Trump's New Tip Pooling Rule Means Harsh Fines for Rule-Breakers

Trump's New Tip Pooling Rule Means Harsh Fines for Rule-Breakers

First, the back story:  The Fair Labor Standards Act (FLSA) sets the rules for paying minimum wage and overtime.  It allows employers to take a tip credit against its minimum wage obligations if certain conditions are met.  One of those conditions is that tipped employees must be allowed to retain all of their tips. There is one exception to this – that employers can require employees to participate in a valid tip pooling arrangement.  

There are various requirements for a tip pool to be valid but most importantly, the tips can only be shared with people who customarily and regularly receive tips. Typically, these jobs are in the front of the house.

The FLSA is silent as to whether these same restrictions apply to employers who don’t take a tip credit and instead just pay a full minimum wage.  In 2010, the Ninth Circuit ruled that they don’t apply if you don’t take the tip credit. In 2011, the DOL issued regulations saying that they apply whether you take the tip credit or not.

The Tip Pooling Loophole

In 2017, the Trump Administration proposed a rule that would clarify this issue.  

The rule sought to allow employers who pay a full minimum wage to include back of house workers in a tip pool.  But the rule as proposed left open a potential loophole – that in giving employers control over the tips (under the expectation that they would use them to pay back of house workers) that the rule would have also allowed employers to pocket the tips if they wanted to.  

This prompted an enormous uproar and ultimately the administration scaled back; the law would be revised to make clear that employers cannot under any circumstances keep any portion of their employees’ tips.

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Washington Report: Legislation Impacting the Restaurant Industry

In an effort to keep you up-to-date on industry issues, Foodable has created the Washington Report, an "On Foodable Weekly" edition dedicated to discussing legislation facing restaurant owners and operators. This week, we talk about at the Affordable Care Act, the New Joint Employer Standard, and the Department of Labor’s recently updated overtime regulations. Guests Fred LeFranc and Larry Reinstein give us insights on what is being seen inside restaurants in reaction to these issues.

Affordable Care Act

The Affordable Care act has been lauded for providing health care benefits to many employees who otherwise would not have those benefits. However, the definitions within the legislation are causing an upset among restaurant owners. As it is currently written, the ACA says that large companies are legally required to provide all full-time employees with health care benefits. The legislation defines a large company as one with 50 or more employees and defines a “full-time” employee as an employee working an average of 30 hours per week for any given month.

According to the National Restaurant Association, this is a major issue for restaurants because they are labor-intensive, have low profits per employee, and have a significant number of “part-time” employees.

Joint Employer Status and Franchising

The National Labor Relations Board (NLRB) updated the Joint Employer standard in response to a case involving Browning-Ferris Industries and a subcontracted company. The NLRB transformed the joint employer standard into a two-part test that now considers whether a common law employment relationship exists and whether the potential “joint employer” possesses control over employees’ essential terms and conditions of employment. The critical distinction is that “control” can now be direct, indirect, or even a reserved right to control, whether or not that right is ever exercised.

"[Franchisors] need to provide some form of assistance. The question is, does that violate that separation of church and state and the Chinese wall?" asks Chaos strategist Fred LeFranc. "This ruling, if it threatens that, then it essentially dissolves the benefit of having intellectual capital of a franchise program."

Previously, the Joint Employer Standard had said joint employer status only existed when two separate entities shared direct and immediate control over essential terms and conditions of employment like hiring, firing, discipline, supervision, and direction. This new standard could make franchisors liable for employment law violations committed by their franchisees and as such has caused many franchisors to provide less assistance.

Department of Labor Overtime Rule

On May 18, the Department of Labor finalized their rule updating overtime regulations, increasing the salary threshold below which most white-collar, salaried workers are entitled to overtime. Currently, those non-exempt employees making $455 per week or less are entitled to be paid time and a half for overtime work. Starting December 1, those employees making $913 or less will also be entitled to overtime pay.

This means operators will either need to:

  1. Pay time-an- a-half for overtime work
  2. Raise workers’ salaries above the new threshold ($913/week)
  3. Limit workers to 40 hours per week

Future automatic updates based on wage growth are also in place to update those thresholds every three years beginning in 2020.