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  • Writer's pictureJohn B. Reyna

FLSA and tips: When is employer control over employees’ tips allowed?

Updated: Oct 23, 2023

In a previous post, I wrote about the difference between a tip and a service charge. This distinction is paramount to understanding and applying many other Fair Labor Standards Act (“FLSA”) provisions. One such provision is Section 203(m)(2)(B), which 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 employee’s tips, regardless of whether or not the employer takes a tip credit.” Congress added Section 203(m)(2)(B) to the FLSA in 2018, and this law is violated regularly.

In this article, I will explain the nuances of this law so that employers can apply it correctly and employees can receive their tips.

How does an employer keep its employees’ tips?

So long as the employer is not keeping the employee’s tips, then the employer is not violating Section 203(m)(2)(B). Of course, the FLSA does not define the word keep regarding tips. So, we have to look to the Department of Labor’s Wage and Hour Division’s interpretation of the FLSA for more guidance, located in Title 29 of the Code of Federal Regulations (“Regulations”).

The following are examples in the Regulations reflecting when employers keep tips. This list is illustrative but not exhaustive.

  • If an employer uses tips to pay for any portion of its business expenses, such as using tips to pay for operating expenses or employee social functions.

  • If an employer directs tips to anyone who is not an employee of the employer, such as a vendor or a charity.

  • If an employer requires an employee to share tips with another employee who is not eligible. Thus, an employer keeps tips when it requires employees to share tips with a manager or supervisor.

  • If an employer requires an employee for whom it takes a tip credit to share tips with an employee who does not customarily and regularly receive tips (e.g., cook or dishwasher).

Employer control permitted.

The FLSA permits the employer to control employees’ tips in certain situations. So, those situations are a starting place for understanding when an employer exerts control but does not keep its employees’ tips. An employer may exercise control over employees’ tips only to: (1) distribute tips to the employee who received them; (2) require employees to share tips with other eligible employees; or (3) distribute tips to other eligible employees in a tip pool where the employer facilitates tip pooling by collecting and redistributing employees’ tips. In these three scenarios, employees, not employers, keep the tips. Any other employer control over employees’ tips constitutes keeping tips, which the FLSA prohibits.

  • Distribute tips to the employee who received them.

If a guest charges a tip to a credit card, the employer’s point-of-sale (“POS”) system will track the tip. The employer must promptly distribute the tips according to the Regulations.

If a customer hands the employer a tip for an employee, the employer must distribute the tips to the employee the customer designated.

  • Require employees to share tips with other eligible employees.

Under the FLSA, employers are permitted to require employees to share or pool their tips with other eligible employees. The Department of Labor’s Wage and Hour Division (“WHD”) refers to these arrangements as mandatory tip pool. The WHD distinguishes these arrangements from scenarios in which tipped employees voluntarily share tips with other non-managerial employees, so long as such sharing is free from coercion, outside of any formalized arrangement, and is not a condition of employment.

In this scenario, the employees facilitate the tip pooling without the employer’s assistance. For example, waiters give a portion of their tips to the busser. Again, this is done without the tips going to the employer for redistribution.

It is important to note that the FLSA does not restrict the amount of tips an employee can be required to contribute to eligible employees in a mandatory tip pool. There is no maximum or minimum contribution percentage.

  • Distribute tips to other eligible employees in a tip pool where the employer facilitates tip pooling by collecting and redistributing employees’ tips.

In this scenario, we are still dealing with mandatory tip pools. However, the employer facilitates the tip pool by collecting and redistributing employees’ tips. To not violate the FLSA’s prohibition against keeping tips, the employer must fully distribute any collected tips: (1) no later than the regular payday for the workweek in which the tips were collected; or (2) no later than the regular payday if the pay period covers more than a single workweek; or (3) as soon as practicable after the regular payday if the employer is unable to ascertain the amount of tips that have been received or how tips should be distributed before processing payroll.

Damages for violating Section 203(m)(2)(B) of the FLSA.

Where an employer keeps employees’ tips, either WHD or the affected employee or employees may recover (1) the amount of tip credit taken by the employer, if any; (2) all tips unlawfully kept by the employer; and (3) an additional equal amount in liquidated damages. Also, WHD may impose civil money penalties not to exceed $1,300 for each violation of Section 203(m)(2)(B).

Final thoughts.

I read a lot of Department of Labor News Releases, and one of the most consistent violations discussed is employers keeping tips. Often, the violations occur because of an invalid tip pool. As stated above, tip pools are permissible under the FLSA. Still, the FLSA has strict requirements regarding operating valid tip pools. Those requirements are beyond the scope of this article. But suffice to say, when a tip pool violates the FLSA or Regulations, the WHD will often find that the employer kept employees’ tips in violation of Section 203(m)(2)(B).

The Texas Hospitality and Non-profit Law Center only provides this material for informational purposes. The firm does not intend for this material to constitute legal advice. Nor does this create a client-attorney relationship between the firm and any recipient.

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