On September 23, 2021, the U.S. Department of Labor (DOL) published a final rule announcing when it will assess civil money penalties (CMPs) against employers who retain tips earned by their workers.  Under the rule, available here, the DOL may assess a penalty of up to $1,100 per violation each time it finds an employer retained employee tips, regardless of whether the violation is repeated or willful.  The rule represents yet another move by the agency to protect tipped workers, putting hospitality-sector employers and others with tipped employees on clear notice that it intends to enforce Fair Labor Standards Act (FLSA) requirements aggressively.

In June, the DOL issued new regulations aimed at clarifying the FLSA’s tip credit exception, under which some service employees may receive less than the general minimum wage from their employer if they receive the difference in customer tips.  Its announcements reversed Trump-era rules on topics like work in non-tipped duties, tip pooling, and record-keeping.  This week’s announcement makes clear that the DOL intends to continue its push to aggressively enforce these and other tip rules.

The new rule, first announced in March in a Notice of Proposed Rulemaking, represent the DOL’s interpretation of changes to the FLSA made by Congress in 2018.  It will go into effect 60 days from the date of final publication.  When it does, they will establish that employers, along with any managerial or supervisory personnel, are strictly prohibited from retaining any portion of employee-earned tips, except when the manager or supervisory is solely responsible for providing the tipped service.  Importantly, the prohibition against employers keeping any tips applies in all tip-pool scenarios, including those in which the employer does not take a tip credit.  In addition, the DOL’s decision to pursue CMPs in these scenarios, regardless of employer intent, stands in contrast to its approach to other violations of the FLSA, which generally only result in such penalties when the employer acts willfully or commits the same violation multiple times.

The rule also revises the definition of the term “willful” in the tip credit to include those circumstances in which a violation is committed with reckless disregard for FLSA requirements.  In its explanation of the rule, the DOL specifically notes that such standard may apply in situations in which the agency finds that an employer should have inquired as to whether its tip practices were lawful.  This change, like the first, substantially increases the likelihood that employers will face stiff CMPs, even in situations in which they are not aware of DOL’s standards.

Given the risk of enhanced penalties, all employers with tipped employees must take careful note of the new rule, along with the DOL’s other pronouncement regarding hospitality workers.  The agency’s flurry of activity demonstrates that it takes compensation for such workers seriously and intends to enforce the FLSA standards that cover them forcefully.  The potential that first-time offenders will face high CMPs should cause all employers with tipped workers to review their practices and make sure they pay those employees consistent with these new requirements.