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REGULATIONS: Department Of Labor Issues New Rules For Tipped Employees


On May 5, 2011, the Department of Labor’s new regulations addressing tip credits and tip pools went into effect. These regulations revise the steps you must follow in order to credit gratuities that your employees receive against the minimum wage you are required to pay. Read on to learn how these new rules change your obligations to employees who receive tips.

You Must Explain To Your Employees How You Are Using The Tip Credit

In general, both Kentucky and federal law require employers to pay employees no less than $7.25 per hour, plus overtime for non-exempt employees. In some situations, employers who satisfy certain requirements may pay “tipped employees,” as defined by the law, less than the minimum wage, with the understanding that the employees will make up the difference through tips.

The new federal rules require employers to communicate the following information to each employee for whom they plan to take a tip credit:
• Advise the employee that you cannot take a tip credit unless you explain to the employee how the tip credit works;
• Disclose to the employee the amount you are paying the employee per hour (this amount will be $2.13 per hour for employers who take the full tip credit allowed by law); 

• Disclose to the employee the amount you are claiming as a “tip credit” per hour, i.e., the difference between the minimum wage and the amount you are paying the employee per hour (this amount will be $5.12 per hour for employers who take the full tip credit);

• Explain to the employee that this “tip credit” cannot exceed the amount the employee actually receives in tips;

• Notify the employee that he or she has a right to retain all tips, except for tips that the employee is required to contribute to a legal tip pool. (Employers in Kentucky should remember that, as discussed below, Kentucky law, unlike federal law, prohibits employers from requiring employees to participate in tip pools.)

Although you are not required by law to provide this information in writing, it is prudent to do so in order to document your compliance.

Rule Removes Ceiling On Tip Pools Under Federal Law

One potentially confusing aspect of the new rules for Kentucky employers is the rule addressing how much employers may require employees to contribute to tip pools under federal law. In certain situations, federal law allows employers to require employees to contribute their tips to tip pools, i.e., intermingle and reallocate their tips with other employees who are customarily tipped. Previously, the Department of Labor took the position that employers may require employees to contribute to tip pools only 15% of their total tips. The new regulations remove this limitation.

Kentucky employers should disregard this portion of the regulation because, under Kentucky law, employers may not require employees to contribute any amount to tip pools. Taking this action, even though it is permitted by federal statute, would violate Kentucky wages and hour laws.

Employees’ Tips Are Their Property

Finally, the new regulations clarify what employers may require employees to do with their tips, even for employers who do not take tip credits. In a recent decision, a federal court of appeals governing employers in California and other west coast states held that, if an employer pays employees the full minimum wage and does not utilize tip credits, the employer may require employees to participate in tip pools that do not comply with federal law.

The new regulations reject this rule, and provide that an employer may require employees to divert tips only to lawful tip pools, even if the employer does not utilize a tip credit. Although this regulation is not necessarily controlling, courts likely will find it highly persuasive. Accordingly, you should ensure that you are not forcing employees to participate in tip pools that violate the law, even if you pay your tipped employees the full minimum wage.

Employers Who Utilize The Tip Credit Should Take Action

In order to comply with the new tip credit and tip pool regulations, you should take two steps. First, you should provide all of your employees for whom you take a tip credit with the information detailed above. Placing this information in writing and requiring employees to sign documents acknowledging that they received this information could help immensely in the event of litigation. Second, you should audit your tip credit and tip pooling procedures to ensure that they comply with both federal and Kentucky law. Under these new rules, employers can be found liable for unlawful tip pools, even if they do not take a tip credit. The following section contains advice that should be helpful in determining whether your tip credit and tip pool practices comply with Kentucky and federal law.

If you have any questions or need help, please contact any member of the Greenebaum Doll & McDonald Labor and Employment Department.

Copyright 2011 M. Lee Smith Publishers LLC
KENTUCKY EMPLOYMENT LAW LETTER does not attempt to offer solutions to individual problems but rather to provide information about current developments in Kentucky employment law.  Questions about individual problems should be addressed to the employment law attorney of your choice.

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