.'' 29
U.S.C. 203(t). Current Sec. 531.56(e) recognizes that an employee may
be employed both in a tipped occupation and in a non-tipped occupation,
providing that in such a ``dual jobs'' situation, the employee is a
``tipped employee'' for purposes of section 3(t) only while he or she
is employed in the tipped occupation, and that an employer may only
take a tip credit against its minimum wage obligations for the time the
employee spends in that tipped occupation. In addition to addressing
dual jobs, the current regulation also recognizes that an employee in a
tipped occupation may perform related duties that are ``themselves not
directed toward producing tips,'' such as, for example, a server ``who
spends part of her time'' performing non-tipped duties, such as
``cleaning and setting tables, toasting bread, making coffee, and
occasionally washing dishes or glasses.'' The regulation distinguishes
this situation, in which the employee is still engaged in the tipped
occupation of serving, from a dual jobs situation, in which the
employee is engaged part of the time in a non-tipped occupation. 29 CFR
531.56(e).
The Department has in the past provided enforcement guidance on
whether and to what extent an employer can take a tip credit for a
tipped employee who is performing non-tipped duties related to the
tipped occupation. Previously, the Department advised that an employer
may not take a tip credit for the time an employee spent performing
related duties that do not produce tips if that time exceeded 20
percent of the employee's workweek. However, this policy was difficult
for employers to administer and led to confusion, in part because
employers lacked guidance to determine whether a particular non-tipped
duty is ``related'' to the tip-producing occupation. One court
described it as ``infeasible,'' observing that the policy would
``present a discovery nightmare'' and require employers to ``keep the
employee under perpetual surveillance or require them to maintain
precise time logs accounting for every minute of their shifts.'' Pellon
v. Bus. Representation Int'l, Inc., 528 F. Supp. 2d 1306, 1314 (S.D.
Fla. 2007), aff'd, 291 F. App'x 310 (11th Cir. 2008). The Department
believes that such a situation would help neither employer nor
employee. See WHD Opinion Letter FLSA 2018-27, 2018 WL 5921455, at *3
(Nov. 8, 2018).
In November 2018, the Department issued an opinion letter
addressing these issues.\7\ The Department subsequently issued a FAB
and revised its Field Operations Handbook (FOH) to reflect the
interpretation of related duties in the opinion letter. See FAB 2019-2
(Feb. 15, 2019); WHD FOH 30d00(f). In these guidance documents, the
Department explained that it would no longer prohibit an employer from
taking a tip credit for the time an employee performs related, non-
tipped duties--as long as those duties are performed contemporaneously
with, or for a reasonable time immediately before or after, tipped
duties. See FAB 2019-2, at *2 (Feb. 15, 2019) (``[Section] 531.56(e)
includes non-tipped duties in the tip credit unless they are unrelated
to the tipped occupation or part of a separate, non-tipped occupation
in a `dual job' scenario. Accordingly, an employer may take a tip
credit for any duties that an employee performs in a tipped occupation
that are related to that occupation and either performed
contemporaneous with the tip-producing activities or for a reasonable
time immediately before or after the tipped activities.''); see also
WHD FOH 30d00(f) WHD Opinion Letter FLSA2018-27, 2018 WL 5921455, at
*3-4 (Nov. 8, 2018). The Department believes this policy is consistent
with the plain statutory text, which permits employers to take a tip
credit based on whether an employee is engaged in a tipped
``occupation,'' not on whether the employee is performing certain kinds
of duties within the tipped occupation.
---------------------------------------------------------------------------
\7\ The Department had provided the same guidance initially in
WHD Opinion Letter FLSA2009-23, which was issued on January 16, 2009
and was withdrawn on March 2, 2009 ``for further consideration.''
---------------------------------------------------------------------------
In its recent guidance, the Department also explained that, in
addition to the examples listed in 531.56(e), it would use the
Occupational Information Network (O*NET) to determine whether a tipped
employee's non-tipped duties are related to their tipped occupation.
O*NET is a comprehensive database of worker attributes and job
characteristics, and is available to the public online at
www.onetonline.com. O*NET includes information on work activities for
over 900 occupations based on the Standard Occupational Classification
system, a statistical standard used by federal agencies to classify
workers into occupational categories for the purpose of collecting,
calculating, or disseminating data.
The Department is proposing to revise Sec. 531.56(e) to reflect
the guidance on related duties in the recent opinion letter, FAB, and
FOH revisions. Proposed Sec. 531.56(e) would retain current language
on dual jobs providing that when an individual is employed in
[[Page 53964]]
a tipped occupation and a non-tipped occupation, the tip credit is
available only for the hours the employee spends working in the tipped
occupation. It would also continue to distinguish such a dual jobs
scenario from one in which an employee performs duties that are related
to her tipped occupation but not themselves directed toward producing
tips. The proposed regulation would clarify that an employer may take a
tip credit for any amount of time that an employee performs related,
non-tipped duties contemporaneously with his or her tipped duties, or
for a reasonable time immediately before or after performing the tipped
duties. Proposed Sec. 531.56(e) would also provide that, in addition
to the examples listed in the regulation, a non-tipped duty is related
to a tip-producing occupation if the duty is listed as a task of the
tip-producing occupation in the Occupational Information Network
(O*NET).
The Department requests comments on these proposed changes to Sec.
531.56(e). The Department is particularly interested in comments on how
to identify related duties for occupations that may qualify as tipped
occupations, but which lack a description in the O*NET database,
perhaps because they are newly emerging. In its enforcement guidance,
the Department has stated that when an O*NET description does not exist
for an occupation, the Department will consider any duties usually and
customarily performed by employees in that occupation to be related
duties so long as the duties are consistent with the related duties for
similar occupations listed in O*NET.
F. Proposed Parts 578, 579, and 580--Civil Money Penalties
Section 1201(b)(3) of the CAA amended FLSA section 16(e)(2) by
adding a new penalty provision: ``Any person who violates section
3(m)(2)(B) shall be subject to a civil penalty not to exceed $1,100 for
each such violation, as the Secretary determines appropriate, in
addition to being liable to the employee or employees affected for all
tips unlawfully kept, and an additional equal amount as liquidated
damages, as described in subsection (b).''
The CAA thus provides the Department with discretion to impose CMPs
up to $1,100 \8\ when employers unlawfully keep employee tips,
including when they allow managers or supervisors to keep any portion
of employees' tips. See 29 U.S.C. 203(m)(2)(B). In assessing CMPs for
violations of section 3(m)(2)(B) under amended section 16(e)(2), the
Department proposes to follow the same guidelines and procedures that
it follows for assessing CMPs for violation of the minimum wage
(section 6) and overtime (section 7) provisions of the FLSA, and to
issue CMPs only when it determines there has been a willful or repeated
violation of section 3(m)(2)(B). The Department has been assessing CMPs
for repeated or willful violations of the minimum wage and overtime
provisions of the FLSA using the guidelines in part 578 and procedures
in part 580 for nearly three decades. As such, employers are generally
familiar with these regulations, and the Department's staff and
Administrative Law Judges have experience applying them.
---------------------------------------------------------------------------
\8\ This number is adjusted by inflation annually as required by
the authorities in footnote 5 of this NPRM.
---------------------------------------------------------------------------
Part 578 of the Department's regulations (Sec. Sec. 578.1-578.4)
sets out the criteria the Department uses when determining whether a
minimum wage or overtime violation is repeated or willful and thus
subject to a CMP, as well as the amount of any CMP it assesses, and
part 580 (Sec. Sec. 580.1-580.18) sets out the procedures for
assessing and contesting CMPs. Additionally, Sec. 579.1(a) lists the
maximum allowable CMPs for violations of the FLSA's child labor,
minimum wage, and overtime provisions. See 29 CFR 579.1. The Department
proposes to revise Sec. 578.1 to provide that section 1201 of the CAA
authorizes the Department to issue CMPs for violations of section
3(m)(2)(B); to revise Sec. 578.3(a)(1) to provide that any person who
willfully or repeatedly violates section 3(m)(2)(B) shall be subject to
a CMP not to exceed $1,100 (as adjusted for inflation under the IAA);
to revise Sec. Sec. 578.3(b)-(c) to provide that the Department will
use the criteria therein to determine whether an employer's violation
of section 3(m)(2)(B) is repeated or willful and thus subject to a
civil penalty; and to revise Sec. 578.4 to provide that the Department
will determine the amount of the penalty for repeated or willful
violations of section 3(m)(2)(B) according to the guidelines set forth
in that section. The Department proposes to revise Sec. Sec. 579.1(a)
and 579.1(a)(2) to provide that, consistent with the CAA amendments,
any person who willfully or repeatedly violates section 3(m)(2)(B)
shall be subject to a CMP not to exceed $1,100. Additionally, the
Department proposes to revise Sec. Sec. 580.2, 580.3, 580.12, and
580.18 to provide that the assessment of civil penalties for violations
of section 3(m)(2)(B) shall be governed by the rules and procedures set
forth therein. Finally, the Department proposes additional,
nonsubstantive changes to Sec. 578.1 to better reflect the history of
amendments to the civil money penalty for violations of section 6
(minimum wage) and section 7 (overtime) of the Act.
Since the Department is proposing to revise parts 578 and 579 to
reflect the new CMP provision that the CAA added to the FLSA, the
Department also proposes to revise Sec. Sec. 578.3(c)(2) and (3), and
identical language in Sec. 579.2, to address courts of appeals'
concerns that some of the regulations' statements regarding willful
violations are inconsistent with Supreme Court authority and how the
Department actually litigates willfulness.
When it initially promulgated Sec. 578.3(c) to provide guidance
for assessing CMPs for violations of the FLSA's minimum wage or
overtime pay requirements, the Department based its definition of a
``willful'' violation on the Supreme Court's decision in McLaughlin v.
Richland Shoe Co., 486 U.S. 128 (1988). See 57 FR 49,129 (Oct. 29,
1992). In Richland Shoe, the Supreme Court held that a violation is
willful if the employer ``knew or showed reckless disregard'' for
whether its conduct was prohibited by the FLSA. 486 U.S. at 133.
Section 578.3(c)(1) incorporates this holding and provides that ``[a]ll
of the facts and circumstances surrounding the violation shall be taken
into account in determining whether a violation was willful.'' Section
578.3(c)(2) provides that ``an employer's conduct shall be deemed
knowing'' if the employer received advice from the WHD that its conduct
is unlawful. Section 578.3(c)(3) provides that ``an employer's conduct
shall be deemed to be in reckless disregard'' of the FLSA's
requirements if the employer should have inquired further into whether
its conduct complied with the FLSA and failed to make adequate further
inquiry.
An appellate court has identified an ``incongruity'' between
Sec. Sec. 578.3(c)(2) and (3) and ``the Richland Shoe standard on
which the regulation is based.'' Baystate Alt. Staffing, Inc. v.
Herman, 163 F.3d 668, 680 (1st Cir. 1998). The court expressed
``significant reservations about [Sec. 578.3(c)(2)'s] blanket
assertion that a party's decision not to comply with [WHD's] advice
constitutes a `knowing' violation'' under Richland Shoe. Id. The court
further stated that Sec. 578.3(c)(3) ``by its terms--specifically,
that a party `should have inquired further' about the legality of its
conduct--embraces a negligence standard of liability,'' which Richland
Shoe ``expressly rejected.'' Id. at 680-81
[[Page 53965]]
(citing 486 U.S. at 133-35). Describing Sec. Sec. 578.3(c)(2) and (3)
as ``incomplete'' and ``unhelpful,'' the court urged the Department
``to reconsider [them] to ensure that they comport with the Court's
reading of . . . `willful' in Richland Shoe.'' Id. at 681 n.16.
In several cases addressing this issue, the Department has argued
that advice from WHD to an employer that its conduct was unlawful
``would not necessarily be dispositive of willfulness'' in a future
enforcement action, and that the employer would have the opportunity
``to contest the assertion that the violation was willful
notwithstanding its receipt of such advice.'' See, e.g., Br. for
Appellee at 22-23, Rhea Lana, Inc. v. DOL, 824 F.3d 1023 (DC Cir. 2016)
(No. 15-5014), 2015 WL 4052846, at *22-23. The Department stated that
Sec. 578.3(c)(2) ``simply reflects the commonsense principle that, in
the absence of persuasive and relevant evidence presented by an
employer, notice from the agency of a FLSA violation may be used to
establish willfulness,'' and that such notice is ``but one piece of
evidence.'' Id. at 26. In Rhea Lana, the court did not reject outright
the Department's reading of Sec. 578.3(c), but pointed out that it was
possible to read the regulation as ``a stand-alone trigger for
willfulness penalties'' in a future enforcement action against the
employer. 824 F.3d at 1031-32.
In light of Baystate, Rhea Lana, and Sec. 578.3(c)(1)'s command
that ``[a]ll of the facts and circumstances surrounding the violation
shall be taken into account in determining whether a violation was
willful,'' the Department proposes to revise Sec. Sec. 578.3(c)(2) and
(3) to clarify that no single fact or circumstance is automatically
dispositive as to willfulness to the exclusion of consideration of all
other facts and circumstances. Revising Sec. Sec. 578.3(c)(2) and (3)
as proposed would ensure consistency between the regulation and how the
Department litigates and briefs the issue of willfulness under the
FLSA; resolve concerns that the regulation is inconsistent with
Richland Shoe; and provide greater clarity to the regulated community
regarding the standard for willfulness under the FLSA, including by
specifying that no one fact or circumstance will preclude an employer
from arguing that its conduct was not willful. To ensure consistent
guidance regarding willful violations, the Department proposes to
similarly revise identical language in Sec. 579.2 addressing the
proper assessment of CMPs for willful violations of the FLSA's child
labor provisions.
G. Additional Proposed Regulatory Revisions
Section 531.50 currently sets forth the provisions of the FLSA that
apply to tips and tipped employees. The Department proposes to revise
Sec. 531.50 to reflect the language that the CAA added to the FLSA.
The Department also proposes to update Sec. Sec. 531.50, 531.51,
531.52, 531.55, 531.56, 531.59, and 531.60 to reflect the new statutory
citation to the FLSA's existing tip credit provision, previously cited
as section 3(m), as section 3(m)(2)(A). The Department also proposes to
clarify references in Sec. Sec. 531.56(d), 531.59(a) and (b), and
531.60 to the amount an employer can take as a tip credit under section
3(m) (now 3(m)(2)(A)). The Department's regulations currently state
that the an employer can take a tip credit for each employee equal to
the difference between the minimum wage required by section 6(a)(1) of
the FLSA (currently $7.25 an hour) and $2.13 an hour. To ensure that
the Department's regulations clearly state employers' obligations under
the FLSA, the Department proposes to revise Sec. Sec. 531.56(d),
531.59(a) and (b), and 531.60 to provide, consistent with the text of
the statute, that the tip credit permitted by section 3(m)(2)(A) is
equal to the difference between the Federal minimum wage and the cash
wage paid by the employer. That cash wage must be at least $2.13 per
hour, but the statute does not preclude an employer from paying more.
Finally, the Department proposes to amend the tip provisions of its
Executive Order 13658 regulations. Executive Order 13658 raised the
hourly minimum wage paid by contractors to workers performing work on
or in connection with covered Federal contracts. The Executive Order
also established a tip credit for workers covered by the Order who are
tipped employees pursuant to section 3(t) of the FLSA. Section 4(c) of
the Executive Order encourages the Department, when promulgating
regulations under that Order, to incorporate existing ``definitions,
procedures, remedies, and enforcement processes'' from a number of laws
that the agency enforces, including the FLSA. The Department's current
Executive Order 13658 regulations are modeled after the Department's
current FLSA tip regulations, and prohibit covered employers from
implementing tip pools that include employees who are not customarily
and regularly tipped. The Department proposes to amend Sec. 10.28,
consistent with its proposed rescissions to portions of the
Department's FLSA regulations, to remove similar restrictions on an
employer's use of such tip pools and to otherwise align those
regulations with the authority provided in the Executive Order. Federal
contractors covered by the FLSA would, of course, also be subject to
the FLSA regulations proposed herein. The Department also proposes to
amend Sec. 10.28, consistent with its proposed revisions to Sec.
531.56(e), to reflect its current guidance on when an employee
performing non-tipped work constitutes a tipped employee for the
purposes of 3(t).
V. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq.,
and its attendant regulations, 5 CFR part 1320, require the Department
to consider the agency's need for its information collections, their
practical utility, as well as the impact of paperwork and other
information collection burdens imposed on the public, and how to
minimize those burdens. The PRA typically requires an agency to provide
notice and seek public comments on any proposed collection of
information contained in a proposed rule.\9\ Persons are not required
to respond to the information collection requirements until the Office
of Management and Budget (OMB) approves them under the PRA. This NPRM
would revise the existing information collection burden estimates
previously approved under OMB control number 1235-0018 (Records to be
Kept by Employers--Fair Labor Standards Act) because employers may
choose to pay the full Federal minimum wage and not take a tip credit,
and collect tips to operate an employer-required, mandatory tip pooling
arrangement, thereby triggering the recordkeeping requirement in
proposed Sec. 516.28(b). The Department has opened OMB control number
1235-0NEW for this action. As the PRA requires, the Department has
submitted the information collection revisions to OMB for review to
reflect changes that would result from this proposed rule. The
Department proposes a slight burden increase for employers keeping
records concerning employees who receive tips, as well as a regulatory
familiarization burden.
---------------------------------------------------------------------------
\9\ See 44 U.S.C. 3506(c)(2)(B); 5 CFR 1320.8.
---------------------------------------------------------------------------
Summary: FLSA section 11(c) requires covered employers to make,
keep, and preserve records of employees and their wages, hours, and
other conditions of employment, as prescribed by regulation. The
Department's regulations at 29 CFR part 516 establish the basic FLSA
[[Page 53966]]
recordkeeping requirements. Section 516.28(a) currently requires
employers to keep certain records concerning tipped employees for whom
the employer takes a tip credit under the FLSA. Among other things,
Sec. 516.28(a) requires that the employer identify each employee for
whom the employer takes a tip credit, identify the hourly tip credit
for each such employee, and maintain records regarding the weekly or
monthly amount of tips received (which may consist of IRS Form 4070) as
reported by the employee to the employer. The adoption of proposed
Sec. 516.28(b)(1) and (b)(2) would require an employer that does not
take a tip credit, but that collects employees' tips to operate a
mandatory tip pooling arrangement, to indicate on its pay records each
employee who receives tips and to maintain records of the weekly or
monthly amount of tips that each such employee receives (this may
consist of reports that the employees make to the employer on IRS Form
4070). The increase in the number of respondents and, accordingly, the
burden hours associated with records to be kept under the proposed
Sec. 516.28(b)(1)-(2), is attributable to an expanding economy
increasing the number of establishments employing individuals who
receive tips since the last PRA revision of this recordkeeping
requirement.
Purpose and Use: WHD and employees use employer records to
determine whether covered employers have complied with various FLSA
requirements. Employers use the records to document compliance with the
FLSA, and in the case of this NPRM, the Department would use the
records regarding employees who receive tips to determine compliance
with sections 3(m)(2)(A) and 3(m)(2)(B).
Technology: The regulations prescribe no particular order or form
of records, and employers may preserve records in forms of their
choosing, provided that facilities are available for inspection and
transcription of the records.
Minimizing Small Entity Burden: Although the FLSA recordkeeping
requirements do involve small businesses, including small state and
local government agencies, the Department minimizes respondent burden
by requiring no specific order or form of records in responding to this
information collection.
Public Comments: As part of its continuing effort to reduce
paperwork and respondent burden, the Department conducts a preclearance
consultation program to provide the general public and Federal agencies
with an opportunity to comment on proposed and continuing collections
of information in accordance with the PRA. This program helps to ensure
that requested data can be provided in the desired format, reporting
burden (time and money) is minimized, collection instruments are
clearly understood, and the impact of collection requirements on
respondents can be properly assessed. The Department seeks public
comments regarding the burdens imposed by the information collections
associated with this NPRM. Commenters may send their views about this
information collection to the Department in the same manner as all
other comments (e.g., through the regulations.gov website). All
comments received will be made a matter of public record and posted
without change to http://www.regulations.gov and http://www.reginfo.gov, including any personal information provided.
As previously noted, an agency may not conduct an information
collection unless it has a currently valid OMB approval, and the
Department has submitted information-collection requests under OMB
control number 1235-0NEW to update them to reflect this rulemaking and
provide interested parties a specific opportunity to comment under the
PRA. See 44 U.S.C. 3507(d); 5 CFR 1320.11. Interested parties may
receive a copy of the full supporting statement by sending a written
request to the mail address shown in the ADDRESSES section at the
beginning of this preamble. In addition to having an opportunity to
file comments with the Department, comments about the paperwork
implications may be addressed to OMB. Comments to OMB should be
directed to: Office of Information and Regulatory Affairs, Attention
OMB Desk Officer for the Wage and Hour Division, Office of Management
and Budget, Room 10235, 725 17th Street NW, Washington, DC 20503; by
Fax: 202-395-5806 (this is not a toll-free number); or by email:
[email protected]. OMB will consider all written comments
that the agency receives within 30 days of publication of this proposed
rule. Commenters are encouraged, but not required, to send the
Department a courtesy copy of any comments sent to OMB. The courtesy
copy may be sent via the same channels as comments on the rule.
The Department is particularly interested in comments that:
Evaluate whether the proposed collections of information
are necessary for the proper performance of the functions of the
agency, including whether the information will have practical utility;
Evaluate the accuracy of the agency's estimate of the
burden of the proposed collection of information, including the
validity of the methodology and assumptions used;
Enhance the quality, utility, and clarity of the
information to be collected; and
Minimize the burden of the collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology, e.g., permitting
electronic submission of responses.
Total annual burden estimates, which reflect both the existing and
new responses for the recordkeeping information collection, are
summarized as follows:
Type of Review: Revision of a currently approved collection.
Agency: Wage and Hour Division, Department of Labor.
Title: Records to be Kept by Employers--Fair Labor Standards Act.
OMB Control Number: 1235-0NEW.
Affected Public: Private Sector: businesses or other for-profits,
farms, and not-for-profit institutions: State, Local and Tribal
governments; and individuals or households.
Estimated Number of Respondents: 3,860,288 (102,994 from this
rulemaking).
Estimated Number of Responses: 43,799,221 (248,032 from this
rulemaking).
Estimated Burden Hours: 1,007,512 hours (24,593 from this
rulemaking).
Estimated Time per Response: Various (unaffected by this
rulemaking).
Frequency: Various (unaffected by this rulemaking).
Other Burden Cost: $0.
VI. Analysis Conducted in Accordance With Executive Order 12866,
Regulatory Planning and Review, Executive Order 13563, Improved
Regulation and Regulatory Review, and Executive Order 13771, Reducing
Regulation and Controlling Regulatory Costs
A. Introduction
Under Executive Order 12866, OMB's Office of Information and
Regulatory Affairs determines whether a regulatory action is
significant and, therefore, subject to the requirements of the
Executive Order and OMB review.\10\ Section 3(f) of Executive Order
12866 defines a ``significant regulatory action'' as an action that is
likely to result in a
[[Page 53967]]
rule that: (1) Has an annual effect on the economy of $100 million or
more, or adversely affects in a material way a sector of the economy,
productivity, competition, jobs, the environment, public health or
safety, or State, local or tribal governments or communities (also
referred to as economically significant); (2) creates serious
inconsistency or otherwise interferes with an action taken or planned
by another agency; (3) materially alters the budgetary impacts of
entitlement grants, user fees, or loan programs, or the rights and
obligations of recipients thereof; or (4) raises novel legal or policy
issues arising out of legal mandates, the President's priorities, or
the principles set forth in the Executive Order. Because the annual
effect of this proposed rule would be greater than $100 million, this
proposed rule would be economically significant under section 3(f) of
Executive Order 12866.
---------------------------------------------------------------------------
\10\ 58 FR 51735 (Sept. 30, 1993).
---------------------------------------------------------------------------
Executive Order 13563 directs agencies to propose or adopt a
regulation only upon a reasoned determination that its benefits justify
its costs; that it is tailored to impose the least burden on society,
consistent with achieving the regulatory objectives; and that, in
choosing among alternative regulatory approaches, the agency has
selected the approaches that maximize net benefits. Executive Order
13563 recognizes that some benefits are difficult to quantify and
provides that, when appropriate and permitted by law, agencies may
consider and discuss qualitatively values that are difficult or
impossible to quantify, including equity, human dignity, fairness, and
distributive impacts.
This proposed rule is expected to be an Executive Order 13771
deregulatory action, because it provides more flexibility to employers
in structuring their employee tip pools. Details on the estimated costs
and transfers, as well as qualitative discussions of cost savings of
this proposed rule, can be found in the economic analysis below. The
unquantified cost savings are expected to outweigh the quantified
costs. Cost savings include reduced turnover of back-of-the-house
employees, greater flexibility for tip pooling, and reduced effort
spent ensuring that the tip pool is limited to only customarily and
regularly tipped employees.
B. Economic Analysis
i. Introduction
In March 2018, Congress amended section 3(m) and sections 16(b),
(c), and (e) of the FLSA to prohibit employers from keeping their
employees' tips, to permit recovery of tips that an employer unlawfully
keeps, and suspend the operations of the portions of the 2011 final
rule that restricted tip pooling when employers do not take a tip
credit. This analysis examines the economic impact associated with the
Department's proposed implementation of those amendments, specifically
the transfers resulting from employers that do not claim a tip credit
and previously did not have a mandatory tip pool, or that only had a
traditional tip pool limited to ``front-of-the-house'' employees (i.e.,
servers and bartenders) implementing a nontraditional tip pool that
includes ``back-of-the-house'' employees (i.e., janitors, chefs,
dishwashers, and food-preparation workers). Thus, a transfer of tip
income will occur from ``front-of-the-house'' employees. The Department
also quantified rule familiarization costs and qualitatively discusses
additional costs, cost savings, and benefits. To perform this analysis,
the Department compares the impact relative to a pre-statutory baseline
(i.e., before Congress amended the FLSA in March 2018). If the
Department were to look at economic impacts relative to a post-
statutory baseline, there would likely be no impact aside from rule
familiarization costs, as the transfers arise from the changes put
forth in the statute.
The Department is also proposing to amend its regulations to
reflect guidance which provides that an employer may take a tip credit
for any amount of time that an employee in a tipped occupation performs
related, non-tipped duties contemporaneously with his or her tipped
duties, or for a reasonable time immediately before or after performing
the tipped duties. This interpretation was promulgated in a November
2018 opinion letter and subsequent FAB, and reflects WHD's enforcement
position. As explained below, the Department lacks data to quantify any
potential costs, benefits, or transfers which may be associated with
the implementation of this policy; therefore, the Department discusses
potential costs, benefits, and transfers qualitatively. The Department
welcomes comments on the impact of this proposal, including data on
employers' responses to the codification of this policy.
The economic analysis covers employees in two industries and in two
occupations within those industries. The two industries are classified
under the North American Industry Classification System (NAICS) as
722410 (Drinking Places (Alcoholic Beverages)) and 722511 (Full-service
Restaurants); referred to in this analysis as ``restaurants and
drinking places.'' The two occupations are classified under Bureau of
Labor Statistics (BLS) Standard Occupational Classification (SOC) codes
SOC 35-3031 (Waiters and Waitresses) and SOC 35-3011 (Bartenders).\11\
The Department considered these two occupations because they constitute
a large percentage of total tipped workers and a large percentage of
the workers in these occupations receive tips (see Table 1 for shares
of workers in these employees who may receive tips). The Department
understands that there are other occupations beyond servers and
bartenders with tipped workers, such as SOC 35-9011 (Dining room and
Cafeteria Attendants and Bartender Helpers), SOC 35-9031 (Hosts and
Hostesses, Restaurant, Lounge, and Coffee Shop), and others, as well as
other industries that employ workers who receive tips, such as NAICS
722515 (snack and nonalcoholic beverage bars), NAICS 722513 (limited
service restaurants), NAICS 721110 (hotels and motels), and NAICS
713210 (casinos); thus, the Department welcomes comments and
suggestions on whether this analysis should extend to such occupations
and industries.
---------------------------------------------------------------------------
\11\ In the Current Population Survey, these occupations
correspond to Bartenders (Census Code 4040) and Waiters and
Waitresses (Census Code 4110). The industries correspond to
Restaurants and Other Food Services (Census Code 8680) and Drinking
Places, Alcoholic Beverages (Census Code 8690).
---------------------------------------------------------------------------
The analysis covers ten years to ensure that it captures major
costs and transfers. When summarizing the costs and transfers of the
proposed rule, the Department presents the first year's impact, as well
as the 10-year annualized costs and transfers with 3 percent and 7
percent discounting.\12\
---------------------------------------------------------------------------
\12\ Discount rates are directed by OMB. See Circular A-4, OMB
(Sept. 17, 2003).
---------------------------------------------------------------------------
ii. Estimated Transfers
Under the regulations proposed in this NPRM, transfers would arise
when employers that already pay the full Federal minimum wage and
previously did not have a mandatory tip pool or only had a traditional
tip pool institute nontraditional tip pools in which tipped employees
such as servers and bartenders are required to share tips with
employees who do not customarily and regularly receive tips, such as
cooks and dishwashers. The Department believes that including back-of-
the-house workers in tip pools could help equalize income among the
employees within the establishment, and could also help promote
cooperation and collaboration among employees. Because the statute
prohibits employers from keeping employee tips, directly-observable
transfers will only occur
[[Page 53968]]
among employees. However, because back-of-the-house workers could now
be receiving tips, employers may offset this increase in total
compensation by reducing the direct wage that they pay back-of-the-
house workers (as long as they do not reduce these employees' wages
below the applicable minimum wage); offsets of this type are implied in
the model underlying the quantitative estimates below. To the extent
that wages are sticky in the short run, back-of-the-house employees are
recipients of transfers, but across a longer time horizon, market
adjustments increasingly allow employers to capture the transfer.
The analysis assumes that employers will institute nontraditional
tip pools with employees who do not customarily and regularly receive
tips only in situations that are beneficial to them. Accordingly, it
assumes that employers will include back-of-the-house employees in
their tip pools only if they believe that they can do so without losing
their front-of-the-house staff. To attract and retain the tipped
workers that they need, employers must pay these workers as much as
their ``outside option,'' or the hourly earnings that they could
receive in a non-tipped job with a similar skill level requirement to
their current position. For each tipped worker, the Department assumes
a transfer will occur only if their total earnings, including tips, is
greater than the predicted outside-option wage from a non-tipped job.
This methodology was informed by comments submitted as part of the
Department's 2017 NPRM that discussed using outside options to
determine potential transfer of tips.
The transfer calculation excludes any workers who are paid a direct
cash wage below the full FLSA minimum wage of $7.25, because under the
amended statute and the Department's proposed rule, employers who do
take a tip credit are still subject to section 3(m)(2)(A)'s
restrictions on tip pools. Some employers may begin paying their tipped
workers a direct cash wage of at least the full FLSA minimum wage in
order to institute a tip pool with back-of-the-house workers. This
potential transfer is not quantified due to uncertainty regarding how
many employers would choose to no longer use the tip credit. Choosing
to no longer take a tip credit would require a change to employers'
payroll systems and methods of compensation to which employers and
employers are accustomed, which could discourage employers from making
this change. The Department requests comments on the prevalence of this
adjustment.
The transfer calculation also excludes any workers who are paid a
direct cash wage by their employers, exclusive of any tips received,
that exceeds the applicable minimum wage (either the Federal or
applicable State minimum wage). The Department assumes that because
these employers are already paying more than required under applicable
law for these workers, any reduction in compensation would result in
these workers leaving that employment. These employees will therefore
not have their tips redistributed through a nontraditional tip pool.
The Department requests comments and data on this assumption.
The Department does not attempt to definitively interpret
individual state law; it is assumed, however, that some wait staff and
bartenders work in a state that either prohibits mandatory tip pooling
or imposes stricter limits on who can participate in a mandatory tip
pool than are proposed in this NPRM,\13\ or in a state that is in the
Tenth Circuit \14\ where, as a result of Marlow v. New Food Guy, Inc.,
861 F.3d at 1159, employers that do not take a tip credit were already
permitted to institute nontraditional tip pools at the time Congress
amended the FLSA. The transfer estimate excludes tipped employees in
these states whom the changes proposed in this NPRM may not affect--
amounting to about 43 percent of a $0.5 billion intermediate estimate
of the potential transfer amount.\15\ Thus, the Department first
determined total transfers for all wait staff and bartenders using the
methodology described above. The Department then excluded workers whom
the proposed changes will not affect due to their respective state
laws. The Department welcomes comments with more information regarding
the effects of this proposed rule in specific states. Finally, the
Department further reduced the total transfer amount to account for the
fact that an uncertain number of employers will decline to change their
tip pooling practices even when it is seemingly economically beneficial
for them to do so because it will require changes to practices to which
employees are accustomed, as well as payroll and recordkeeping changes.
---------------------------------------------------------------------------
\13\ See, e.g., Minn. Stat. Sec. 177.24, subd. 3 (``No employer
may require an employee to contribute or share a gratuity received
by the employee with the employer or other employees or to
contribute any or all of the gratuity to a fund or pool operated for
the benefit of the employer or employees.''); Mass. Gen. Laws ch.
149, Sec. 152A(c) (``No employer or person shall cause, require or
permit any wait staff employee, service employee, or service
bartender to participate in a tip pool through which such employee
remits any wage, tip or service charge, or any portion thereof, for
distribution to any person who is not a wait staff employee, service
employee, or service bartender.'')
\14\ The jurisdiction of the Tenth Circuit includes the six
states of Oklahoma, Kansas, New Mexico, Colorado, Wyoming, and Utah.
See About Us, The United States Court of Appeals for the Tenth
Circuit, https://www.ca10.uscourts.gov/clerk (last visited May 9,
2019).
\15\ Arkansas, California, Colorado, Delaware, Hawaii, Kansas,
Kentucky, Massachusetts, Minnesota, New Hampshire, New Mexico, New
York, North Carolina, North Dakota, Oklahoma, Utah, and Wyoming.
---------------------------------------------------------------------------
To compute potential tip transfers, the Department used individual-
level microdata from the 2017 Current Population Survey (CPS), a
monthly survey of about 60,000 households that is jointly sponsored by
the U.S. Census Bureau and BLS. Households are surveyed for four
months, excluded from the survey for eight months, surveyed for an
additional four months, and then permanently dropped from the sample.
During the last month of each rotation in the sample (month 4 and month
16), employed respondents complete a supplementary questionnaire in
addition to the regular survey. These households and questions form the
CPS Merged Outgoing Rotation Group (CPS-MORG) and provide more detailed
information about those surveyed.\16\ The Department used 2017 CPS data
to calculate the transfer because the CAA went into effect in March
2018. Although 2018 CPS data is available, 2017 is the most recent full
year of data that is prior to the statutory change. In this analysis,
2017 wage data are inflated to $2018 using the GDP deflator. For
purposes of rule familiarization costs, the Department used the most
recent year of data (2018) to reflect employers reading the rule after
it is published.
---------------------------------------------------------------------------
\16\ See Current Population Survey, U.S. Census Bureau, https://www.census.gov/programs-surveys/cps.html (last visited August 13,
2019); CPS Merged Outgoing Rotation Groups, NBER, http://www.nber.org/data/morg.html (last visited August 13, 2019).
---------------------------------------------------------------------------
The CPS asks respondents whether they usually receive overtime pay,
tips, and commissions (OTTC), which allows the Department to estimate
the number of bartenders and wait staff in restaurants and drinking
places who receive tips.\17\ CPS data are not available
[[Page 53969]]
separately for overtime pay, tips, and commissions, but the Department
assumes very few bartenders and wait staff at restaurants and drinking
places receive commissions, and the number who receive overtime pay but
not tips is also assumed to be minimal.\18\ Therefore, when bartenders
and wait staff responded affirmatively to this question, the Department
assumed that they receive tips.
---------------------------------------------------------------------------
\17\ This question is only asked of hourly employees and
consequently nonhourly workers are excluded from the transfer
estimate. The Department did not quantify transfers from nonhourly
workers because without knowing the prevalence of tipped income
among nonhourly workers, the Department cannot accurately estimate
potential transfers from these workers. However, the Department
believes the transfer from nonhourly workers will be small because
only 13 percent of wait staff and bartenders in restaurants and
drinking places are nonhourly and the Department believes nonhourly
workers may have a lower probability of receiving tips.
\18\ According to BLS Current Population Survey data, in 2017,
workers in service occupations worked an average of 35 hours per
week. See https://www.bls.gov/cps/aa2017/cpsaat23.htm.
---------------------------------------------------------------------------
All data tables in this analysis include estimates for the year
2017 as the baseline. Table 1 presents the estimates of the share of
bartenders and wait staff in restaurants and drinking places who
reported that they usually earned OTTC in 2017. Approximately 64
percent of bartenders and 55 percent of wait staff reported usually
earning OTTC in 2017. These numbers include workers in all states,
including states whom the changes proposed in this NPRM may not affect.
These numbers also include workers who are paid a direct cash wage
below the full FLSA minimum wage of $7.25 (i.e., employers whose
employers are using a tip credit). Both these populations are excluded
from the transfer calculation.
Table 1--Share of Bartenders and Waiters/Waitresses in Restaurants and Drinking Places Who Earned Overtime Pay,
Tips, or Commissions
----------------------------------------------------------------------------------------------------------------
Workers Report Earning OTTC
responding to -------------------------------
Occupation Total workers question on
(millions) OTTC Workers Percent
(millions) (millions)
----------------------------------------------------------------------------------------------------------------
Total........................................... 2.21 1.92 1.08 56.5
Bartenders.................................. 0.34 0.27 0.17 63.5
Waiters/Waitresses.......................... 1.88 1.65 0.91 55.4
----------------------------------------------------------------------------------------------------------------
Source: CEPR, 2017 CPS-MORG.
Occupations: Bartenders (Census Code 4040) and Waiters and Waitresses (Census Code 4110).
Industries: Restaurants and other food services (Census Code 8680) and Drinking places, alcoholic beverages
(Census Code 8690).
Of the 1.08 million bartenders and wait staff who receive OTTC,
only 688,000 reported the amount received in OTTC. Therefore, the
Department imputed OTTC for those workers who did not report the amount
received in OTTC. As shown in Table 2, 54 percent of bartenders'
earnings (an average of $276 per week) and 49 percent of waiters' and
waitresses' earnings (an average of $234 per week) were from overtime
pay, tips, and commissions in 2017. For workers who reported receiving
tips but did not report the amount, the ratio of OTTC to total earnings
for the sample who reported their OTTC amounts (54 or 49 percent) was
applied to their weekly total income to estimate weekly tips. Nonhourly
workers, who are not asked the question on receipt of OTTC, are assumed
to not be tipped employees.
Table 2--Portion of Income From Overtime Pay, Tips, and Commissions for Bartenders and Waiters/Waitresses in
Restaurants and Drinking Places
----------------------------------------------------------------------------------------------------------------
Those who report the amount earned in OTTC
---------------------------------------------------------------
Percent of
Occupation Average Average earnings
Workers weekly weekly OTTC attributable
earnings to OTTC
----------------------------------------------------------------------------------------------------------------
Total........................................... 688,171 $478.34 $240.15 50%
Bartenders.................................. 105,787 512.29 275.65 54
Waiters and waitresses...................... 582,384 472.17 233.71 49
----------------------------------------------------------------------------------------------------------------
Source: CEPR, 2017 CPS-MORG, inflated to $2018 using the GDP deflator.
Occupations: Bartenders (Census Code 4040) and Waiters and Waitresses (Census Code 4110).
Industries: Restaurants and other food services (Census Code 8680) and Drinking places, alcoholic beverages
(Census Code 8690).
1. Outside-Option Wage Calculation
As discussed above, to determine potential transfers of tips, the
Department assumes that employers will only redistribute tips from
tipped employees to employees who are not customarily and regularly
tipped in a nontraditional tip pool if the tipped employee's total
earnings, including the tips the employee retains, are greater than the
``outside-option wage'' that the tipped employee could earn in a non-
tipped job. To model a worker's outside-option wage, the Department
used robust quartile regression analysis to predict the wage that these
workers would earn in a non-tipped job. Hourly wage was regressed on
age, age squared, age cubed, education, gender, race, ethnicity,
citizenship, marital status, veteran status, metro area status and
state for a sample of non-tipped workers.\19\ The Department restricted
the regression sample to workers earning at least the Federal minimum
wage of $7.25 per hour (inclusive of OTTC), and those who are employed.
This analysis excludes states where the law prohibits non-tipped back-
of-the-house employees from being included in the tip pool, and states
governed by the Marlow decision were also excluded from the regression
analysis.
---------------------------------------------------------------------------
\19\ For workers who had missing values for one or more of these
explanatory variables we imputed the missing value as the average
value for tipped/non-tipped workers.
---------------------------------------------------------------------------
[[Page 53970]]
In calculating the outside-option wage for tipped workers, the
Department defined the comparator sample for tipped workers in two
different ways: (1) All non-tipped workers (i.e., workers who are
either not waiters/waitresses or bartenders, or do not work in
restaurants or drinking places), and (2) Non-tipped workers in a set of
occupations that are likely to represent outside options. The
Department determined the list of relevant occupations by exploring the
similarity between the knowledge, activities, skills, and abilities
required by the occupation to that of servers and bartenders. The
Department searched the Occupational Information Network (O*NET) system
for occupations that share important similarities with waiters and
waitresses and bartenders--the occupations had to require ``customer
and personal service'' knowledge and ``service orientation''
skills.\20\ The list was further reduced by eliminating occupations
that are not comparable to the waitress and bartender occupations in
terms of education and training, as waiter and waitress and bartender
occupations do not require formal education or training. See Appendix
Table 1 for a list of these occupations. The transfer estimates
presented in this analysis use this sample of limited occupations to
predict each tipped worker's outside-option wage, that is, the wage
that the tipped worker could earn in a non-tipped job. The Department
also ran the regression to predict the outside-option wage using all
non-tipped workers as the outside-option sample, and found that
transfers are approximately 30 percent lower in that specification.
---------------------------------------------------------------------------
\20\ For a full list of all occupations on O*NET, see https://www.onetcenter.org/taxonomy/2010/updated.html.
---------------------------------------------------------------------------
The regression calculates a distribution of outside-option wages
for each worker. The Department considered two methods: (1) Using the
50th percentile and (2) using the same percentile for each worker as
they currently earn in the distribution of wages for wait staff and
bartenders in restaurants and drinking places in the state where they
live.\21\ The second method accounts for the fact that two workers may
have the exact same characteristics (age, race, education, etc.), but
one worker may have a higher or lower outside-option wage because he or
she is a more or less effective employee. This method assumes that a
worker's position in the wage distribution for wait staff and
bartenders in restaurants and drinking places reflects their position
in the wage distribution for the outside-option occupations. The
Department believes this method is more appropriate than the 50th
percentile method.\22\
---------------------------------------------------------------------------
\21\ Because of the uncertainty in the estimate of the
percentile ranking of the worker's current wage, the Department used
the midpoint percentile for workers in each decile. For example,
workers whose current wage was estimated to be in the zero to tenth
percentile range were assigned the predicted fifth percentile
outside-option wage, those with wages estimated to be in the
eleventh to twentieth percentile were assigned the predicted
fifteenth percentile outside-option wage, etc.
\22\ The 50th percentile method results in a higher transfer
estimate ($173 million compared with $107 million).
---------------------------------------------------------------------------
2. Transfer Calculation
After determining each tipped worker's outside-option wage, the
Department calculated the potential transferrable tips as the lesser of
the following four numbers:
1. The positive differential between a worker's current earnings
(wage plus tips) and their predicted outside-option wage,
2. The positive differential between a worker's current earnings
and the state minimum wage,
3. The total tips earned by the worker, or
4. Zero if the worker currently earns a direct cash wage above the
full applicable minimum wage.
The second number is included for cases where the outside-option
wage predicted by the analysis is below the state minimum wage, because
the worker will not earn less than their applicable state minimum wage.
The third number is included because the maximum potential tips that
can be transferred from an employee cannot be greater than their total
tips. Total tips for each worker were calculated from the OTTC variable
in the CPS data. For hourly-paid workers, the Department subtracted
predicted overtime pay to better estimate total tips.\23\ For workers
who reported receiving overtime, tips, and commissions, but did not
report the amount they earned, the Department applied the ratio of
tipped earnings to total earnings for all waiters and waitresses and
bartenders in their state (see Table 2).
---------------------------------------------------------------------------
\23\ Predicted overtime pay is calculated as (1.5 x base wage) x
weekly hours worked over 40.
---------------------------------------------------------------------------
The Department set the transfer to zero if the worker currently
earns a direct cash wage above the full applicable minimum wage. If the
employer is paying a tipped employee a direct cash wage above the
required full minimum wage, this indicates the wage is set at the
market clearing wage and any reduction in the wage (e.g., by requiring
tips to be transferred to back-of-the-house workers) would cause the
employee to quit and look for other work. Therefore, where an employer
is paying a tipped employee above the full applicable minimum wage, the
employer would generally not require the employee to contribute tips to
a nontraditional tip pool.
To determine the annual total tip transfer, the Department first
multiplied a weighted sum of weekly tip transfers for all wait staff
and bartenders who work at full-service restaurants and bars in the
United States by 45.2 weeks--the average weeks worked in a year for
waiters and waitresses and bartenders in the 2017 CPS Annual Social and
Economic Supplement. The Department then reduced this total by 43
percent to account for wait staff and bartenders who work in a state
that prohibits mandatory tip pooling or imposes stricter limits on who
can participate in a mandatory tip pool than the limits proposed in
this NPRM or a state that is in the Tenth Circuit. Using this
methodology, the total potential transfer from front-of-the-house
employees associated with this proposed rule is $213.4 million. This
represents the transfers that the Department expects would occur if
every employer that does not take a tip credit, and for whom it was
economically beneficial, instituted tip pools that include back-of-the-
house workers. In reality, even when it is seemingly economically
beneficial, many employers may not change their tip pooling practices,
because it would require changes to the current practice to which their
employees are accustomed, as well as their payroll and recordkeeping
systems.
The Department was unable to determine what proportion of the total
tips estimated to be potentially transferred from these workers will
realistically be transferred. The Department assumes that the likely
potential transfers are somewhere between a minimum of zero and a
maximum of $213.4 million, and therefore used the midpoint as a better
estimate of likely transfers. The Department accordingly estimates that
transfers of tips from front-of-the-house workers will be around $107
million in the first year that this rule is effective. Assuming these
transfers occur annually, and there is no real wage growth, this
results in 10-year annualized transfers of $107 million at both the 3
percent and 7 percent discount rates. The Department requests comments
on whether the midpoint is the appropriate adjustment.
The Department acknowledges that some employers could respond to
the proposed rule by decreasing back-of-the-house workers' wages, as
the rule will
[[Page 53971]]
allow employers to supplement these employees' wages with tips. Some
employers may consider exchanging back-of-the-house workers' hourly
wages for tips, but tips fluctuate at any given time. Thus, employers'
ability to do so would be limited by market forces, such as,
potentially, workers' aversion to risk and the endowment effect
(workers potentially valuing their set wages more than tips of the same
average amount). Because of a lack of data to quantify the extent to
which this will occur, the Department has not included this possibility
in the present analysis.
The Department welcomes comments and information regarding whether
and to what extent employers will choose to expand existing tip pools
to include back-of-the-house employees or otherwise change their
current compensation structures.
iii. Estimated Costs, Cost Savings, and Benefits
In this subsection, the Department addresses costs attributable to
the proposed rule, by quantifying regulatory familiarization costs and
qualitatively discussing additional recordkeeping costs. The Department
qualitatively discusses benefits and cost savings associated with this
proposed rule. Lastly, the Department qualitatively discusses the
potential costs, transfers, and benefits associated with its proposed
revision to its regulations to reflect its guidance that an employer
may take a tip credit for any amount of time that an employee in a
tipped occupation performs related, non-tipped duties performed
contemporaneously with his or her tipped duties, or for a reasonable
time immediately before or after performing the tipped duties.
1. Regulatory Familiarization Costs
Regulatory familiarization costs represent direct costs to
businesses associated with reviewing the new regulation. It is not
clear whether regulatory familiarization costs are a function of the
number of establishments or the number of firms.\24\ Presumably, the
headquarters of a firm will conduct the regulatory review for
businesses with multiple restaurants, and may also require chain
restaurants to familiarize themselves with the regulation at the
establishment level. To be conservative, the Department used the number
of establishments in its cost estimate--which is larger than the number
of firms--and assumes that regulatory familiarization occurs at both
the headquarters and establishment levels.
---------------------------------------------------------------------------
\24\ An establishment is commonly understood as a single
economic unit, such as a farm, a mine, a factory, or a store, that
produces goods or services. Establishments are typically at one
physical location and engaged in one, or predominantly one, type of
economic activity for which a single industrial classification may
be applied. An establishment is in contrast to a firm, or a company,
which is a business and may consist of one or more establishments,
where each establishment may participate in a different predominant
economic activity. See BLS, ``Quarterly Census of Employment and
Wages: Concepts,'' https://www.bls.gov/opub/hom/cew/concepts.htm.
---------------------------------------------------------------------------
The Department assumes that all establishments will incur some
regulatory familiarization costs regardless of whether the employer
decides to change its tip pooling practices as a result of the proposed
rule.\25\ There may be differences in familiarization cost by the size
of establishments; however, our analysis does not compute different
costs for establishments of different sizes. To estimate the total
regulatory familiarization costs, the Department used (1) the number of
establishments in the two industries, Drinking Places (Alcoholic
Beverages) and Full-Service Restaurants; (2) the wage rate for the
employees reviewing the rule; and (3) the number of hours that it
estimates employers will spend reviewing the rule. Table 3 shows the
number of establishments in the two industries. To estimate the number
of potentially affected establishments, the Department used data from
BLS's Quarterly Census of Employment and Wages (QCEW) for 2018.
---------------------------------------------------------------------------
\25\ This includes establishments in states excluded from the
transfer calculation.
Table 3--Number of Establishments With Tipped Workers
------------------------------------------------------------------------
Industry Establishments
------------------------------------------------------------------------
NAICS 722410 (Drinking Places (Alcoholic Beverages)). 42,826
NAICS 722511 (Full-service Restaurants).............. 247,237
------------------
Total............................................ 290,063
------------------------------------------------------------------------
Source: QCEW, 2018
The Department assumes that a Compensation, Benefits, and Job
Analysis Specialist (SOC 13-1141) (or a staff member in a similar
position) with a mean wage of $32.65 per hour in 2018 will review the
rule.\26\ Given the change proposed, the Department assumes that it
will take on average about 15 minutes to review the final rule. The
Department has selected a small time estimate because it is an average
for both establishments making changes to their compensation structure
and those who are not (and consequently will have negligible or no
regulatory familiarization costs). Further, the change effected by this
regulation is unlikely to cause major burdens or costs. Assuming
benefits are paid at a rate of 46 percent of the base wage, and
overhead costs are 17 percent of the base wage, the reviewer's
effective hourly rate is $53.22; thus, the average cost per
establishment is $13.30 for 15 minutes of review time. The number of
establishments in the selected industries was 290,063 in 2018.
Therefore, regulatory familiarization costs in Year 1 are estimated to
be $3.86 million ($13.30 x 290,063 establishments), which amounts to a
10-year annualized cost of $452,422 at a discount rate of 3 percent or
$549,471 at a discount rate of 7 percent. Regulatory familiarization
costs in future years are assumed to be de minimis.
---------------------------------------------------------------------------
\26\ A Compensation/Benefits Specialist ensures company
compliance with federal and state laws, including reporting
requirements; evaluates job positions, determining classification,
exempt or non-exempt status, and salary; plans, develops, evaluates,
improves, and communicates methods and techniques for selecting,
promoting, compensating, evaluating, and training workers. See BLS,
``13-1141 Compensation, Benefits, and Job Analysis Specialists,''
https://www.bls.gov/oes/current/oes131141.htm (last visited August
14, 2019).
---------------------------------------------------------------------------
2. Other Costs
The Department also assumes that there will be a minimal increase
in recordkeeping costs associated with this proposed rule. Under the
Department's current regulations, employers are only required to keep
records of which employees receive tips and how much each employee
receives if the employer takes a tip credit. If this rule is finalized
as proposed, employers that do not take
[[Page 53972]]
a tip credit but collect tips to institute a mandatory tip pool must
keep records showing which employees are included in the tip pool, and
the amount of tips they receive, as reported by employees to the
employer. As such records are already required under IRS Form 4070,
there will be minimal recordkeeping costs for employers that pay the
full Federal minimum wage in direct cash wages and choose to institute
a nontraditional tip pool.
Employers may incur some training costs associated with
familiarizing first line managers and staff with the proposed rule;
however, the Department believes these costs will be de minimis. The
Department welcomes data on these costs.
3. Benefits
Section 3(m)'s tip credit provision allows an employer to meet a
portion of its Federal minimum wage obligation from the tips customers
give employees. If an employer takes a tip credit, section 3(m)(2)(A)
applies, along with its requirement that only employees who customarily
and regularly receive tips be included in any mandatory tip pool. When
an employer does not take a tip credit, however, the proposed rule
would allow the employer to act in a manner currently prohibited by
regulation--that is, by distributing tips to employees who are employed
in occupations in which they do not customarily and regularly receive
tips (e.g., cooks or dishwashers) through a tip pool. The proposed
rule, therefore, provides employers greater flexibility in determining
their pay policies for tipped and non-tipped workers.
Full-service restaurants commonly have a tip pool. One study
suggests that tip pooling contributes to increased service quality,
along with enhanced interaction and cooperation between coworkers,
especially when team members rely on input or task completion from each
other.\27\ Another study indicates that tip pooling may foster
customer-focused service, promote employee camaraderie, and increase
productivity.\28\ Additionally, under the proposed changes, the
employer will be able to distribute customer tips to back-of-the-house
employees like cooks and dishwashers, possibly resulting in increased
earnings for those employees. The Department believes that allowing
employers to expand tip pools beyond customarily and regularly tipped
workers like servers and bartenders could help incentivize back-of-the-
house workers, which may improve the customer's experience.
---------------------------------------------------------------------------
\27\ Samuel Estreicher & Jonathan Nash, The Law and Economics of
Tipping: The Laborer's Perspective, Am. Law & Econ. Ass'n Annual
Meetings. (2004), https://law.bepress.com/cgi/viewcontent.cgi?referer=&httpsredir=1&article=1068&context=alea.
\28\ Ofer H. Azar, The Implications of Tipping for Economics and
Management, 30 (10) Int'l J. Soc. Econ., 1084-94 (2003), http://individual.utoronto.ca/diep/c/azar2003.pdf.
---------------------------------------------------------------------------
4. Cost Savings
The cost savings associated with this rule would result from the
increased earnings for back-of-the-house employees. Higher earnings for
these employees could result in reduced turnover, which reduces hiring
and training costs for employers. This proposed rule would also give
employers greater flexibility for tip pooling, and could reduce effort
spent ensuring that the tip pool is limited to only customarily and
regularly tipped employees. The Department believes that the cost
savings would outweigh any increased rule-familiarization and
recordkeeping costs.
This rule may also reduce deadweight loss. Deadweight loss is the
loss of economic efficiency that occurs when the perfectly competitive
equilibrium in a market for a good or service is not achieved. Minimum
wages may prevent the market from reaching equilibrium and thus result
in fewer hours worked than would otherwise be efficient. Allowing
nontraditional tip pools may cause a shift in the labor demand and/or
supply curves for wait staff and bartenders. This could result in the
market moving closer to the competitive market equilibrium. The
Department did not quantify the potential reduction in deadweight loss
because of uncertainty (e.g., what are the appropriate demand and
supply elasticities).
5. Costs, Benefits, and Potential Transfers Associated With Revision to
Dual Jobs Regulation
The Department proposes to amend its regulations to reflect its
recent guidance removing the limit on the amount of time that an
employee for whom an employer takes a tip credit can perform related,
non-tipped duties has potential benefits. Under the previous guidance,
in order to ensure they were in compliance, employers may have tracked
how tipped employees were spending their time, which could be difficult
and costly. Removing the time requirement will eliminate this
monitoring cost. Additionally, the revisions add clarity by providing a
reference list of applicable related duties through O*NET. Although
employers will reference this list of duties to ensure that their
employees' non-tipped duties are related to their tipped occupations,
this would likely be less of a burden than constantly monitoring their
employee's time.
The removal of the twenty percent time limit may result in tipped
workers such as wait staff and bartenders performing more of these non-
tipped duties such as ``cleaning and setting tables, toasting bread,
making coffee, and occasionally washing dishes or glasses.''
Consequently, employment of workers currently performing these duties,
such as dishwashers and cooks, may fall, possibly resulting in a
transfer of employment-related producer surplus from those non-tipped
workers to tipped workers who work longer hours. However, tipped
workers might lose tipped income by spending more of their time
performing duties where they are not earning tips, while still
receiving cash wages of less than minimum wage. For example, assume
that prior to this change, a restaurant server spends 12 minutes each
hour of their shift (i.e., 20 percent) performing related, non-tipped
duties (e.g., clearing tables, washing dishes, etc.), and 48 minutes
providing direct customer service. Assume the server earns $12 per hour
in tips (i.e., $0.25 per minute of customer service work). With no 20
percent limit on the performance of related, non-tipped duties, an
employee might spend more than 12 minutes per hour performing related,
non-tipped duties, as long as they still receive enough tips to earn at
least $7.25 per hour for the shift. Thus, if an employee now spends 20
minutes performing non-tipped work (i.e., 33 percent of their shift)
and 40 minutes interacting with customers, they would be expected to
lose $2 per hour in tips, a decrease accounting for eight fewer minutes
per hour spent performing tip-generating work (i.e., 8 minutes x $0.25
per minute). Similarly, employers that had been paying the full minimum
wage to tipped employees performing related, non-tipped duties could
potentially pay the lower direct cash wage for this time and could pass
these reduced labor cost savings on to consumers. As mentioned above,
the Department lacks data to quantify this potential reduction in tips.
For instance, data does not exist on the amount of time that tipped
employees currently spend on tipped duties or related, nontipped
duties. Absent such a baseline, the Department cannot quantify how time
spent by tipped employees on related, nontipped duties would change as
a result of this proposed rule. The Department welcomes feedback on how
employers would adjust employees' schedules as a result of this recent
guidance.
[[Page 53973]]
iv. Summary of Transfers and Costs
Below the Department provides a summary table of the quantified
transfers and costs for the RIA. Transfer costs in years two through
ten are assumed to be the same as in Year 1.
Table 4--Summary of Transfers and Costs Calculations
[2018 dollars]
----------------------------------------------------------------------------------------------------------------
Potential tip Regulatory
transfers familiarization
(Millions) costs (Millions)
----------------------------------------------------------------------------------------------------------------
Year 1:
Preferred Estimate.................................................... $106.7 $3.9
Lower-Bound........................................................... 0.0 N/A
Upper-Bound........................................................... 213.4 N/A
10-year Annualized Transfers (Preferred Est.):
3% Discount Rate.......................................................... 106.7 0.5
7% Discount Rate.......................................................... 106.7 0.5
----------------------------------------------------------------------------------------------------------------
v. Additional Potential Impacts of This Rulemaking
The Department believes that by implementing section 3(m)(2)(B) and
providing clarification on tip pooling, this proposal could affect the
number of employers who choose to implement tip pools or otherwise
affect their practices. Because of the lack of data to determine how
employers would behave, the Department welcomes comments that provide
insight into employers' decisions to implement tip pools, and how these
decisions affect both employers and employees.
C. Analysis of Regulatory Alternatives
In developing this NPRM, the Department considered a regulatory
alternative that would be less restrictive than what is currently
proposed and one that would be more restrictive. For the less-
restrictive option, the Department considered excluding employers that
do not take a tip credit from the requirement to keep records of the
weekly or monthly amount of tips received by each employee as reported
by the employee to the employer.\29\ The Department concluded, however,
that requiring all employers with tip pools to keep records of the
weekly or monthly amount of tips received by employees would ensure
uniformity among these employers and help the Department administer
section 3(m)(2)(B).
---------------------------------------------------------------------------
\29\ Current Sec. 516.28(a) requires employers that take a tip
credit under the FLSA to keep records of the weekly or monthly
amount of tips received by employees.
---------------------------------------------------------------------------
For a more restrictive alternative, the Department considered
requiring employers that collect cash tips for a mandatory tip pool to
fully distribute the tips on a daily basis. The Department concluded,
however, that this requirement would be unnecessarily onerous for
employers. The Department's proposal for full distribution of cash and
credit-card tips on the regular payday or, in certain cases, as soon as
practicable afterward, would be simpler for employers to follow. It
would align the policy for cash tips with the current policy for
credit-card tips and allow employers to pay tips the same day they
otherwise pay their employees. The Department believes that the current
proposal will ensure that employers do not operate tip pools in such a
manner that they ``keep'' tips.
VII. Regulatory Flexibility Analysis
The Regulatory Flexibility Act of 1980 (RFA), 5 U.S.C. 601 et seq.,
as amended by the Small Business Regulatory Enforcement Fairness Act of
1996, Public Law 104-121 (1996), requires federal agencies engaged in
rulemaking to consider the impact of their proposals on small entities,
consider alternatives to minimize that impact, and solicit public
comment on their analyses. The RFA requires the assessment of the
impact of a regulation on a wide range of small entities, including
small businesses, not-for-profit organizations, and small governmental
jurisdictions. Accordingly, the Department examined the regulatory
requirements of the proposed rule to determine whether they would have
a significant economic impact on a substantial number of small
entities.
In its analysis, the Department used the Small Business
Administration size standards, which determine whether a business
qualifies for small-business status.\30\ According to the 2017
standards, Full-service Restaurants (NAICS 722511) and Drinking Places
(Alcoholic Beverages) (NAICS 722410) have a size standard of $7.5
million in annual revenue.\31\ The Department used this number to
estimate the number of small entities. Any establishments with annual
sales revenue less than this amount were considered small entities.
---------------------------------------------------------------------------
\30\ SBA, Summary of Size Standards by Industry Sector, 2017,
www.sba.gov/document/support-table-size-standards.
\31\ Id., Subsector 722.
---------------------------------------------------------------------------
The Department used the U.S. Census Bureau's 2012 Economic Census
to obtain the number of establishments (operating the entire year) and
annual sales/receipts for the two industries in the analysis: Full-
service Restaurants and Drinking Places (Alcoholic Beverages).\32\ From
annual receipts/sales, the Department can estimate how many
establishments fall under the size standard. Table 5 shows the number
of private, year-round establishments in the two industries by
revenue.\33\
---------------------------------------------------------------------------
\32\ U.S. Census Bureau, 2012 Economic Census, Accommodation and
Food Services: Subject Series--Estab & Firm Size: Summary Statistics
by Sales Size of Establishments for the U.S.: 2012. https://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?src=bkmk.
\33\ The small-business size standard for the two industries is
$7.5 million in annual revenue. However, the final size category
reported in the table is $5 million-$9 million. This is a data
limitation because the 2012 Economic Census reported this category
of $5 million-$9 million and not $5 million-$7.5 million. Thus, the
total number of firms shown may be slightly higher than the actual
number of small entities.
---------------------------------------------------------------------------
The annual cost per establishment is the regulatory familiarization
cost of $13.30 per establishment calculated in section V.B.iii.1. The
Department applied this cost to all sizes of establishments since each
establishment would incur this cost regardless of the number of
affected workers. Finally, the impact of this provision was calculated
as the ratio of annual cost per establishment to average sales receipts
per establishment. As shown, the annual cost per establishment is less
than 0.03 percent of average annual sales for establishments in all
small
[[Page 53974]]
entity size classes. The impact of this proposed rule on small
establishments will be de minimis. The Department certifies that the
proposed rule will not have a significant economic impact on a
substantial number of small entities.
Table 5--Costs to Small Entities
----------------------------------------------------------------------------------------------------------------
Annual cost per
Number of Average annual Annual cost per establishment as
Annual revenue/sales/receipts establishments sales per establishment ($) percent of sales/
establishment ($) receipts
[a] [b] [c]
----------------------------------------------------------------------------------------------------------------
722511 Full-service Restaurants
----------------------------------------------------------------------------------------------------------------
2 U.S.C. 1532, requires
agencies to prepare a written statement, which includes an assessment
of anticipated costs and benefits, before proposing any Federal mandate
that may result in excess of $100 million (adjusted annually for
inflation) in expenditures in any one year by state, local, and tribal
governments in the aggregate, or by the private sector. This rulemaking
is not expected to affect state, local, or tribal governments. While
this rulemaking would affect employers in the private sector, it is not
expected to result in expenditures greater than $100 million in any one
year. See section V.B for an assessment of anticipated costs and
benefits to the private sector.
IX. Executive Order 13132, Federalism
The Department has (1) reviewed this proposed rule in accordance
with Executive Order 13132 regarding federalism and (2) determined that
it does not have federalism implications. The proposed rule would not
have substantial direct effects on the States, on the relationship
between the national government and the States, or on the distribution
of power and responsibilities among the various levels of government.
X. Executive Order 13175, Indian Tribal Governments
This proposed rule would not have substantial direct effects on one
or more Indian tribes, on the relationship between the Federal
Government and Indian tribes, or on the distribution of power and
responsibilities between the Federal Government and Indian tribes.
List of Subjects
29 CFR Part 10
Administrative practice and procedure, Construction industry,
Government procurement, Law enforcement, Reporting and recordkeeping
requirements, Wages
29 CFR Part 516
Minimum wages, Reporting and recordkeeping requirements, Wages
29 CFR Part 531
Wages
29 CFR Part 578
Penalties, Wages
29 CFR Part 579
Child labor, Penalties
29 CFR Part 580
Administrative practice and procedure, Child labor, Penalties,
Wages.
For the reasons set forth above, the Department proposes to amend
Title 29, Parts 10, 516, 531, 578, 579, and 580 of the Code of Federal
Regulations as follows:
PART 10--ESTABLISHING A MINIMUM WAGE FOR CONTRACTORS
0
1. The authority citation for Part 10 is revised to read as follows:
Authority: 4 U.S.C. 301; section 4, E.O 13658, 79 FR 9851;
Secretary of Labor's Order No. 01-2014 (Dec. 19, 2014), 79 FR 77527
(Dec. 24, 2014).
0
2. Amend Sec. 10.28 by revising paragraphs (b)(2), (c), (e), and (f)
to read as follows:
Sec. 10.28 Tipped employees.
* * * * *
(b) * * *
(2)(i) In some situations an employee is employed in a dual job, as
for example, where a maintenance person in a hotel also works as a
server. In such a situation the employee, if he or she customarily and
regularly receives more than $30 a month in tips for his or her work as
a server, is a tipped employee only with respect to his or her
employment as a server. The employee is employed in two occupations,
and no tip credit can be taken for his or her hours of employment in
the occupation of maintenance person.
[[Page 53975]]
(ii) Such a situation is distinguishable from that of an employee
who spends time performing duties that are related to his or her tip-
producing occupation but not themselves directed toward producing tips.
For example, a server may spend part of his or her time cleaning and
setting tables, toasting bread, making coffee and occasionally washing
dishes or glasses. Likewise, a counter attendant may also prepare his
or her own short orders or may, as part of a group of counter
attendants, take a turn as a short order cook for the group. An
employer may take a tip credit for any amount of time that an employee
performs related, non-tipped duties contemporaneously with his or her
tipped duties, or for a reasonable time immediately before or after
performing the tipped duties.
(iii) ``Related'' duties defined. In addition to the examples
described in (e)(ii), a non-tipped duty is related to a tip-producing
occupation if the duty is listed as a task in the description of the
tip-producing occupation in the Occupational Information Network
(O*NET) at www.onetonline. Occupations not listed in O*NET may qualify
as tipped occupations. For those occupations, duties usually and
customarily performed by employees are related duties as long as they
are included in the list of duties performed in similar O*NET
occupations.
(c) Characteristics of tips. A tip is a sum presented by a customer
as a gift or gratuity in recognition of some service performed for the
customer. It is to be distinguished from payment of a fixed charge, if
any, made for the service. Whether a tip is to be given, and its
amount, are matters determined solely by the customer. Customers may
present cash tips directly to the employee or may designate a tip
amount to be added to their bill when paying with a credit card or by
other electronic means. Special gifts in forms other than money or its
equivalent such as theater tickets, passes, or merchandise, are not
counted as tips received by the employee for purposes of determining
wages paid under the Executive Order.
* * * * *
(e) Tip pooling. Where tipped employees share tips through a tip
pool, only the amounts retained by the tipped employees after any
redistribution through a tip pool are considered tips in applying the
provisions of FLSA section 3(t) and the wage payment provisions of
section 3 of the Executive Order. There is no maximum contribution
percentage on mandatory tip pools. However, an employer must notify its
employees of any required tip pool contribution amount, may only take a
tip credit for the amount of tips each employee ultimately receives,
and may not retain any of the employees' tips for any other purpose.
(f) Notice. An employer is not eligible to take the tip credit
unless it has informed its tipped employees in advance of the
employer's use of the tip credit. The employer must inform the tipped
employee of the amount of the cash wage that is to be paid by the
employer, which cannot be lower than the cash wage required by
paragraph (a)(1) of this section; the additional amount by which the
wages of the tipped employee will be considered increased on account of
the tip credit claimed by the employer, which amount may not exceed the
value of the tips actually received by the employee; that all tips
received by the tipped employee must be retained by the employee except
for a tip pooling arrangement; and that the tip credit shall not apply
to any worker who has not been informed of these requirements in this
section.
PART 516--RECORDS TO BE KEPT BY EMPLOYERS
0
3. Revise the authority section for Part 516 to read:
Authority: Sec. 11, 52 Stat. 1066, as amended, 29 U.S.C. 211.
Section 516.28 also issued under 29 U.S.C. 203(m), as amended by
sec. 2105(b), Pub. L. 104-188, 110 Stat. 1755; sec. 8102(a), Pub. L.
110-28, 121 Stat. 112; and sec. 1201, Div. S., Tit. XII, Pub. L.
115-141, 132 Stat. 348. Section 516.33 also issued under 52 Stat.
1060, as amended; 29 U.S.C. 201 et seq. Section 516.34 also issued
under Sec. 7, 103 Stat. 944, 29 U.S.C. 207(q).
0
4. Amend Sec. 516.28 by revising the section heading and paragraph (b)
to read as follows:
Sec. 516.28 Tipped employees and employer-administered tip pools.
* * * * *
(b) With respect to employees who receive tips but for whom a tip
credit is not taken under section 3(m)(2)(A), any employer that
collects tips received by employees to operate a mandatory tip-pooling
or tip-sharing arrangement shall maintain and preserve payroll or other
records containing the information and data required in Sec. 516.2(a)
and, in addition, the following:
(1) A symbol, letter, or other notation placed on the pay records
identifying each employee who receive tips.
(2) Weekly or monthly amount reported by the employee, to the
employer, of tips received (this may consist of reports made by the
employees to the employer on IRS Form 4070).
PART 531--WAGE PAYMENTS UNDER THE FAIR LABOR STANDARDS ACT OF 1938
0
5. Revise the authority citation for Part 531 to read as follows:
Authority: 29 U.S.C. 203(m) and (t), as amended by sec. 3(m),
Pub. L. 75-718, 52 Stat. 1060; sec. 2, Pub. L. 87-30, 75 Stat. 65;
sec. 101, sec. 602, Pub. L. 89-601, 80 Stat. 830; sec. 29(B), Pub.
L. 93-259, 88 Stat. 55 sec. 3, sec. 15(c), Pub. L. 95-151, 91 Stat
1245; sec. 2105(b), Pub. L. 104-188, 110 Stat 1755; sec. 8102, Pub.
L. 110-28, 121 Stat. 112; and sec. 1201, Div. S., Tit. XII, Pub. L.
115-141, 132 Stat. 348.
0
6. Amend Sec. 531.50 by:
0
a. Revising paragraph (a) introductory text and adding paragraph
(a)(3);
0
b. Redesignating paragraph (b) as paragraph (c); and
0
c. Adding a new paragraph (b).
The revisions and additions read as follows:
Sec. 531.50 Statutory provisions with respect to tipped employees.
(a) With respect to tipped employees, section 3(m)(2)(A) provides
that, in determining the wage an employer is required to pay a tipped
employee, the amount paid such employee by the employee's employer
shall be an amount equal to--
* * *
(3) Section 3(m)(2)(A) also provides that an employer that takes a
tip credit against its minimum wage obligations to its tipped employees
must inform those employees of the provisions of that subsection, and
that the employees must retain all of their tips, although the employer
may require those employees to participate in a tip pool with other
tipped employees that customarily and regularly receive tips.
(b) Section 3(m)(2)(B) provides that an employer may not keep tips
received by its employees for any purposes, including allowing managers
and supervisors to keep any portion of employees' tips, regardless of
whether the employer takes a tip credit under section 3(m)(2)(A).
* * * * *
0
7. Revise the first sentence of Sec. 531.51 to read as follows:
Sec. 531.51 Conditions for taking tip credits in making wage
payments.
The wage credit permitted on account of tips under section
3(m)(2)(A) may be taken only with respect to wage payments made under
the Act to those employees whose occupations in the workweeks for which
such payments are made are those of ``tipped employees'' as defined in
section 3(t). * * *
[[Page 53976]]
0
8. Revise Sec. 531.52 to read as follows:
Sec. 531.52 General restrictions on an employer's use of its
employees' tips.
(a) A tip is a sum presented by a customer as a gift or gratuity in
recognition of some service performed for the customer. It is to be
distinguished from payment of a charge, if any, made for the service.
Whether a tip is to be given, and its amount, are matters determined
solely by the customer. An employer that takes a tip credit against its
minimum wage obligations is prohibited from using an employee's tips
for any reason other than that which is statutorily permitted in
section 3(m)(2)(A): As a credit against its minimum wage obligations to
the employee, or in furtherance of a tip pool limited to employees who
customarily and regularly receive tips. Only tips actually received by
an employee as money belonging to the employee may be counted in
determining whether the person is a ``tipped employee'' within the
meaning of the Act and in applying the provisions of section 3(m)(2)(A)
which govern wage credits for tips.
(b) Section 3(m)(2)(B) of the Act provides that an employer may not
keep tips received by its employees for any purposes, regardless of
whether the employer takes a tip credit.
(1) An employer may exert control over an employee's tips only to
distribute tips to the employee who received them, require employees to
share tips with other employees in compliance with Sec. 531.54, or,
where the employer facilitates tip pooling by collecting and
redistributing employees' tips, distribute tips to employees in a tip
pool in compliance with Sec. 531.54.
(2) An employer may not allow managers and supervisors to keep any
portion of an employee's tips, regardless of whether the employer takes
a tip credit. For purposes of section 3(m)(2)(B), the term ``manager''
or ``supervisor'' shall mean any employee whose duties match those of
an executive employee as described in Sec. 541.100(a)(2) through (4)
or Sec. 541.101.
0
9. Revise Sec. 531.54 to read as follows:
Sec. 531.54 Tip pooling.
(a) Monies counted as tips. Where employees practice tip splitting,
as where waiters give a portion of their tips to the busser, both the
amounts retained by the waiters and those given the bussers are
considered tips of the individuals who retain them, in applying the
provisions of sections 3(m)(2)(A) and 3(t). Similarly, where an
accounting is made to an employer for his information only or in
furtherance of a pooling arrangement whereby the employer redistributes
the tips to the employees upon some basis to which they have mutually
agreed among themselves, the amounts received and retained by each
individual as his own are counted as his tips for purposes of the Act.
Section 3(m)(2)(A) does not impose a maximum contribution percentage on
mandatory tip pools.
(b) Meaning of ``keep.'' Section 3(m)(2)(B)'s prohibition against
keeping tips applies regardless of whether an employer takes a tip
credit. Section 3(m)(2)(B) expressly prohibits employers from requiring
employees to share tips with managers or supervisors, as defined in
Sec. 531.52(b)(2), or employers, as defined in 29 U.S.C. 203(d). An
employer does not violate section 3(m)(2)(B)'s prohibition against
keeping tips if it requires employees to share tips with other
employees who are eligible to receive tips.
(1) Full and prompt distribution of tips. An employer that
facilitates tip pooling by collecting and redistributing employees'
tips does not violate section 3(m)(2)(B)'s prohibition against keeping
tips if it fully distributes any tips the employer collects no later
than the regular payday for the workweek in which the tips were
collected, or when the pay period covers more than a single workweek,
the regular payday for the period in which the workweek ends. To the
extent that it is not possible for an employer to ascertain the amount
of tips that have been received or how tips should be distributed prior
to processing payroll, tips must be distributed to employees as soon as
practicable after the regular payday.
(c) Employers that take a section 3(m)(2)(A) tip credit. When an
employer takes a tip credit pursuant to section 3(m)(2)(A):
(1) The employer may require an employee for whom the employer
takes a tip credit to contribute tips to a tip pool only if it is
limited to employees who customarily and regularly receive tips; and
(2) The employer must notify its employees of any required tip pool
contribution amount, may only take a tip credit for the amount of tips
each employee ultimately receives, and may not retain any of the
employees' tips for any other purpose.
(d) Employers that do not take a section 3(m)(2)(A) tip credit. An
employer that pays its tipped employees the full minimum wage and does
not take a tip credit may impose a tip pooling arrangement that
includes dishwashers, cooks, or other employees in the establishment
who are not employed in an occupation in which employees customarily
and regularly receives tips. An employer may not participate in such a
tip pool, and may not include supervisors and managers in the pool.
0
10. Revise Sec. 531.55(a) to read as follows:
Sec. 531.55 Examples of amounts not received as tips.
(a) A compulsory charge for service, such as 15 percent of the
amount of the bill, imposed on a customer by an employer's
establishment, is not a tip and, even if distributed by the employer to
its employees, cannot be counted as a tip received in applying the
provisions of sections 3(m)(2)(A) and 3(t). Similarly, where
negotiations between a hotel and a customer for banquet facilities
include amounts for distribution to employees of the hotel, the amounts
so distributed are not counted as tips received.
* * * * *
0
11. Amend Sec. 531.56 by revising the second and third sentences in
paragraph (a), and paragraphs (d) and (e) to read as follows:
Sec. 531.56 ``More than $30 a month in tips.''
(a) In general. * * * An employee employed in an occupation in
which the tips he receives meet this minimum standard is a ``tipped
employee'' for whom the wage credit provided by section 3(m)(2)(A) may
be taken in computing the compensation due him under the Act for
employment in such occupation, whether he is employed in it full time
or part time. An employee employed full time or part time in an
occupation in which he does not receive more than $30 a month in tips
customarily and regularly is not a ``tipped employee'' within the
meaning of the Act and must receive the full compensation required by
its provisions in cash or allowable facilities without any deduction
for tips received under the provisions of section 3(m)(2)(A).
* * * * *
(d) Significance of minimum monthly tip receipts. More than $30 a
month in tips customarily and regularly received by the employee is a
minimum standard that must be met before any wage credit for tips is
determined under section 3(m)(2)(A). It does not govern or limit the
determination of the appropriate amount of wage credit under section
3(m)(2)(A) that may be taken for tips under section 6(a)(1) (tip credit
equals the difference between the minimum wage required by section
6(a)(1) and the cash wage paid (at least $2.13 per hour)).
(e) Dual jobs. (1) In some situations an employee is employed in a
dual job, as for example, where a maintenance
[[Page 53977]]
person in a hotel also works as a server. In such a situation the
employee, if he or she customarily and regularly receives more than $30
a month in tips for his or her work as a server, is a tipped employee
only with respect to his or her employment as a server. The employee is
employed in two occupations, and no tip credit can be taken for his or
her hours of employment in the occupation of maintenance person.
(2) Such a situation is distinguishable from that of an employee
who spends time performing duties that are related to his or her tip-
producing occupation but not themselves directed toward producing tips.
For example, a server may spend part of his or her time cleaning and
setting tables, toasting bread, making coffee and occasionally washing
dishes or glasses. Likewise, a counter attendant may also prepare his
or her own short orders or may, as part of a group of counter
attendants, take a turn as a short order cook for the group. An
employer may take a tip credit for any amount of time that an employee
performs related, non-tipped duties contemporaneously with his or her
tipped duties, or for a reasonable time immediately before or after
performing the tipped duties.
(3) ``Related'' duties defined. In addition to the examples
described in (e)(2), a non-tipped duty is related to a tip-producing
occupation if the duty is listed as a task in the description of the
tip-producing occupation in the Occupational Information Network
(O*NET) at www.onetonline. Occupations not listed in O*NET may qualify
as tipped occupations. For those occupations, duties usually and
customarily performed by employees are related duties as long as they
are included in the list of duties performed in similar O*NET
occupations.
0
12. Revise Sec. 531.59 to read as follows:
Sec. 531.59 The tip wage credit.
(a) In determining compliance with the wage payment requirements of
the Act, under the provisions of section 3(m)(2)(A) the amount paid to
a tipped employee by an employer is increased on account of tips by an
amount equal to the formula set forth in the statute (minimum wage
required by section 6(a)(1) of the Act minus cash wage paid (at least
$2.13)), provided that the employer satisfies all the requirements of
section 3(m)(2)(A). This tip credit is in addition to any credit for
board, lodging, or other facilities which may be allowable under
section 3(m).
(b) As indicated in Sec. 531.51, the tip credit may be taken only
for hours worked by the employee in an occupation in which the employee
qualifies as a ``tipped employee.'' Pursuant to section 3(m)(2)(A), an
employer is not eligible to take the tip credit unless it has informed
its tipped employees in advance of the employer's use of the tip credit
of the provisions of section 3(m)(2)(A) of the Act, i.e.: The amount of
the cash wage that is to be paid to the tipped employee by the
employer; the additional amount by which the wages of the tipped
employee are increased on account of the tip credit claimed by the
employer, which amount may not exceed the value of the tips actually
received by the employee; that all tips received by the tipped employee
must be retained by the employee except for a tip pooling arrangement
limited to employees who customarily and regularly receive tips; and
that the tip credit shall not apply to any employee who has not been
informed of these requirements in this section. The credit allowed on
account of tips may be less than that permitted by statute (minimum
wage required by section 6(a)(1) minus the cash wage paid (at least
$2.13)); it cannot be more. In order for the employer to claim the
maximum tip credit, the employer must demonstrate that the employee
received at least that amount in actual tips. If the employee received
less than the maximum tip credit amount in tips, the employer is
required to pay the balance so that the employee receives at least the
minimum wage with the defined combination of wages and tips. With the
exception of tips contributed to a tip pool limited to employees who
customarily and regularly receive tips as described in Sec. 531.54,
section 3(m)(2)(A) also requires employers that take a tip credit to
permit employees to retain all tips received by the employee.
0
13. Revise Sec. 531.60 to read as follows:
Sec. 531.60 Overtime payments.
When overtime is worked by a tipped employee who is subject to the
overtime pay provisions of the Act, the employee's regular rate of pay
is determined by dividing the employee's total remuneration for
employment (except statutory exclusions) in any workweek by the total
number of hours actually worked by the employee in that workweek for
which such compensation was paid. (See part 778 of this chapter for a
detailed discussion of overtime compensation under the Act.) In
accordance with section 3(m)(2)(A), a tipped employee's regular rate of
pay includes the amount of tip credit taken by the employer per hour
(not in excess of the minimum wage required by section 6(a)(1) minus
the cash wage paid (at least $2.13)), the reasonable cost or fair value
of any facilities furnished to the employee by the employer, as
authorized under section 3(m) and this part 531, and the cash wages
including commissions and certain bonuses paid by the employer. Any
tips received by the employee in excess of the tip credit need not be
included in the regular rate. Such tips are not payments made by the
employer to the employee as remuneration for employment within the
meaning of the Act.
PART 578--[AMENDED]
0
14. The heading of Part 578 is revised to read as follows:
PART 578--TIP RETENTION, MINIMUM WAGE, AND OVERTIME VIOLATIONS--
CIVIL MONEY PENALTIES
0
15. The authority citation for Part 578 is revised to read as follows:
Authority: 29 U.S.C. 216(e), as amended by sec. 9, Pub. L. 101-
157, 103 Stat. 938, sec. 3103, Pub. L. 101-508, 104 Stat. 1388-29,
sec. 302(a), Pub. L. 110-233, 122 Stat. 920, and sec. 1201, Div. S.,
Tit. XII, Pub. L. 115-141, 132 Stat. 348; Pub. L. 101-410, 104 Stat.
890 (28 U.S.C. 2461 note), as amended by sec. 31001(s), Pub. L. 104-
134, 110 Stat. 1321-358, 1321-373, and sec. 701, Pub. L. 114-74, 129
Stat 584.
0
16. Revise Sec. 578.1 to read as follows:
Sec. 578.1 What does this part cover?
Section 9 of the Fair Labor Standards Amendments of 1989 amended
section 16(e) of the Act to provide that any person who repeatedly or
willfully violates the minimum wage (section 6) or overtime provisions
(section 7) of the Act shall be subject to a civil money penalty not to
exceed $1,000 for each such violation. In 2001, WHD adjusted this
penalty for inflation pursuant to the Federal Civil Penalties Inflation
Adjustment Act of 1990 (Pub. L. 101-410), as amended by the Debt
Collection Improvement Act of 1996 (Pub. L. 104-134, section 31001(s)).
See 66 FR 63503 (Dec. 7, 2001). The Genetic Information
Nondiscrimination Act of 2008 amended section 16(e) of the Act to
reflect this increase. See Pub. L. 110-233, sec. 302(a), 122 Stat. 920.
Section 1201(b)(3) of the Consolidated Appropriations Act, 2018,
amended section 16(e) to add that any person who violates section
3(m)(2)(B) of the Act shall be subject to a civil money penalty not to
exceed $1,100. The Federal Civil Penalties Inflation Adjustment Act of
1990 (Pub. L. 101-410), as amended by the Debt Collection Improvement
Act of 1996 (Pub. L. 104-134, section 31001(s)) and the Federal Civil
Penalties Inflation Adjustment Act Improvement Act of
[[Page 53978]]
2015 (Pub. L. 114-74, section 701), requires that inflationary
adjustments be annually made in these civil money penalties according
to a specified cost-of-living formula. This part defines terms
necessary for administration of the civil money penalty provisions,
describes the violations for which a penalty may be imposed, and
describes criteria for determining the amount of penalty to be
assessed. The procedural requirements for assessing and contesting such
penalties are contained in part 580 of this chapter.
0
17. Revise Sec. 578.3 to read as follows:
Sec. 578.3 What types of violations may result in a penalty being
assessed?
(a)(1) A penalty of up to $1,100 may be assessed against any person
who repeatedly or willfully violates section 3(m)(2)(B) of the Act.
(2) A penalty of up to $1,964 per violation may be assessed against
any person who repeatedly or willfully violates section 6 (minimum
wage) or section 7 (overtime) of the Act. The amount of the penalties
stated in paragraphs (a)(1) and (2) of this section will be determined
by applying the criteria in Sec. 578.4.
(b) Repeated violations. An employer's violation of section
3(m)(2)(B), section 6, or section 7 of the Act shall be deemed to be
``repeated'' for purposes of this section:
(1) Where the employer has previously violated section 3(m)(2)(B),
section 6, or section 7 of the Act, provided the employer has
previously received notice, through a responsible official of the Wage
and Hour Division or otherwise authoritatively, that the employer
allegedly was in violation of the provisions of the Act; or
(2) Where a court or other tribunal has made a finding that an
employer has previously violated section 3(m)(2)(B), section 6, or
section 7 of the Act, unless an appeal therefrom which has been timely
filed is pending before a court or other tribunal with jurisdiction to
hear the appeal, or unless the finding has been set aside or reversed
by such appellate tribunal.
(c) Willful violations. (1) An employer's violation of section
3(m)(2)(B), section 6, or section 7 of the Act shall be deemed to be
``willful'' for purposes of this section where the employer knew that
its conduct was prohibited by the Act or showed reckless disregard for
the requirements of the Act. All of the facts and circumstances
surrounding the violation shall be taken into account in determining
whether a violation was willful.
(2) For purposes of this section, the employer's receipt of advice
from a responsible official of the Wage and Hour Division to the effect
that the conduct in question is not lawful is a relevant fact and
circumstance when determining if the employer's conduct is knowing.
(3) For purposes of this section, whether the employer should have
inquired further into whether its conduct was in compliance with the
Act and failed to make adequate further inquiry is a relevant fact and
circumstance when determining if the employer's conduct is in reckless
disregard of the requirements of the Act.
18. Revise Sec. 578.4(a) to read as follows:
Sec. 578.4 Determination of penalty.
(a) In determining the amount of penalty to be assessed for any
repeated or willful violation of section 3(m)(2)(B), section 6, or
section 7 of the Act, the Administrator shall consider the seriousness
of the violations and the size of the employer's business.
* * * * *
PART 579--CHILD LABOR VIOLATIONS--CIVIL MONEY PENALTIES
0
19. The authority citation for Part 579 is revised to read as follows:
Authority: 29 U.S.C. 203(m), (l), 211, 212, 213(c), 216; Reorg.
Plan No. 6 of 1950, 64 Stat. 1263, 5 U.S.C. App; secs. 25, 29, 88
Stat. 72, 76; Secretary of Labor's Order No. 01-2014 (Dec. 19,
2014), 79 FR 77527 (Dec. 24, 2014); 28 U.S.C. 2461 Note (Federal
Civil Penalties Inflation Adjustment Act of 1990); and Pub. L. 114-
7, 129 Stat 584.
0
20. Amend Sec. 579.1 by:
0
a. Revising paragraph (a) introductory text;
0
b. Redesignating paragraph (a)(2) as paragraph (a)(2)(i); and
0
c. Adding paragraph (a)(2)(ii).
The revisions and additions read as follows:
Sec. 579.1 Purpose and scope.
(a) Section 16(e), added to the Fair Labor Standards Act of 1938,
as amended, by the Fair Labor Standards Amendments of 1974, and as
further amended by the Fair Labor Standards Amendments of 1989, the
Omnibus Budget Reconciliation Act of 1990, the Compactor and Balers
Safety Standards Modernization Act of 1996, the Genetic Information
Nondiscrimination Act of 2008, and the Consolidated Appropriations Act
of 2018, provides for the imposition of civil money penalties in the
following manner:
* * * * *
(2) * * *
(ii) Any person who repeatedly or willfully violates section
203(m)(2)(B) of the FLSA, relating to the retention of tips, shall be
subject to a civil penalty not to exceed $1,100 for each such
violation.
* * * * *
0
21. Amend Sec. 579.2 by revising the definition of ``Willful
violations'' to read as follows:
Sec. 579.2 Definitions.
* * * * *
Willful violations under this section has several components. An
employer's violation of section 12 or section 13(c) of the Act relating
to child labor or any regulation issued pursuant to such sections,
shall be deemed to be willful for purposes of this section where the
employer knew that its conduct was prohibited by the Act or showed
reckless disregard for the requirements of the Act. All of the facts
and circumstances surrounding the violation shall be taken into account
in determining whether a violation was willful. In addition, for
purposes of this section, the employer's receipt of advice from a
responsible official of the Wage and Hour Division to the effect that
the conduct in question is not lawful is a relevant fact and
circumstance when determining if the employer's conduct is knowing. For
purposes of this section, whether the employer should have inquired
further into whether its conduct was in compliance with the Act and
failed to make adequate further inquiry is a relevant fact and
circumstance when determining if the employer's conduct is in reckless
disregard of the requirements of the Act.
PART 580--CIVIL MONEY PENALTIES--PROCEDURES FOR ASSESSING AND
CONTESTING PENALTIES
0
22. The authority citation for part 580 continues to read as follows:
Authority: 29 U.S.C. 9a, 203, 209, 211, 212, 213(c), 216; Reorg.
Plan No. 6 of 1950, 64 Stat. 1263, 5 U.S.C. App; secs. 25, 29, 88
Stat. 72, 76; Secretary's Order 01-2014 (Dec. 19, 2014), 79 FR 77527
(Dec. 24, 2014); 5 U.S.C. 500, 503, 551, 559; 103 Stat. 938.
0
23. Revise the first sentence of Sec. 580.2 to read as follows:
Sec. 580.2 Applicability of procedures and rules.
The procedures and rules contained in this part prescribe the
administrative process for assessment of civil money penalties for any
violation of the child labor provisions at section 12 of the Act and
any regulation thereunder as set
[[Page 53979]]
forth in part 579, and for assessment of civil money penalties for any
repeated or willful violation of the tip retention provisions of
section 3(m)(2)(B), the minimum wage provisions of section 6, or the
overtime provisions of section 7 of the Act or the regulations
thereunder set forth in 29 CFR subtitle B, chapter V. * * *
0
24. Revise the first sentence of Sec. 580.3 to read as follows:
Sec. 580.3 Written notice of determination required.
Whenever the Administrator determines that there has been a
violation by any person of section 12 of the Act relating to child
labor or any regulation issued under that section, or determines that
there has been a repeated or willful violation by any person of section
3(m)(2)(B), section 6, or section 7 of the Act, and determines that
imposition of a civil money penalty for such violation is appropriate,
the Administrator shall issue and serve a notice of such penalty on
such person in person or by certified mail. * * *
0
25. Amend Sec. 580.12 by revising the first sentence of paragraph (b)
of to read as follows:
Sec. 580.12 Decision and Order of Administrative Law Judge.
* * * * *
(b) The decision of the Administrative Law Judge shall be limited
to a determination of whether the respondent has committed a violation
of section 12, or a repeated or willful violation of section
3(m)(2)(B), section 6, or section 7 of the Act, and the appropriateness
of the penalty assessed by the Administrator. * * *
* * * * *
0
26. Amend Sec. 580.18 by revising the third sentence in paragraph
(b)(3) to read as follows:
Sec. 580.18 Collection and recovery of penalty.
* * * * *
(b) * * *
(3) * * * A willful violation of sections 3(m)(2)(B), 6, 7, or 12
of the Act may subject the offender to the penalties provided in
section 16(a) of the Act, enforced by the Department of Justice in
criminal proceedings in the United States courts. * * *
The following appendix will not appear in the Code of Federal
Regulations.
Appendix Table 1--List of Occupations Included in the Outside-Option
Regression Sample
------------------------------------------------------------------------
-------------------------------------------------------------------------
Amusement and Recreation Attendants
Bus Drivers, School or Special Client
Bus Drivers, Transit and Intercity
Cashiers
Childcare Workers
Concierges
Door-To-Door Sales Workers, News and Street Vendors, and Related Workers
Driver/Sales Workers
Flight Attendants
Funeral Attendants
Hairdressers, Hairstylists, and Cosmetologists
Home Health Aides
Hotel, Motel, and Resort Desk Clerks
Insurance Sales Agents
Library Assistants, Clerical
Maids and Housekeeping Cleaners
Manicurists and Pedicurists
Massage Therapists
Nursing Assistants
Occupational Therapy Aides
Office Clerks, General
Orderlies
Parking Lot Attendants
Parts Salespersons
Personal Care Aides
Pharmacy Aides
Pharmacy Technicians
Postal Service Clerks
Real Estate Sales Agents
Receptionists and Information Clerks
Recreation Workers
Residential Advisors
Retail Salespersons
Sales Agents, Financial Services
Sales Representatives, Wholesale and Manufacturing, Except Technical and
Scientific Products
Secretaries and Administrative Assistants, Except Legal, Medical, and
Executive
Social and Human Service Assistants
Statement Clerks
Stock Clerks, Sales Floor
Subway and Streetcar Operators
Taxi Drivers and Chauffeurs
Telemarketers
Telephone Operators
Tellers
Tour Guides and Escorts
Travel Agents
Travel Guides
------------------------------------------------------------------------
[[Page 53980]]
Signed in Washington, DC this 19th day of September, 2019.
Cheryl M. Stanton,
Administrator, Wage and Hour Division.
[FR Doc. 2019-20868 Filed 10-7-19; 8:45 am]
BILLING CODE 4510-27-P
