New gratuity sharing law modifies the way restaurant employees receive tips

A waitress serves food at a Tony Packo's restaurant.

By Justin K. Thomas

June 4, 2018

According to Setareh Ebrahimian, a labor and employment law expert at the national law firm LeClairRyan, restaurant owners and managers need to have a firm grasp on the new federal gratuity law.

“The recently enacted Tip Income Protection Act of 2018 may have been buried in the 2,323 pages of the federal omnibus spending bill,” Ebrahimian said. “But restaurants across the country need to be aware of this new law and understand its implications.”

If an employer compensates an employee with the entire federally mandated minimum wage and doesn’t take the "tip credit" — a tax offset against a tax liability that lets employers to take a credit toward their minimum wage obligation for tipped employees — the Act allows for employees who do not customarily receive tips to participate in the restaurant’s tip pool, Ebrahimian said.

In a tip pooling agreement, an employer requires tipped employees to combine their gratuities and creates a method for redistributing that money among the pooled employees.

According to the Fair Labor Standards Act or FLSA, tip pools are only for employees who usually receive tips such as servers. But this arrangement can now include employees who typically do not accept tips.

"[Tip pools can now include] back-of-the-house employees such as busboys, chefs, line cooks, and janitors," she said. "The Act makes it very clear that tips belong to the employees, and not employers. This strict prohibition against managers, supervisors and employers collecting or retaining tips made by employees is critical in light of the increased penalties under the Act."

Consequences for tip pool violations were increased to include the amount of tip credit taken and amount of wages withheld while "the Secretary of Labor may impose civil penalties of $1,100 per violation," Ebrahimian said.

According to Ebrahimian, the Act does not speak to the aspect of managers and supervisors who also partake in a tip pool. She points to the fact that a bartender who can't hire or fire employees but performs the duties of a manager.

However, each situation will require substantial proof for a court of law to issue a ruling that will hand out a penalty, she said.

“Restaurants commonly use tip-credit and tip pooling arrangements, and must be careful not to violate the FLSA," Ebrahimian said. "Also, state law can provide stricter restrictions on these arrangements than the FLSA. We encourage employers considering these arrangements to contact legal counsel."

In addition to working as a member of LeClairRyan's Labor and Employment Team, Ebrahimian also writes for the LR Workplace Defender, a blog which focuses on employment litigation issues.