Attention (Again) California Restaurant Employers: Congress Changes the Tip Pool Rules

Author: Sean Gentry

Earlier in the year, we reported that the Department of Labor was proposing to rescind prior Federal restrictions on tip-pool arrangements, and that we expect a related decision from the U.S. Supreme Court on those rules.

In a somewhat unexpected turn, Congress decided to directly intervene on the tip-sharing agreements under the Fair Labor Standards Act as a part of a recently-passed spending bill.

Under the new federal law, employers with regularly tipped employees may include a broader group of employees in employer-mandated tip-pool arrangements, including any employees who provide “direct table service” or who are in the “chain of service.”

This brings the law back to prior interpretations of the rule in California under Labor Code Section 351 and the 2009 decision in Etheridge v. Reins International California, Inc., which held that kitchen staff contribute to the “chain of service” and could receive tips.

Under existing California law, however, tips still belong to employees and must be allocated in percentages to different types of employees in a manner reasonable under standard industry practices (i.e., the restaurant industry).  The tip-pool may not include any owners and most managers or supervisors, even if those individuals provide direct service to a customer.  It is also possible that California’s legislature might react by imposing some of its own new regulations.

The new law does not change the current rules for employers that take a tip credit toward federal minimum wage obligations (which California does not allow anyway).  The DOL has also stated that the new federal law prohibits managers and supervisors from participating in tip pools under federal law, which has been a concern in states that do not have protections like the one in California.

Finally, there may yet still be another twist on tip pool arrangements when the Supreme Court finally issues its opinion in the case of Oregon Restaurant & Lodging Assoc. v. Perez.  The Supreme Court seemed to be waiting until the dust settled on the DOL regulations.

If you have questions about tip-pool arrangements for your restaurant workers or other tipped employees, or how to allocate the percentage of tips to different types of employees that will pass the reasonableness test, please feel free to reach out to us at Ad Astra.

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