Proposed Tip Regulations Impact Restaurant Industry

October 23, 2019
Author: ThinkWhy Analyst

A new “Tip Regulation” change to the Fair Labor Standards Act (FLSA) has been proposed by the Labor Department. If passed, the restaurant industry would see a change in the way tips are shared among employees — and a possible restructure of tipped employee wages.

New Policy May Change How Restaurants Manage Compensation For Tipped Employees

The Labor Department published the proposed rule for comment in the Federal Register on October 8th and the public has 60 days from the date of publication to comment on the proposed rule. Here are three ways the Tip Regulations proposal could impact the restaurant industry if passed into law.

Minimum Wage vs. Sub-Minimum Wage

Employers aren’t required to pay tipped employees the current federal minimum wage, which is set at $7.25 per hour. Instead, tipped employees are paid $2.13 per hour, an amount that’s been in place federally since 1991. Unless job duties require these employees to complete untipped tasks (e.g. restocking table items or cleaning) for more than 20 percent of the time they’re working, they are eligible for the tipped employee hourly wage.

Under the proposed rule, employers would no longer be required to shift wages to accommodate tipped and non-tipped activities, as long as the untipped work takes a reasonable amount of time before or after tipped duties. Some legislators argue the new standard would be too vague and cause confusion or dishonesty. One solution proposed by legislators would be to eliminate the sub-minimum wage altogether and pay every worker the required federal minimum wage. However, others argue that removing the sub-minimum wage would eliminate the incentives for restaurant patrons to tip or prompt businesses to follow a no-tipping model. Both of these actions would impact tipped worker income.

Tip Sharing Increases

If passed, the new regulation would allow restaurant owners to mandate tip-sharing with kitchen workers, dishwashers and other staff who traditionally have not been tipped. This is only permitted if all the workers are paid at least the federal minimum wage for untipped workers. Restaurants that pay tipped workers less than the federal minimum can only require tip-sharing with those who have traditionally shared in tip pools, such as busboys and hostesses.

Employers Don’t Get Gratuities

The Labor Department estimates that more expansive tip pools could result in the transfer of as much of between $106-$213 million a year. These would be tips that are transferred from wait staff to kitchen workers, but never to the establishment itself. Under the new proposal, employers would still be prohibited from keeping tips received by their employees, regardless of whether the employers take a tip credit, as currently stated in the Fair Labor Standards Act.