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To be valid tips can only be shared with other employees such as servers bartenders bar backs and bussers who serve customers
<p>To be valid, tips can only be shared with other employees such as servers, bartenders, bar backs and bussers, who serve customers.</p>

Department of Labor stepping up enforcement efforts

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In recent years, the Wage and Hour Division of the Department of Labor (DOL) has escalated its enforcement initiatives. The division has investigation and enforcement responsibilities over various labor laws, including the Fair Labor Standards Act (FLSA).  The DOL generally initiates an investigation for two reasons: (a) in response to a specific complaint about a company’s practice brought by anyone (e.g., an employee, a union, a competitor or an advocacy group); and (b) targeted investigations directed at certain industries or certain geographical regions, typically aimed at remedying labor violations for low-wage workers.

One of the industries the DOL has recently targeted for investigation is the restaurant industry. Common areas for DOL review in the restaurant industry include application of the tip credit, compliance with tip pooling regulations, payment of the minimum wage and overtime and the employment of minors. Based upon the DOL’s focus on the industry, restaurants should review compensation policies and practices to better armor themselves in the event the DOL comes knocking at the door. In conducting this review, the restaurant should ensure that it is complying with the following requirements:

1. Tip Credit

A restaurant may take a credit against required minimum wage payments for tips received by its employees. However, this credit may only be taken under certain circumstances, and the practice may be prohibited by state law.  Under the FLSA, the tip credit can only be taken for tipped employees. “Tipped employees” are defined as employees who “customarily and regularly receive more than $30 per month in tips.”  Under federal law, employers must pay at least $2.13 per hour as a cash wage to tipped employees. Employers can use the tips received by employees as a credit for the difference between the cash wage and the federal minimum wage. Currently, the federal minimum wage is $7.25 per hour; therefore, employers can take a credit based upon tips received by the employee of up to $5.12 per hour. The tip credit can only be taken for tips actually retained by the employee. Moreover, in order to take a tip credit, employees must receive notification. There is no express requirement this notice be provided in writing.  But because the tip credit will be lost if notice is not given, it is advisable to provide all employees with written notification.

2. Tip Pool 

Under federal law, tipped employees may be required to pool or share tips. However, this can only be done pursuant to a valid tip pooling arrangement; again, this practice may be prohibited by state law. To be valid, tips can only be shared with other employees such as servers, bartenders, bar backs and bussers, who serve customers. A tip pool will be invalidated (and full minimum wage will be owed to participants) if tips are shared with nontipped employees. This includes cooks, chefs and dishwashers. Also, any pooling with a manager or an owner of a restaurant will invalidate the tip pool. Federal law imposes no maximum contribution limit to the tip pool. However, like the tip credit, to have a tip pooling arrangement, employers must provide prior notice to affected employees informing them of any required tip pool contribution amount. In addition, the employer can take a tip credit only for the amount of tips each employee ultimately receives after contributing to a tip pool.

3. Minimum Wage

Especially when taking a tip credit, employers must ensure that all employees are receiving minimum wage for the hours they have worked. When a tipped employee does not receive sufficient tips to make up the difference between the cash wage paid by the employer and the applicable minimum wage rate, the employer must pay the difference between the two. Furthermore, employers need to be particularly mindful that deductions or expenses are not reducing employees’ wages below minimum wage. For example, deduction from an employee’s pay should not be taken when a customer walks out without paying the bill or for a cash register shortage. Moreover, if employees are required to pay for items such as uniforms or tools, the restaurant should make sure that such expenses do not result in the employee being paid less than minimum wage in the workweek in which the expense is incurred.

4. Overtime

Employers should also monitor overtime compliance.  In general, under federal law, employees are entitled to payment of 1.5 times their regular rate of pay for all hours worked over 40 in a work week. This calculation becomes a bit tricky when a tip credit is taken. Where the employer takes the tip credit, overtime is calculated on the full minimum wage, not the lower cash wage payment. In other words, assuming a minimum wage of $7.25 per hour, employees must earn at least $10.88 per hour for all overtime hours worked. Employers can take the maximum tip credit (up to $5.12 per hour) from this amount. Moreover, in calculating the overtime rate, all compensation received by the employee (but not tips above the amount credited against the minimum wage obligation) must be considered to determine the regular rate of pay. This includes bonuses or other incentive payments received by the employee. 

5. Employment of Minors

Although workers who are 14-17 years old can be employed at restaurants and quick-service establishments, there are certain restrictions related to their employment. One such restriction is that minors cannot use certain power-driven machines such as meat slicers, meat grinders, commercial mixers or other bakery machines. Another is that minors cannot work as delivery drivers. In addition, 14- and 15-year-olds are limited both in the time of day and number of hours they can work. Many states impose similar time and hour restrictions or additional limitations on the employment of minors of all ages.

Given the DOL’s ramped-up enforcement efforts and focus on the restaurant industry, you may not be able to avoid a Department of Labor investigation. By reviewing your business’s practices, however, and making sure that they comply with both federal and state laws, you can hopefully avoid costly violations.

Libby Henninger is a shareholder in Littler Mendelson’s Washington, DC office. She advises and represents employers in a broad range of employment law, with a focus on wage and hour issues.

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