DOL Tipping Rules How To Comment

Federal Register / Vol. 82, No.
232 / Tuesday, December 5, 2017 / Proposed Rules 57395
Signed: October 30, 2017. All comment submissions must include Federal minimum wage, which is
John J. Manfreda, the agency name and Regulatory currently $7.25 per hour. See 29 U.S.C.
Administrator. Information Number (RIN 1235AA21) 206(a)(1). Under section 3(m) of the
Approved: November 30, 2017. for this NPRM. Response to this NPRM FLSA, which defines the term wage,
Timothy E. Skud, is voluntary. The Department requests an employer of tipped employees can
that no business proprietary satisfy its obligation to pay those
Deputy Assistant Secretary (Tax, Trade and
Tariff Policy). information, copyrighted information, employees the Federal minimum wage
or personally identifiable information be by paying a lower direct cash wage and
[FR Doc. 201726283 Filed 12417; 8:45 am]
submitted in response to this NPRM. counting a limited amount of the tips
BILLING CODE 481031P
Submit only one copy of your comment received by its employees as a partial
by only one method (e.g., persons credit to satisfy the difference between
submitting comments electronically are the direct cash wage paid and the
DEPARTMENT OF LABOR encouraged not to submit paper copies). Federal minimum wage (known as a
Please be advised that comments tip credit), if it follows certain
Wage and Hour Division
received will become a matter of public statutory requirements. See 29 U.S.C.
record and will be posted without 203(m).
29 CFR Part 531 In 1966, Congress created a tip credit
change to http://www.regulations.gov,
RIN 1235AA21 including any personal information provision within the definition of a
provided. All comments must be wage in section 3(m) of the statute
Tip Regulations Under the Fair Labor received by 11:59 p.m. on the date that permitted an employer to utilize
Standards Act (FLSA) indicated for consideration in this tips received by its employees to
NPRM; comments received after the subsidize up to 50 percent of its
AGENCY: Wage and Hour Division,
comment period closes will not be minimum wage obligations. See Public
Department of Labor.
considered. Commenters should Law 89601, 101(a), 80 Stat. 830 (1966);
ACTION: Notice of proposed rulemaking; 76 FR 18,832, 18,838.1 In 1974,
request for comments. transmit comments early to ensure
timely receipt prior to the close of the Congress again amended section 3(m) by
SUMMARY: The Department of Labor comment period. Electronic submission providing that an employer could not
(Department) is proposing to rescind via http://www.regulations.gov enables utilize tips received by its employees
portions of its tip regulations issued prompt receipt of comments submitted toward its Federal minimum wage
pursuant to the Fair Labor Standards as DOL continues to experience delays obligation unless, among other things:
Act that impose restrictions on in the receipt of mail in our area. For (1) [its] employee has been informed by the
employers that pay a direct cash wage access to the docket to read background employer of the provisions of this subsection
of at least the full federal minimum documents or comments, go to the and (2) all tips received by such employee
have been retained by the employee, except
wage and do not seek to use a portion Federal eRulemaking Portal at http:// that this subsection shall not be construed to
of tips as a credit toward their minimum www.regulations.gov. prohibit the pooling of tips among employees
wage obligations. This Notice of FOR FURTHER INFORMATION CONTACT: who customarily and regularly receive tips.
Proposed Rulemaking (NPRM) seeks the Melissa Smith, Director of the Division Public Law 93259, 13(e), 88 Stat. 55
views of the public on the Departments of Regulations, Legislation, and (1974). Thus, section 3(m) permits an
proposed rescission of those portions of Interpretation, Wage and Hour Division, employer to take a partial credit against
the regulations. U.S. Department of Labor, Room S its minimum wage obligations on
DATES: Comments must be received on 3502, 200 Constitution Avenue NW., account of tips received by its
or before January 4, 2018. Washington, DC 20210, telephone: (202) employees but only if, among other
ADDRESSES: To facilitate the receipt and 6930406 (this is not a toll-free things, its tipped employees retain all of
processing of written comments on this number). Copies of this NPRM may be their tips. Section 3(m), however, does
NPRM, the Department encourages obtained in alternative formats (Large not preclude an employer that takes a
interested persons to submit their Print, Braille, Audio Tape or Disc), upon tip credit from implementing a tip pool
comments electronically. You may request, by calling (202) 6930675 (this in which tips are shared only among
submit comments, identified by is not a toll-free number). TTY/TDD those employees who customarily and
Regulatory Information Number (RIN) callers may dial toll-free 1 (877) 889 regularly receive tips. Id.
1235AA21, by either of the following 5627 to obtain information or request The Department first promulgated
methods: materials in alternative formats. regulations implementing the section
Electronic Comments: Follow the Questions of interpretation and/or 3(m) tip credit in 1967. See 32 FR
instructions for submitting comments enforcement of the agencys regulations 13,575 (Sept. 28, 1967). In 2011, the
on the Federal eRulemaking Portal may be directed to the nearest WHD Department updated those regulations
http://www.regulations.gov. district office. Locate the nearest office to reflect its then-existing view that the
Mail: Address written submissions to by calling the WHDs toll-free help line statutory conditions in section 3(m) of
Melissa Smith, Director of the Division at (866) 4USWAGE ((866) 4879243) the FLSA require that tipped employees
of Regulations, Legislation, and between 8 a.m. and 5 p.m. in your local retain all of their tips, except for those
Interpretation, Wage and Hour Division, time zone, or log onto WHDs Web site tips distributed through a tip pool
U.S. Department of Labor, Room S at http://www.dol.gov/whd/ limited to customarily and regularly
sradovich on DSK3GMQ082PROD with PROPOSALS
3502, 200 Constitution Avenue NW., america2.htm for a nationwide listing of tipped employees, regardless whether
Washington, DC 20210. WHD district and area offices. such employees work for an employer
Instructions: This NPRM is available SUPPLEMENTARY INFORMATION: that takes a tip credit. See, e.g., 531.52.
through the Federal Register and the
http://www.regulations.gov Web site. I. Executive Summary 1 As discussed further below, Congress changed
You may also access this document via the amount of tips received by employees that an
The Fair Labor Standards Act of 1938 employer can credit against its minimum wage
the Wage and Hour Divisions (WHD) (FLSA) generally requires covered obligation in subsequent amendments to the FLSA.
Web site at http://www.dol.gov/whd/. employers to pay employees at least a See, infra, Sec. III.
VerDate Sep<11>2014 18:01 Dec 04, 2017 Jkt 244001 PO 00000 Frm 00013 Fmt 4702 Sfmt 4702 E:\FR\FM\05DEP1.SGM 05DEP1
57396 Federal Register / Vol. 82, No. 232 / Tuesday, December 5, 2017 / Proposed Rules
As discussed below, since 2011 there employees for tip sharing among a larger regulatory changes, which in turn
has been a significant amount of private tip pool of employees. This change would affect total tipped income and
litigation involving the tip pooling and could result, for example, in tips being employer behavior. The Department
tip retention practices of employers that shared with employees who are not currently lacks data to quantify possible
pay a direct cash wage of at least the customarily and regularly tipped, such reallocations of tips through newly
Federal minimum wage and do not take as back-of-the-house employees in expanded tip pools to employees who
a tip credit. There has also been restaurants. This type of tip sharing was do not customarily and regularly receive
litigation directly challenging the at issue in Cumbie v. Woody Woo, Inc., tips. The Department presents a
Departments authority to promulgate 596 F.3d 577 (9th Cir. 2010) (employer primarily qualitative approach to
the 2011 Final Rule as it applies to paid its tipped employees a direct wage assessing the benefits and transfers of
employers that pay a direct cash wage payment that exceeded the Federal the new rule.
of at least the Federal minimum wage. minimum wage and instituted a tip pool The Department estimated the
At the same time, there have been that included back-of-the-house regulatory familiarization costs
changes in state laws that require employees who did not customarily and associated with this proposed rule on an
employers to pay their tipped regularly receive tips, such as establishment basis and calculated the
employees a direct cash wage of at least dishwashers and cooks). If the first year cost to be $3.431 million. The
the Federal minimum wage, which have Departments rule were adopted as Department discussed other impacts
resulted in more employers being proposed herein, it would expressly and benefits of the proposed rule
unable to claim a tip credit. allow such tip sharing. Employers in qualitatively. For the purposes of E.O.
In part because of these other industries could also adopt 13771, it is expected that this proposed
developments, the Department is similarly varied tip pooling rule would, if finalized as proposed,
concerned about the scope of its current arrangements among tipped and non- qualify as an E.O. 13771 deregulatory
tip regulations as applied to employers tipped employees. E.g., Cesarz v. Wynn action.
that pay the full Federal minimum wage Las Vegas, 2014 WL 117579 (D. Nev. II. Recent Developments in Tip Pooling
to their tipped employees. The 2014), revd and remanded by Oregon Regulations and Litigation; Proposed
Department is also seriously concerned Rest. & Lodging Assn v. Perez, 816 F.3d Changes to Regulations; and
that it incorrectly construed the statute 1080 (9th Cir. 2016), rehg and rehg en Nonenforcement Policy
in promulgating the tip credit banc denied, 843 F.3d 355 (9th Cir.
2016), pet. for cert. filed (Aug. 1 2016) As noted above, the FLSAs tip credit
regulations that apply to such
(employer instituted a tip pool through provision was enacted in 1966. WHD
employers. Additionally, the
which dealers tips were shared with promulgated regulations implementing
Department seeks to consider whether it
other casino employees in jobs that have the FLSAs tip credit provision in 1967.
is unnecessary to prohibit the sharing of
not traditionally been customarily and See 29 U.S.C. 203(m), Public Law 89
tips with employees who do not
regularly tipped). Promulgation of the 601, 101(a), 80 Stat. 830 (1966); 32 FR
customarily receive tips, including
regulation would also make clear that 13,575 (Sept. 28, 1967). Among other
restaurant cooks, dishwashers, and things, the 1967 regulations
other traditionally lower-wage job where an employer does not claim the
tip credit under section 3(m) and pays acknowledged that employers and
classifications, when their employer employees could agree that tips received
does not take a tip credit under FLSA a direct wage that satisfies the FLSAs
minimum wage requirements, the would belong to the employer, which
section 3(m) and its employees are paid might then use the tips to satisfy the
at least the full Federal minimum wage. treatment and disposition of tips is a
entirety of its minimum wage
The Department is therefore matter of agreement between the
obligations, thus exceeding the then-50
proposing to rescind the parts of its tip employer and employees or of state law.
To estimate the impact of the percent limitation on an employers
regulations that bar tip-sharing crediting of tips received by its
arrangements in establishments where proposed rule, the Department looked at
two occupations that constitute a large employees against its minimum wage
the employers pay full Federal obligations. See, e.g., 531.55(b) (1967)
minimum wage and do not take a tip percentage of tipped workers (waiters,
waitresses, and bartenders) and focused ([I]f pursuant to an employment
credit against their minimum wage agreement the tips received by an
obligations. This proposed rule applies on two industries (drinking places and
employee must be credited or turned
only to employers that pay direct cash full-service restaurants). Based on the
over to the employer, such sums may,
wages of at least the Federal minimum data used in the regulatory impact
after receipt by the employer, be used by
wage and do not take a tip credit. It does analysis below, the Department
the employer to satisfy the monetary
not apply to employers who pay less estimated that there are up to 1,298,231
requirements of the Act. In such
than the Federal minimum wage and tipped workers in the selected
instances there is no applicability of the
take a tip credit. occupations, and 206,770 full-service
50-percent limitation on tip credits
The proposed removal of the restaurants, and 40,095 drinking places.
There are labor market forces that will provided by section 3(m).).
regulatory limitation on an employers The 1967 regulations were consistent
ability to utilize tips if it pays a direct affect decisions concerning employer
with Williams v. Jacksonville Terminal
wage of at least the full FLSA minimum use or reallocation of tips. For example,
Co., 315 U.S. 386 (1942), and the
wage will allow for employers to there are certain market factors that may
legislative history of the 1966
provide in their agreements 2 with discourage any changes in tip-sharing
amendments. In Jacksonville Terminal,
practices, such as employee resistance

the Supreme Court held that an
2 Similar references to agreements in this notice and heightened turnover among the
employer had complied with the FLSAs
refer to agreements, whether written or otherwise, customarily tipped employees. The
between an employer and its employees regarding minimum-wage requirements by paying
Department is unable to quantify how
the treatment and disposition of tips received by its employees only those tips that the
such employees. Cf. Williams v. Jacksonville customers will respond to proposed
employees received from customers
Terminal Co., 315 U.S. 386, 397 (1942) (determining
that, [i]n businesses where tipping is customary, an arrangement [may be] made by which the
and, if tips received by any employee
the tips, in the absence of an explicit contrary employee agrees to a different disposition of such did not satisfy the minimum wage, by
understanding, belong to the recipient, but that tips). paying the difference to that employee.
Federal Register / Vol. 82, No. 232 / Tuesday, December 5, 2017 / Proposed Rules 57397
Id. at 388389, 397398, 403408. The the 1974 amendments to the FLSA. See Restaurant Association, Washington
Court reasoned that such tips belong to 73 FR 43,654, 43,659 (July 28, 2008). Restaurant Association, Alaska Cabaret,
the recipient employee in the absence Before it had finalized that rulemaking, Hotel, Restaurant & Retailers
of an explicit contrary understanding, the Department participated as amicus Association, and others (the ORLA
but that an employer and its employees curiae in support of a tipped employee Plaintiffs), challenged the Departments
could agree that the employer would challenging her employers tip pooling authority to promulgate the 2011 Final
take the compensation paid by arrangement in Cumbie v. Woody Woo, Rule as it applies to employers that do
[customers] for the service [provided by a case before the Ninth Circuit. 596 F.3d not take a tip credit and that pay a direct
the employees], whether paid as a fixed 577. Woody Woo involved an employer cash wage of at least the Federal
charge or as a tip. Id. at 397398. The that paid its tipped employees a direct minimum wage. See Compl., July 12,
Court ultimately concluded that the wage payment that exceeded the Federal 2012, Oregon Rest. & Lodging Assn v.
parties in the case had entered, and the minimum wage and instituted a Solis, 948 F.Supp.2d 1217 (D. Or. 2013).
FLSA did not prohibit, such an mandatory tip pool that included back- The ORLA Plaintiffs sought to have
agreement to transfer the tips of-the-house employees who do not those parts of the Departments 2011 tip
[collected by the employees] . . . to the customarily and regularly receive tips, regulations that apply to employers that
credit of the [employer]. Id. at 403; see such as dishwashers and cooks. Id. at do not take a tip credit against their
id. at 403408. The 1966 legislative 57879. The district court in Woody minimum wage obligations declared
history similarly reflected that the new Woo had concluded that section 3(m)s invalid and vacated. See id. at 3334
statutory tip provisions [we]re restrictions on tip pooling apply only (identifying 531.52, 531.54, and
sufficiently flexible to permit the when an employer takes a tip credit 531.59).
continuance of existing practices with against its minimum wage obligations. The plaintiffs alleged, inter alia, that
respect to tips, including practices See Cumbie v. Woody Woo, Inc., 2008 such tip regulations are contrary to the
under which an employer and his WL 2884484, at *3 (D. Or. July 25, FLSAs clear statutory language in
tipped employees . . . agree that all tips 2008). The Department argued before section 3(m), which places restrictions
are to be turned over or accounted for the Ninth Circuit that the district courts on an employers use of tips only when
to the employer to be treated by him as interpretation would permit an the employer takes a tip credit. See id.
part of his gross receipts. S. Rep. 1487, employer to use tips received by its at 1821. The Department responded by
89th Cong., 2d Sess. 12 (1966). In that employees to a greater extent than that arguing that the FLSA does not address
circumstance, however, the employer permitted in section 3(m), since it an employers use of tips when the
must pay the employee the full would permit an employer to use tips to employer does not take a tip credit, and
minimum hourly wage, since for all meet its entire minimum wage that the Department appropriately used
practical purposes the employee is not obligation or to subsidize the wages of its rulemaking authority to address that
receiving tip income. Id. non-tipped employees. See Br. of the statutory gap through the 2011 tip
When it amended section 3(m) in Secy of Labor as Amicus Curiae, Apr. regulations. See Reply Br. of the Secy
1974, Congress added the requirement 29, 2009, at 8, 2009 WL 2609879, of Labor, Dec. 7, 2012, at 58, Oregon
that an employer taking a tip credit Cumbie v. Woody Woo, Inc., 596 F.3d Rest. & Lodging Assn v. Solis, 948
must permit its tipped employees to 577 (9th Cir. 2010). On February 23, F.Supp.2d 1217 (D. Or. 2013). On June
retain all of their tips, except for those 2010, the Ninth Circuit issued an 7, 2013, the district court granted the
tips distributed through a mandatory tip opinion in Cumbie v. Woody Woo, plaintiffs motion for summary
pool that includes only employees who which held in the context of an judgment, ruling that the 2011 tip
customarily and regularly receive tips. employer that did not use tips to pay its regulations were invalid. Oregon Rest. &
See Public Law 93259, 13(e). employees the minimum wage, that Lodging Assn v. Solis, 948 F.Supp.2d
Immediately after the 1974 section 3(m)s tip retention 1217, 1227 (D. Or. 2013). The court
amendments, WHD stated that its requirements apply only to employers concluded that the regulations were
existing regulations were superseded by that avail themselves of the tip credit contrary to the clear intent of Congress
the amendments to the extent that they provision. 596 F.3d 577, 581 (9th Cir. to limit the use or pooling of tips only
were in conflict with those 2010). to employers that elect to take a tip
amendments, in particular, those The Department finalized its revisions credit. See id. at 1226.
provisions that permitted an employer to the tip regulations in 2011. See 76 FR On August 21, 2013, the Department
to use tips received by its employees 18,832, 18,85456 (revising, among appealed the district courts decision to
toward its minimum wage obligations to other provisions, 531.52, 531.54, and the Ninth Circuit. See Br. of the Secy
a greater extent than permitted by 531.59). Those regulations, among other of Labor, Dec. 27, 2013, at 8, Oregon
section 3(m). See Wage and Hour things, bar all employers from sharing Rest. & Lodging Assn v. Perez, 816 F.3d
Opinion Letter FLSA626, 1974 WL tips with employees who do not 1080 (9th Cir. 2016) (ORLA). In its brief,
422051 (June 21, 1974), at *2; Wage and customarily and regularly receive tips the Department argued that the 1974
Hour Opinion Letter WH310, 1975 WL regardless whether the employers take a amendments to the FLSA expressly
40934, at *1 (Feb. 18, 1975); Wage and tip credit. See, e.g., 531.52. The delegated broad authority to the
Hour Opinion Letter WH321, 1975 WL Departments regulations thus provide Department to implement the terms of
40945, at *12 (Apr. 30, 1975). that an employer is prohibited from the amendments and that the
However, although the statutory tip using tips received by employees, Department properly used this authority
credit provision was significantly whether or not it has taken a tip credit, to promulgate the 2011 tip regulations,
amended in 1974 and thereafter, WHD except as a credit against its minimum which address a gap in the statutory
did not revise its 1967 tip credit wage obligations to the employee to the scheme: Whether an employer that does
regulations until 2011. See 76 FR extent permitted by that section, or in not take a tip credit is subject to section
18,832, 18,85456 (Apr. 5, 2011). furtherance of a tip pool that is 3(m)s restrictions. See id. at 2428. The
In 2008, the Department published a permissible under that section. Id. Department further argued that the
Notice of Proposed Rulemaking that On July 12, 2012, the Oregon regulations were necessary to prevent a
proposed, among other things, to amend Restaurant and Lodging Association circumvention of section 3(m)s
WHDs tip credit regulations to reflect (ORLA), along with the National limitations on an employers ability to
use or require the pooling of tips. See rehearing en banc. See Pet. for Panel retention practices of employers that
id. at 3233. The Ninth Circuit Rehg and Rehg En Banc, Apr. 6, 2016, pay a direct cash wage of at least the
consolidated the case with Cesarz v. ORLA v. Perez, 816 F.3d 1080 (9th Cir. Federal minimum wage. Much of that
Wynn Las Vegasa private FLSA action 2016). The ORLA Plaintiffs argued that litigation involves the application of the
in which the plaintiffs-employees, the Ninth Circuits decision in ORLA Departments 2011 tip credit regulations
relying on the Departments 2011 cannot be reconciled with Woody Woo that bar employers from retaining and
regulations, alleged that the employer and reiterated their contention that the from sharing tips with employees who
violated the FLSA when it required its 2011 tip pooling regulation is an do not customarily and regularly receive
tipped employees to share their tips impermissible interpretation of the tips, even when the employers have not
with non-tipped employees, see 2014 FLSA. See id. at 11, 13. taken a tip credit. For example, in Trejo
WL 117579, at *1 (D. Nev. 2014) for On September 6, 2016, the ORLA v. Ryman Hospitality Properties, the
purposes of oral argument and panel denied the plaintiffs request for employees alleged that their employer,
disposition. See 816 F.3d 1080 n.* (9th panel rehearing, and a majority of the which had paid its tipped employees a
Cir. 2016).3 non-recused active judges voted to direct cash wage of at least the Federal
On February 23, 2016, the Ninth decline en banc review. See ORLA v. minimum wage, improperly required its
Circuit, reversing the district court, Perez, 816 F.3d 1080, rehg and rehg en tipped employees to contribute to a tip
upheld the validity of the 2011 tip banc denied, 843 F.3d 355, 356 (9th Cir. pool including employees who were not
regulations in ORLA v. Perez, 816 F.3d 2016). customarily and regularly tipped.
1080, 1090 (9th Cir. 2016). In deciding Judge OScannlain, joined by nine Sazzad v. Ryman Hosp. Properties, No.
ORLA, the Ninth Circuit concluded that other judges, dissented. See id. 8:13cv02911 (D. Md., April 21, 2014),
Woody Woo held only that section 3(m) (OScannlain, J., dissenting). Judge affd sub nom, Trejo, 795 F.3d 442 (4th
does not prohibit employers that do not OScannlain concluded that the Cir. 2015); see also Malivuk, 2016 WL
take a tip credit from instituting an Departments tip pooling regulation is 3999878, affd on other grounds,F.
invalid tip pool. See id. at 1088. Having precluded because the Ninth Circuit Appx , 2017 WL 2491498 (11th Cir.
found that the FLSA is silent with previously held in Woody Woo that the June 9, 2017); see also Brueningsen v.
respect to employers that do not take a FLSA clearly and unambiguously Resort Express Inc., 2015 WL 339671 (D.
tip credit, the Ninth Circuit concluded permits employers who forgo a tip Utah Jan. 26, 2015), recons. denied,
that the 2011 tip regulations were a credit to arrange their tip-pooling affairs 2016 WL 1181683 (D. Utah Mar. 25,
reasonable application of the agencys however they see fit. See id. at 358 2016), appeal filed (10th Cir., Nov. 16,
authority to fill gaps left by the text of (citing Cumbie v. Woody Woo, 596 F.3d 2016). Wynn, 2014 WL 117579 (D. Nev.
the FLSA, because the purpose of the at 579 n.6, 581, 581 n.11, 582, 583; Natl 2014) (employees alleged that the
Act does not support the view that Cable & Telecomms. Assn v. Brand X employer improperly required them to
Congress intended permanently to allow Internet Servs., 545 U.S. 967, 984
contribute to a tip pool that included
employers that do not take a tip credit (2005)). Based on this statutory
their supervisors), revd and remanded
to do whatever they wish with their construction, Judge OScannlain wrote,
by ORLA, 816 F.3d 1080 (9th Cir. 2016),
employees tips. See id. at 10891090. [T]he Department has not been
rehg and rehg en banc denied, 843
On April 6, 2016, the ORLA Plaintiffs delegated authority to ban tip pooling
F.3d 355 (9th Cir. 2016), pet. for cert.
filed a petition for panel rehearing and by employers who forgo the tip credit,
filed (Aug. 1 2016). Therefore, the
and [as such] the Departments assertion
application of the Departments
3 While ORLA was pending before the Ninth of regulatory jurisdiction is manifestly
regulations to employers who do not
Circuit, the Fourth Circuit heard Trejo v. Ryman contrary to the statute and exceeds [its]
Hospitality Properties, Inc., an appeal from a take a tip credit has gained increasing
statutory authority. Id. at 36364
district courts dismissal of a private FLSA action
(internal quotation marks omitted). importance in recent years.
in which plaintiffswhose employer did not claim
the tip creditsought to recoup tips that their The National Restaurant Association Additionally, the Tenth Circuit
employer required them to pay into an allegedly (and other plaintiffs in the OLRA recently ruled in Marlow v. The New
invalid tip pool. 795 F.3d 442 (4th Cir. 2015). The litigation) filed a petition for certiorari Food Guy, a private FLSA case in which
Department submitted a brief as amicus curiae
arguing that the 2011 tip-pooling regulation was with the Supreme Court, asking for the United States participated as amicus
valid and entitled to deference, but also pointing review of the Ninth Circuits decision in curiae, that the Departments 2011 tip
out that the FLSA provides a cause of action only ORLA, and that petition is pending. See regulations are invalid to the extent that
to recover unpaid minimum wages or overtime Sup. Ct. No. 16920 (certiorari petition they bar an employer from using or
compensation under sections 6 and 7 of the FLSA,
rather than to recover tips in and of themselves filed Jan. 19, 2017). The Wynn sharing tips with employees who do not
under section 3(m), and that plaintiffs had Defendants filed their own petition for customarily and regularly receive tips
expressly disclaimed any minimum wage violation. certiorari with the Supreme Court on when the employer pays a direct cash
See Br. of the United States as Amicus Curiae, Jan. August 1, 2016, which is also still wage of at least the Federal minimum
2015, at *12, *13, 2015 WL 191535, Trejo, 795 F.3d
442 (4th Cir. 2015). In other words, and as pending. Sup. Ct. No. 16163 (certiorari wage and does not claim a section 3(m)
explained further in footnote 10, infra, Plaintiffs did petition filed (Aug. 1 2016)). tip credit. See Marlow v. New Food Guy,
not argue that the effect of the invalid tip pool was As explained further in Part IV, Inc., 861 F.3d 1157 (10th Cir. 2017). In
to reduce their wages below the minimum wage, below, more employers are unable to Marlow, the plaintiff alleged that the
which would present a valid cause of action under
the FLSA. See id. at *12 (citing 29 U.S.C. 216(b)
claim a tip credit in 2017 than when the employer, which paid the plaintiff a
(private right of action limited to enforcing the Departments regulations were direct wage of at least the Federal
FLSAs minimum wage and overtime compensation promulgated in 2011 due to the minimum wage and did not claim a
provisions); see also 29 U.S.C. 216(c) (imposing increased number of states that require section 3(m) tip credit, violated section
similar limitations on the Secretarys ability to
enforce the FLSA)). The Fourth Circuit concluded
employers to pay their tipped 3(m) and the Departments 2011
that section 3(m) simply does not contemplate a employees a direct cash wage of at least regulations by retaining the tips
claim for wages other than minimum wage or the Federal minimum wage. Perhaps employees received from customers. Id.
overtime wages. Trejo, 795 F.3d at 448 (internal because of these changes to state law, at 115859. The district court dismissed
quotation marks omitted). See also Malivuk v.
Ameripark, 2016 WL 3999878, affd on other
there has been a significant amount of the plaintiffs claim, concluding that the
grounds,F. Appx , 2007 WL 2491498, (11th Cir. private litigation in recent years employer satisfied its obligations under
June 9, 2017). involving the tip pooling and tip the FLSA and that section 3(m) does not
provide a cause of action for lost tips. matter. In particular, the Department Department moves forward with
Marlow v. New Food Guy, Inc., No. 15 seeks to remove prohibitions on sharing rulemaking.
CV01327, 2016 WL 4920980, at *1 (D. tips with employees who do not
III. Legislative and Regulatory History
Colo. Feb. 17, 2016).4 On appeal, the customarily and regularly receive tips
of the Section 3(m) Tip Credit
United States, while also defending the including restaurant cooks,
validity of the Department of Labors dishwashers, and other traditionally As discussed above, Congress
2011 tip regulations, argued as a lower-wage job classificationswhen amended the FLSAs tip credit
threshold matter that the plaintiff failed their employer does not take a tip credit provision in 1974 to require an
to plead a claim under the FLSA under FLSA section 3(m) and all employer that elects to take a tip credit
because she did not allege that her employees are paid at least the full against its minimum wage obligations to
employers retention of her tips resulted Federal minimum wage. In light of all permit its tipped employees to retain all
in a minimum wage or overtime of these factors, the Department is tips they receive, except for those
violation. See Br. of the United States as proposing to rescind the parts of its tip distributed through a tip pool limited to
Amicus Curiae, Oct. 2016, 2016 WL regulations that apply to employers that customarily and regularly tipped
6566326, at *10. The Tenth Circuit pay a direct cash wage of at least the full employees. See Public Law 93259,
affirmed the district courts dismissal of Federal minimum wage and do not take 13(e). The legislative history
the plaintiffs claim, holding that the a tip credit against their minimum wage emphasizes that the employee-tip-
text of the FLSA limits an employers obligations. The Department also issued retention requirement was not
use of tips only when the employer a nonenforcement policy on July 20, intended to discourage the practice of
takes a tip credit, leaving [the 2017, whereby WHD will not enforce pooling, splitting, or sharing tips with
Department] without authority to the Departments regulations on the employees who customarily and
regulate to the contrary. See Marlow, retention of tips received by employees regularly receive tipse.g., waiters,
861 F.3d at 116364.5 with respect to any employee who is bellhops, waitresses, countermen,
The Department has taken into paid a cash wage of not less than the full busboys, [and] service bartenders, etc.
account the changed landscape and FLSA minimum wage ($7.25) and for S. Rep. No. 93690, at 43 (1974). On
extensive litigation since promulgating whom their employer does not take an the other hand, the Report explains,
its 2011 Final Rule. In that regard, the FLSA section 3(m) tip credit either for the employer will lose the benefit of
dissent to the denial of the petition for 18 months or until the completion of the tip credit if tipped employees are
rehearing en banc in ORLA is notable, this rulemaking, whichever comes first.6 required to share their tips with
not only because of the force of that This nonenforcement policy provides employees who do not customarily and
opinion but also because it drew the nationwide consistency while the regularly receive tipse.g., janitors,
support of nine other judges in the dishwashers, chefs, laundry room
Ninth Circuit. After considering the 6 This nonenforcement policy extends the attendants, etc. Id. 7
ORLA rehearing dissent and the Tenth agencys partial nonenforcement policy already in The language from the 1974
Circuits decision in Marlow, both of effect. In Oregon Restaurant and Lodging Assn v. amendments to section 3(m) is
which state that the Departments 2011 Solis, 948 F. Supp. 2d 1217 (D. Or. 2013), the U.S. essentially the same as the current
District Court for the District of Oregon declared the
Final Rule exceeded the agencys Departments 2011 regulations that limit an
version of the law. See 29 U.S.C.
authority under section 3(m), the employers use of tips received by its employees 203(m). Although section 3(m)s tip
Department is reconsidering its when the employer has not taken a tip credit credit provision has been amended
regulations to the extent that they apply against its minimum wage obligations to be invalid, three times since 1974in 1977, 1989,
and imposed injunctive relief, as described below.
to employers that pay a direct wage of Notwithstanding the Ninth Circuits decision in
and 1996these amendments changed
at least the Federal minimum wage and ORLA reversing that decision, the Department only the applicable amount of tips
do not claim a credit based on tips to continues to be constrained by the injunctive relief received by employees that could be
satisfy their minimum wage obligation. entered by the district court until the Ninth Circuit used as a credit against an employers
issues its mandate, which formally notifies the
The Department has serious concerns district court of the court of appeals decision;
minimum wage obligations. See Public
that it incorrectly construed the statute issuance of that mandate has been stayed until Law 95151, 3(b), 91 Stat. 1245 (1977);
in promulgating its current regulations, final disposition [of this litigation] by the Supreme Public Law 101157, 5, 103 Stat. 938
the scope of which extends to Court. ORLA v. Perez, No. 1335765 (9th Cir. Sept. (1989); and Public Law 104188,
13, 2016). For these reasons, the Department is
employers that have paid the full currently prohibited from enforcing its tip retention
2105(b), 110 Stat. 1755 (1996).8 In
Federal minimum wage to their tipped requirements against the Oregon Restaurant and
employees, particularly insofar as those Lodging Association plaintiffs (which include 7 The Department has concluded that employer-
employers, rather than taking the tips several associations, one restaurant, and one mandated tip pools described in section 3(m) may
individual) and members of the plaintiff also include employees in occupations with duties
for their own purposes, provide for such associations that can demonstrate that they were a analogous to those of the Senates list of
tips to be shared with other employees member on June 24, 2013. The plaintiff associations employees who customarily and regularly receive
through a tip pool. The Department also in the Oregon litigation were the National tips (waiters, bellhops, waitresses, countermen,
has independent and serious concerns Restaurant Association, Washington Restaurant busboys, service bartenders), such as barbacks. See
Association, Oregon Restaurant and Lodging Field Operations Handbook 30d04(b). Likewise, the
about those regulations as a policy Association, and Alaska Cabaret, Hotel, Restaurant, Department has concluded that employees who do
and Retailer Association. As a matter of not customarily and regularly receive tips, and
4 Following the Ninth Circuits decision in ORLA, therefore may not be included in an employer-
enforcement policy, the Department decided that
the plaintiff moved for reconsideration of the while the injunction is in place it will not enforce mandated tip pool described in 3(m), include
district courts decision. See Marlow, 861 F.3d at its tip retention requirements against any employer employees in occupations with duties analogous to
1159. The district court denied the plaintiffs that has not taken a tip credit in jurisdictions the Senates list of non-customarily tipped
motion, expressing its agreement with the ORLA within the Ninth Circuit. The Ninth Circuit has occupations (janitors, chefs or cooks, dishwashers,
dissent. See id.; Order on Plaintiffs Motion for appellate jurisdiction over the states of California, laundry room attendants), such as salad preparers
Reconsideration, Marlow, No. 15CV01327 (D. Co. Nevada, Washington, Oregon, Alaska, Idaho, and prep cooks. See Field Operations Handbook
Apr. 4, 2016). Montana, Hawaii, and Arizona; Guam; and the 30d04(f).
5 The plaintiff in Marlow petitioned for panel Northern Mariana Islands. See WHD, Fact Sheet 8 The 1977 amendments to the FLSA decreased
rehearing of the Tenth Circuits decision, which the #15: Tipped Employees Under the Fair Labor the section 3(m) tip credit to a maximum of 40
Court denied on July 20, 2017. See Order on Standards Act (FLSA), https://www.dol.gov/whd/ percent of the Federal minimum wage, while the
Appellants Petition for Panel Rehearing, Marlow, regs/compliance/whdfs15.pdf (last accessed June 1989 amendments returned it to a maximum of 50
No. 161134 (10th Cir. July 20, 2017). 12, 2017). Continued
amendments to the FLSA in 2007, over to the employer for use by the reasoning 9 and, on that premise,
Congress increased the minimum wage employer in satisfying the monetary concluded that a tipped employee who
in three steps to $7.25 per hour requirements of the Act. See Wage and is required to participate in a tip pool
beginning July 2009, but did not change Hour Opinion Letter FLSA626, 1974 that does not satisfy the criteria in
the definition of wage in section 3(m) WL 422051, at *2 (June 21, 1974). section 3(m) is effectively required to
for purposes of applying the tip credit contribute part of his or her property
The Department opined shortly after
formula. Public Law 11028, 8102(a), to the employer or to other persons for
the 1974 amendments that an
121 Stat. 112 (2007). Thus, the the benefit of the employer. Id. at *2.
maximum tip credit that an employer is employer may not take advantage of
Thus, under the erroneous reasoning
permitted to claim under section 3(m) Section 3(m) by using any part of his
reflected in that letter, even when an
today is $5.12 per hourthe current employees tips as a credit to meet his employer does not claim a tip credit to
Federal minimum wage, $7.25 per hour, monetary obligation unless the reduce the direct cash wage it pays and
29 U.S.C. 206(a)(1), minus $2.13or 71 employee is permitted to keep all tips does not use tips to fulfill any part of
percent of the current Federal minimum and, if an employer takes tips received its minimum wage obligation to its
wage. See 76 FR 18,832, 18,839. by an employee, then, in order to come tipped employees, mandating that a
As explained above, the Department into compliance, such employer must tipped employee contribute to a pool
promulgated its initial tip regulations in return the tips and pay the full statutory that includes employees in occupations
1967, one year after Congress created minimum wage. Wage and Hour that do not customarily and regularly
the tip credit in section 3(m), and Opinion Letter WH310, 1975 WL receive tips would become an issue
several years before the 1974 40934, at *1 (Feb. 18, 1975); see Wage under the minimum wage provisions of
amendments to section 3(m)s tip and Hour Opinion Letter WH386, 1976 the Act, if the employer does not pay
provisions. 32 FR 13,575 (Sept. 28, WL 41739, at *3 (July 12, 1976) a sufficiently high cash wage to
1967). Consistent with the Departments ([E]mployers must pay tipped reimburse such employee for such loss,
understanding of the 1966 amendments, employees at least half of the applicable plus at least the minimum wage. Id.10
the 1967 tip regulations permitted minimum wage (from their own In 2011, the Department issued a
agreements under which tips received pockets) for each hour worked, and may Final Rule addressing tip pooling and
by employees would be turned over to take a tip credit of no more than 50 other uses of tips. See 76 FR 18,832,
the employer, which could then use the percent of the required minimum 18,842. Revised 531.52 provides in
tips to pay the Federal minimum wage. wage.). To conclude otherwise, the
Cf. S. Rep. 1487, 89th Cong., 2d Sess. 12 relevant part that:
Department reasoned, would enable an
(1966) (explaining that such practices employer to circumvent section 3(m)s 9 The opinion letter, in the context of an employer
could continue under the 1966 restriction that employers use no more that did not take a 3(m) tip credit, stated that [t]he
amendments). than a limited portion of tips received courts have made clear that tips are the property of
Shortly after the 1974 statutory the employee to whom they are given. 1989 WL
by employees to satisfy their Federal
amendments, however, the Department 610348, at *2 (citing Barcellona v. Tiffany English
minimum wage obligations. Cf. Woody Pub, Inc., 597 F.2d 464, 466467 (5th Cir. 1979)).
addressed the impact of the
amendments on its tip regulations and Woo, 596 F.3d at 579 n.7. The Department acknowledges that that statement
is incorrect. Barcellona concluded that [i]f there
stated that its then-existing regulations The opinion letters issued shortly was no agreement as to ownership, then the tips
were superseded by the amendments to after the 1974 amendments were were the property of the recipient, and that the
the extent tha they were in conflict. primarily focused on whether it would trial evidence in that particular case supported the
factual finding that no such agreement existed. 597
Specifically, when asked about the constitute an impermissible F.2d at 467 (emphasis added) (citing Williams v.
legality of an agreement under which circumvention of section 3(m) of the Act Jacksonville Terminal Co., 315 U.S. 386, 397
the employer would retain all monies for an employer to utilize tips received (1940)); cf. Richard v. Marriott Corp., 549 F.2d 303,
generated by tips and directly pay its by its employees to satisfy its minimum 304305 (4th Cir. 1977) (concluding that tips
belong to the employee to whom they are left in
employees at the minimum wage rate, wage obligations to a greater extent than circumstances in which no contrary agreement
the Department stated that [t]he Congress expressly permitted in the existed and the employer simply undertook to pay
amendments to section 3(m) of the Act, Acts tip credit provision. In a 1989 the difference between the tips and the [minimum]
which specified that an employers opinion letter, however, the Department hourly wage).
10 The Department similarly stated in the
wage credit for tips (up to 50% of the opined that merely requiring tipped preamble to the 2011 Final Rule that, if, by
minimum wage) could not exceed the employees to participate in a tip pool requiring tipped employees to participate in a tip
amount of tips actually received by the that is not limited to employees in pool that does not satisfy the standards in section
employee, would have no meaning or customarily and regularly tipped 3(m) or by claiming and using the tips itself, such
effect unless they prohibit agreements an employer deducts sufficient tips to reduce the
occupationsi.e., a tip pool in a form employers direct wage payment to an amount
under which tips are credited or turned not expressly authorized by section below the minimum wage, the employer would
3(m)may also violate the FLSA, even violate section 6 of the FLSA and be subject to suit
percent of the Federal minimum wage. See Public under section 16 or 17. 76 FR 18,832, 18,842; see
Law 95151, 2(a), 3(b), 91 Stat. 1245 (1977);
when an employer has paid all of the also Notice of Proposed Rulemaking, 73 FR 43,654,
Public Law 101157, 2, 5, 103 Stat. 938 (1989). tipped and non-tipped employees in the 43,659 (July 28, 2008) (explaining that if an
The 1996 amendments froze the direct cash wage pool a direct cash wage equal to or employer paid the employee a direct wage in
that an employer must pay its tipped employees greater than the Federal minimum wage. excess of the minimum wage it would be able to
under section 3(m) at a minimum of 50 percent of make deductions [from the employees tips] so long
the minimum wage in effect on the date of their
See Wage and Hour Opinion Letter WH as they did not reduce the direct wage payment
enactment, or $2.13 per hour. See Public Law 104 536, 1989 WL 610348, at *3 (Oct. 26, below the minimum wage); Br. of the United
188, 2104(b), 2105(b), 110 Stat. 1755 (1996). 1989). In that letter, the Department States as Amicus Curiae, Jan. 2015, at 2, 2015 WL
This change shifted the amount of the maximum tip stated that tips are an employees 191535, Trejo v. Ryman Hospitality Indus., 795 F.3d
credit from a fixed percentage of the current Federal 442 (4th Cir. Jan. 2015) (pointing out that private
minimum wage to the difference between the property even when an employer pays plaintiffs who did not allege that the effect of their
current Federal minimum wage and the frozen a direct cash wage of at least the full employers tip pool was to reduce their wages
minimum direct cash payment, thus allowing the Federal minimum wage and does not below the minimum wage in violation of section 6
percentage of the Federal minimum wage covered failed to plead a cause of action under the FLSA
by the tip credit to increase as the minimum wage
claim a tip credit against its minimum because section 3(m) of the Act does not provide
rose. wage obligations based on erroneous a freestanding right to recover tips).
Tips are the property of the employee Commission, 46 Cal. 3d 1262, 127576 $9.35 in January 2018. Haw. Rev. Stat.
whether or not the employer has taken a tip (Cal. 1988) (holding that Labor Code Ann. 3872. In December 2015, New
credit under section 3(m) of the FLSA. The section 351, as amended in 1975, bar[s] York increased the direct cash wage
employer is prohibited from using an the establishment of a minimum wage employers that take a tip credit must
employees tips, whether or not it has taken
a tip credit, for any reason other than that
for tipped employees lower than the pay tipped food service employees and
which is statutorily permitted in section generally applicable minimum wage.); other service employees to at least $7.50
3(m): As a credit against its minimum wage Moen v. Las Vegas Intl Hotel, Inc., 402 per hour. See 12 NY ADC 1461.3 (Dec.
obligations to the employee, or in furtherance F. Supp. 157, 158 (D. Nev. 1975) 4, 2015).12 And in November 2016,
of a valid tip pool. (outlining requirements of Nev. Rev. Arizona and Colorado enacted ballot
Stat. 608.160); Wash. Atty Gen. Op. measures that will increase the direct
Id. at 18,855 (emphasis added). Under
1974 No. 18, 1974 WL 168752 cash wage employers that take a tip
the current regulations an employer that
(concluding that hotels and restaurants credit must pay tipped employees to at
pays a direct cash wage equal to or
must pay the full Washington minimum least the current Federal minimum wage
greater than the Federal minimum
wage to their tipped employees, and by January 2020. See Ariz. Proposition
wagejust like an employer that claims
may not take advantage of the section 206, approved Nov. 8, 2016 (amending
a tip credit to reduce the direct cash
3(m) tip credit, since, as it has long Ariz. Rev. Stat. Ann. 23363(C)); 2016
wage it paysmay require tipped
been administratively construed by the Colo. Legis. Serv. Init. Pet. 101
employees to participate in a tip pool
department of labor and industries, tips (amending Colo. Const. art. XVIII, 15).
that is limited to employees in Due to these changes, the share of
customarily and regularly tipped are . . . not included as a part of an
employees wages for the purposes of servers, bellhops and porters, counter
occupations, but it may not require attendants, bartenders, and dining room
tipped employees to participate in a tip the Washington law.); WHD, Minimum
Wages for Tipped Employees, January 1, attendants and bartender helpers 13 with
pool that includes employees who are employers that are or will be required
not in customarily and regularly tipped 2003, https://www.dol.gov/whd/state/
tipped2003.htm.11 under state law to pay a direct cash
occupations. Nor may an employer that wage of at least the Federal minimum
pays a direct cash wage equal to or Since the Department promulgated
the 2011 Final Rule, a number of wage to all or a portion of their tipped
greater than the Federal minimum wage employees has almost doubled, from
use its tips received by its employees for additional states have increased the
direct cash wage an employer must pay approximately 17 percent in 2011 to
any other purpose. approximately 31 percent today. See
some or all tipped employees under
IV. Recent Changes in State Tip Pooling state law. In August 2014, Minnesota Table A: WHD Analysis of BLS Data
Laws which prohibits employers from taking Regarding States that Require Employers
a tip credit against the state minimum to Pay Tipped Employees a Direct Cash
As a result of market forces and Wage At Least Equal to the Federal
changes in state wage laws, the number wageincreased its minimum wage for
large employers from $6.15 per hour to Minimum Wage.
of employers paying tipped employees a
direct cash wage that is equal to or $8.00 per hour (it was increased on V. The Department Is Proposing To
greater than the Federal minimum wage August 1, 2016 to $9.50 per hour) and Rescind Portions of Its Tip Regulations
(and thus not claiming a section 3(m) tip increased its minimum wage for small The Department seeks public
credit) has increased since the employers from $5.25 per hour to $7.25 comments, which should include
Department promulgated the 2011 Final per hour beginning in August 2015 (it is supporting data whenever possible, on
Rule. The Department believes that currently $7.75 per hour). See Minn. the proposed rescission of those
these changes also merit reconsideration Stat. Ann. 177.24, subd. 1, 2; 2014 portions of its 2011 tip regulations that
of the tip pooling restrictions imposed Minn. Sess. Law Serv. Ch. 166. As a apply to employers that pay tipped
on employers that do not claim a tip result, employers in Minnesota now employees a direct cash wage that is
credit under section 3(m). must pay tipped employees a direct equal to or greater than the Federal
Historically, six western states cash wage that is greater than the minimum wage and that do not claim a
(Alaska, California, Montana, Nevada, Federal minimum wage. In January tip credit. The Departments current
Oregon, and Washington) have 2015, Hawaiiwhich permits regulations require that tipped
prohibited employers from using tips employers to take a tip credit but employees retain all tips they receive
received by employees as a credit requires that the combined cash wage regardless whether the employer takes a
against their state minimum wagesall and tips must equal at least $7.00 more
of which today equal or exceed the than the state minimum wage 12 Effective December 31, 2016, New York has
Federal minimum wagethereby increased the direct cash wage four schedules of direct cash wages that employers
preventing employers in these states employers must pay tipped employees must pay tipped service workers and food service
to $7.25 per hour (the current Federal workers based on employer size and geographic
from claiming a section 3(m) tip credit location. See N.Y. Comp. Codes R. & Regs. tit. 12,
to reduce the direct cash wage they pay minimum wage). Haw. Rev. Stat. Ann. 1461.3. Currently, the lowest direct cash wage an
without incurring liability under state 3872. The minimum direct cash wage employer can pay to a tipped food service worker
law. See Alaska Stat. 23.10.065(a); Cal. an employer must pay a tipped in any part of the state is $7.50 per hour and the
employee in Hawaii is currently $8.50 lowest direct cash wage an employer can pay a
Lab. Code 351 (amended 1975); Mont. tipped service employee in any part of the state is
Code Ann. 393402, 392404 per hour and is scheduled to increase to $8.10 per hour. See id.
(originally enacted Sec. 2, Ch. 417 13 The BLS occupational categories of Waiters
11 Additionally, Connecticut has required and Waitresses, Baggage Porters and Bellhops,
(1971)), Mont. Admin. R. 24.16.1508(1);
employers to pay bartenders a direct cash wage of Counter Attendants, Cafeteria, Food Concession,
Nev. Rev. Stat. 608.160(1)(b); Or. Rev. at least the Federal minimum wage since 2001. See and Coffee Shop, Bartenders, and Dining Room
Stat. 653.035; Rev. Code Wash. Conn. Gen. Stat. Ann. 3158, 3160; Conn. Pub. and Cafeteria Attendants and Bartender Helpers
49.46.020, Wash. Admin. Code 296 Act. No. 00144 (May 26, 2000). Connecticut most closely correspond to the illustrative list of
126022 (effective 1974); see also currently requires bartenders to be paid a direct customarily and regularly tipped occupations in
cash wage of at least $8.23 per hour. See Conn. Gen. the Senate Report accompanying the 1974
Alaska School Bus Safety Act, 1990 Stat. Ann. 3158, 3160. It permits employers to amendments to the FLSA: waiters, bellhops,
Alaska Laws Ch. 12, 23.10.065 (1990); pay other tipped employees a minimum direct cash waitresses, countermen, busboys, [and] service
Henning v. Industrial Welfare wage of $6.38. See id. bartenders. See S. Rep. No. 93690, at 43 (1974).
tip credit under section 3(m). Employers the full Federal minimum wage and cash wage of at least the Federal
can only require tipped employees to does not take a tip credit, the proposed minimum wage and do not claim a tip
participate in a mandatory tip pool if rule would allow tip sharing in a credit against their minimum wage
the tip pool is limited to employees in manner currently prohibited by obligations.
customarily and regularly tipped regulation, including by sharing tips This NPRM uses the term tip
occupations, such as servers, bartenders, with employees who are not pooling to describe any scenario in
and bussers. As discussed above, this customarily and regularly tipped (e.g., which a tip provided by a customer to
regulatory restriction limiting tip pools restaurant cooks and dishwashers) an employee or group of employees is
to only customarily and regularly tipped through a tip pool. The proposed rule, shared, in whole or in part, with other
employees applies even when an therefore, provides such employers and
employer pays a direct cash wage of at employees. The Department recognizes
employees greater flexibility in that in some workplaces or under State
least the full Federal minimum wage determining the pay policies for tipped
and does not claim a credit pursuant to laws, the term tip pooling may refer
and non-tipped workers. It additionally to a narrower set of practices, and that
section 3(m).
The purpose of section 3(m)s tip allows them to reduce wage disparities employers and workers may use other
credit provision is to allow an employer among employees who all contribute to termsfor example tip out, tip
to subsidize a portion of its Federal the customers experience and to sharing, or tip jarto describe
minimum wage obligation by crediting incentivize all employees to improve certain practices regarding tips.
the tips customers give to employees. If that experience regardless of their Accordingly, the Department asks
an employer takes a tip credit against its position. In sum, due to the commenters to define in their comments
wage obligations, section 3(m) applies, Departments serious concerns that it any terms they use to describe practices
along with its attendant protections that incorrectly construed the statute in regarding tips. The Department will
restrict the employers use of tips promulgating its current tip regulations consider information provided by the
received by its employees. Where an to cover employers who pay a direct public in response to this NPRM in
employer has paid a direct cash wage of cash wage of at least the full Federal finalizing its proposal to amend 29 CFR
at least the full Federal minimum wage minimum wage, as well as the various part 531, subpart D, as it applies to
and does not take the employee tips other reasons described in this NPRM, situations where an employer pays
directly, a strong argument exists that the Department is proposing to rescind tipped employees a direct cash wage
the statutory protections of section 3(m) the portions of the current regulations that is at least the Federal minimum
do not apply.14 But if an employer pays that apply to employers that pay a direct wage.
TABLE AWHD ANALYSIS OF BLS DATA REGARDING STATES THAT REQUIRE EMPLOYERS TO PAY TIPPED EMPLOYEES A
DIRECT CASH WAGE AT LEAST EQUAL TO THE FEDERAL MINIMUM WAGE
Servers;
bartenders;
Counter Dining room and counter
Servers attendants, cafeteria Baggage attendants;
(waiters & Bartenders cafeteria, food attendants and porters & dining room &
State waitresses) SOC Code concession, and bartender bellhops cafeteria
SOC Code 353011 coffee shop helpers SOC Code attendants &
353031 SOC Code SOC Code 396011 bartenders
353022 359011 helpers;
porters &
bellhops
Direct cash wage for tipped employees at least equal to the Federal minimum wage, 2011 15
Alaska .................. 3690 1930 1550 1020 190 8380

California .............. 233330 45280 61040 61380 4800 405830
Montana ............... 8780 4550 690 1060 90 15170
Nevada ................. 37380 13420 3960 11050 3080 68890
Oregon ................. 26530 9340 5100 3320 340 44630
Washington .......... 41160 12530 19080 8430 920 82120
Subtotal ......... 350870 86450 91420 86260 9420 624420
Total,
U.S. .... 2289010 512230 441830 391290 44130 3678490
% U.S. total .......... 15.33% 16.88% 20.69% 22.05% 21.35% 16.97%
Direct cash wage for tipped employees equal to or scheduled to reach at least Federal minimum wage, present 16
Alaska .................. 4260 1740 2540 920 90 9550

Arizona ................. 53580 11150 8340 9610 740 83420

California .............. 280100 57340 47970 71460 5660 462530
Colorado ............... 52540 12560 4530 7490 640 77760
Connecticut .......... 28430 7740 5480 3430 180 45260
14 If an employer pays its tipped employees a there is a question as to whether the employer is than permitted under the statute for employers that
direct cash wage of at least the full Federal circumventing the protections of section 3(m) take the tip credit. The Department will consider
minimum wage but takes its employees tips to because it is utilizing its employees tips towards whether additional guidance on this circumvention
satisfy the entirety of its minimum wage obligation, its minimum wage obligations to a greater extent issue should be issued in the future.
TABLE AWHD ANALYSIS OF BLS DATA REGARDING STATES THAT REQUIRE EMPLOYERS TO PAY TIPPED EMPLOYEES A
DIRECT CASH WAGE AT LEAST EQUAL TO THE FEDERAL MINIMUM WAGEContinued
Servers;
bartenders;
Counter Dining room and counter
Servers attendants, cafeteria Baggage attendants;
(waiters & Bartenders cafeteria, food attendants and porters & dining room &
State waitresses) SOC Code concession, and bartender bellhops cafeteria
SOC Code 353011 coffee shop helpers SOC Code attendants &
353031 SOC Code SOC Code 396011 bartenders
353022 359011 helpers;
porters &
bellhops
Hawaii .................. 16110 3200 5470 5130 1380 31290

Minnesota ............. 50230 17270 15060 4040 330 86930
Montana ............... 8540 5340 870 1040 70 15860
Nevada ................. 39450 14870 4670 13070 2710 74770
New York ............. 155540 43670 31470 33390 4250 268320
Oregon ................. 33100 9040 9950 4270 270 56630
Washington .......... 48380 13520 13380 8240 520 84040
Subtotal ......... 770260 197440 149730 162090 16840 1296360
Total,
U.S. .... 2564610 603320 499550 423080 44750 4135310
% U.S. total .......... 30.03% 32.73% 29.97% 38.31% 37.63% 31.35%
VI. Paperwork Reduction Act regulatory action is significant and, difficult to quantify and provides that,
The Paperwork Reduction Act of 1995 therefore, subject to the requirements of where appropriate and permitted by
(PRA), 44 U.S.C. 3501 et seq., and its the Executive Order and review by law, agencies may consider and discuss
attendant regulations, 5 CFR part 1320, OMB. 58 FR 51735. Section 3(f) of qualitatively values that are difficult or
require the Department to consider the Executive Order 12866 defines a impossible to quantify, including
significant regulatory action as an equity, human dignity, fairness, and
agencys need for its information
action that is likely to result in a rule distributive impacts.
collections, their practical utility, as
that: (1) Has an annual effect on the Executive Order 13771 (E.O. 13771)
well as the impact of paperwork and
economy of $100 million or more, or directs agencies to reduce regulation
other information collection burdens
adversely affects in a material way a and control regulatory costs by
imposed on the public, and how to
sector of the economy, productivity, eliminating at least two existing
minimize those burdens. The PRA
competition, jobs, the environment, regulations for each new regulation, and
typically requires an agency to provide
public health or safety, or State, local or by controlling the cost of planned
notice and seek public comments on
tribal governments or communities (also regulations through the budgeting
any proposed collection of information
referred to as economically significant); process. See 82 FR 9339. In relevant
contained in a proposed rule. See 44 (2) creates serious inconsistency or
U.S.C. 3506(c)(2)(B); 5 CFR 1320.8. part, OMB defines an E.O. 13771
otherwise interferes with an action regulatory action as a significant
This NPRM does not contain a taken or planned by another agency; (3)
collection of information subject to regulatory action as defined in section
materially alters the budgetary impacts 3(f) of E.O. 12866 that has been finalized
OMB approval under the Paperwork of entitlement grants, user fees, or loan
Reduction Act. The Department and that imposes total costs greater than
programs, or the rights and obligations zero. 17 By contrast, an E.O. 13771
welcomes comments on this of recipients thereof; or (4) raises novel
determination. deregulatory action is defined as an
legal or policy issues arising out of legal action that has been finalized and has
VII. Analysis Conducted in Accordance mandates, the Presidents priorities, or total costs less than zero. 18 For the
With Executive Order 12866, the principles set forth in the Executive purposes of E.O. 13771, it is expected
Regulatory Planning and Review, Order. Id. OMB has determined that this that this proposed rule would, if
Executive Order 13563, Improved proposed rule is a significant finalized as proposed, qualify as an
Regulation and Regulatory Review, and regulatory action under section 3(f) of E.O. 13771 deregulatory action.
Executive Order 13771, Reducing Executive Order 12866.
Regulation and Controlling Regulatory Executive Order 13563 directs A. The Need for Rulemaking
Costs agencies to propose or adopt a As explained earlier in Part IV of this
regulation only upon a reasoned notice, more employers are unable to
Under Executive Order 12866, the determination that its benefits justify its
Office of Management and Budgets claim a tip credit in 2017 than when the
costs; it is tailored to impose the least Departments regulations were
(OMBs) Office of Information and burden on society, consistent with
Regulatory Affairs determines whether a promulgated in 2011 due to the
achieving the regulatory objectives; and increased number of states that require
in choosing among alternative employers to pay their tipped
15 These employment figures are from the May
regulatory approaches, the agency has
2011 BLS Occupational Employment Statistics
(OES) Survey. selected those approaches that 17 OIRA Memo M1721, Guidance Implementing
16 These employment figures are from the May maximize net benefits. Executive Order Executive Order 13771 (April 5, 2017).
2016 BLS OES Survey. 13563 recognizes that some benefits are 18 Id.
employees a direct cash wage of at least from the proposed rule.19 The potential Department understands that there are
the current $7.25 per hour Federal benefits and transfers have not been other occupations with tipped workers
minimum wage. Perhaps because of quantified in this NPRM. such as SOC 359011 (Dining room and
these changes to state law, there has There are labor market forces that will Cafeteria Attendants and Bartender
been a significant amount of private affect employers decisions on tips that Helpers) and SOC 359031 (Hosts and
litigation in recent years involving the employees receive. For example, there Hostesses, Restaurant, Lounge, and
tip pooling and tip retention practices of are certain market factors that may Coffee Shop), and others; thus, the
employers that pay a direct cash wage cause employers not to change their Department welcomes comments and
of at least the Federal minimum wage. practices with respect to tips, such as suggestions on whether this analysis
See, e.g., Trejo v. Ryman Hosp. employee resistance and a decline in should extend to additional tipped
Properties, 795 F.3d 442 (4th Cir. 2015); employee morale, as well as the costs of occupations. The Department focused
Aguila v. Corp. Caterers IV, 199 F. employee turnover. The Department is on employees in those two occupations
Supp. 3d 1358 (S.D. Fla. 2016), affd sub unable to quantify how customers will in the two industries in which they are
nom. 2017 WL 1101081 (11th Cir. Mar. respond to proposed regulatory changes, primarily concentrated. The two
24, 2017); Marlow v. The New Food which in turn would affect total tipped industries are classified under the North
Guy, Inc., 861 F.3d 1157 (10th Cir. income and employer behavior. American Industry Classification
2017). The Department welcomes comments System (NAICS) as 722410 (Drinking
that provide data or information Places (Alcoholic Beverages)) and
In part because of these
regarding the potential benefits and 722511 (Full-service Restaurants). The
developments, the Department has
transfers of this proposed rule, and has Department understands that there are
serious concerns that it incorrectly
asked some specific questions that may other industries with tipped workers,
construed the statute in promulgating its
help the Department quantify benefits and welcomes comments and
current tip regulations as applied to
and transfers in the Final Rule analysis. suggestions on whether this analysis
employers that have paid the full
See Section VII.B.iv. should extend to those additional
Federal minimum wage to their tipped
employees, and serious concerns about ii. Estimated Number of Affected industries, and if so, which industries
the regulations as a policy matter, Workers and Firms and why.
especially under changed The Department used the Current
This section explains the Population Survey (CPS), a large,
circumstances. Additionally, the methodology used to estimate the
Department seeks to remove nationally representative sample of the
number of workers who are defined as labor force, for data on the number of
prohibitions on sharing tips with non- a tipped employee, i.e., where a tipped
customarily tipped employees workers employed in the two
employee means any employee engaged occupations mentioned above, the
including restaurant cooks, in an occupation in which he or she
dishwashers, and other traditionally wages for these workers, and their usual
customarily and regularly receives more hours worked. The CPS, which is
lower-wage job classificationswhen than $30 a month in tips. See 29 U.S.C.
their employer does not take a tip credit sponsored jointly by the U.S. Census
203(t). In the absence of data to Bureau and BLS, is a monthly survey of
under FLSA section 3(m) and all specifically categorize employees by the
employees are paid at least the full about 60,000 households. In any given
definition above, the Department relied month, one adult household member
Federal minimum wage. The on a broader definition as allowed by
Department is therefore proposing to reports employment and other
the available data, where the minimum information for each member of the
rescind the portions of its tip tip amount received is relaxed (that is,
regulations at 29 CFR part 531, subpart household.21 Households are surveyed
this analysis does not consider the $30- for four months, excluded from the
D that limit employee arrangements to a-month threshold), and where the focus
share tips by imposing restrictions on survey for eight months, surveyed for an
is on tipped employees who are additional four months, then
employers that pay a direct cash wage classified under two Bureau of Labor
of at least the full Federal minimum permanently dropped from the sample.
Statistics (BLS) Standard Occupational During the last month of each rotation
wage and do not claim a tip credit Classification (SOC) codes: SOC 35
against their minimum wage obligation. in the sample (month 4 and month 16),
3031 (Waiters and Waitresses) and SOC employed respondents complete a
The Department also issued a 353011 (Bartenders).
nonenforcement policy on July 20, 2017, supplementary questionnaire in
For the present analysis, the addition to the regular survey. These
whereby WHD will not enforce the Department considered these two
Departments regulations on the households and questions form the CPS
occupations as they constitute a large Merged Outgoing Rotation Group (CPS
retention of employees tips with percentage of tipped workers.20 The
respect to any employee who is paid a MORG) and provide more detailed
cash wage of not less than the full FLSA 19 The Department focused on two industries,
information about those surveyed.
minimum wage ($7.25) and for whom which are classified under the North American The CPS asks respondents whether
their employer does not take an FLSA Industry Classification System (NAICS) as 722410 they usually receive overtime pay, tips,
section 3(m) tip credit, either for 18 (Drinking Places (Alcoholic Beverages)) and 722511 and commissions, which allows the
(Full-service Restaurants, the focus is on tipped Department to estimate the number of
months or until the completion of this employees who are classified under two Bureau of
rulemaking, whichever comes first. Labor Statistics (BLS) Standard Occupational bartenders and wait staff in restaurants
Classification (SOC) codes: SOC 353031 (Waiters
B. Economic Analysis and Waitresses) and SOC 353011 (Bartenders). a Minimum-Wage Increase on Employment and
20 Source: Bureau of Labor Statistics, Current Family Income (https://www.cbo.gov/sites/default/
i. Introduction Population Survey, Table 11b. Employed Persons files/113th-congress-2013-2014/reports/44995-
by Detailed Occupation and Age, 2016 (https:// MinimumWage.pdf).
This economic analysis provides a www.bls.gov/cps/cpsaat11b.pdf). The number of 21 See Current Population Survey, U.S. Census
quantitative analysis of the rule bartenders and wait staff were calculated as a Bureau, https://www.census.gov/programs-surveys/
familiarization costs of the proposed percentage of total employment in 11 occupations cps.html (last visited July 17, 2017); CPS Merged
in which compensation depends heavily on tips. Outgoing Rotation Groups, NBER, http://
rule, and a qualitative discussion of the The 11 occupations are based on a 2014 www.nber.org/data/morg.html (last visited July 17,
benefits and transfers that may result Congressional Budget Office report, The Effects of 2017).
and drinking places who receive tips. is also assumed to be minimal. of the share of bartenders and wait staff
CPS data, however, are not available Therefore, where bartenders and wait in restaurants and drinking places who
separately for overtime pay, tips, and staff responded affirmatively to this reported that they usually earned
commissions, but the Department question, the Department assumes that overtime pay, tips, or commissions in
assumes very few bartenders and wait they receive tips. 2016. Approximately 61 percent of
staff at restaurants and drinking places All data tables in this analysis include bartenders and 57 percent of wait staff
receive commissions, and the number estimates for the year 2016 as the reported usually earning overtime pay,
who receive overtime pay but not tips baseline. Table 1 presents the estimates tips, or commissions in 2016.
TABLE 1SHARE OF BARTENDERS AND WAITERS/WAITRESSES IN RESTAURANTS AND DRINKING PLACES WHO EARNED
OVERTIME PAY, TIPS, OR COMMISSIONS, 2016
Number who
Number of Percent who
responded Yes
bartenders and responded Yes to
to earning
Occupation waiters/waitresses earning overtime
overtime pay,
in restaurants and pay, tips, or
tips, or
drinking places commissions
commissions
Total ..................................................................................................................... 2,265,705 1,298,231 57

Bartenders .................................................................................................... 357,727 218,989 61
Waiters and waitresses ................................................................................ 1,907,979 1,079,243 57
Source: 2016 Current Population Survey. The Department used DataFerrett to extract basic monthly CPS data.
Occupations: Bartenders (Census Code 4040) and Waiters and Waitresses (Census Code 4110).
Industries: Restaurants and other food services (Census Code 8680) and Drinking places, alcoholic beverages (Census Code 8690).
The Department used data from BLS law, and is therefore unable to Department recognizes that in some
Quarterly Census of Employment and determine to what extent state law will workplaces or under State laws, the
Wages (QCEW) to estimate the affect employer behavior in light of the term tip pooling may refer to a
familiarization cost (Section VII.B.iv). proposed changes. It is assumed, narrower set of practices, and that
The Department believes regulatory however, that about 30 percent of all employers and workers may use other
familiarization will occur at the specific waiters and waitresses and bartenders termsfor example tip out, tip
establishment level rather than the work in states that prohibit employers sharing, or tip jarto describe
broader firm level.22 from obtaining tips received by certain practices regarding tips.
iii. Qualitative Analysis employees.24 In these states, employers Accordingly, the Department asks
must continue complying with state commenters to define in their comments
Under this NPRM, employers that pay law, and therefore tipped employees in any terms they use to describe practices
at least the full FLSA minimum wage these states may not be impacted by the regarding tips. Specifically, the
directly to tipped employees could changes proposed in this NPRM. The Department solicits comments with
utilize some or all of the tips received potential transfers of tips would depend supporting data to the following issues:
by employees for purposes currently on employer behavior, employee 1. Among employers that currently
prohibited by the regulations (i.e., for behavior, customer behavior, and other pay a direct cash wage of at least the
purposes other than a tip pool limited factors. The Department seeks public Federal minimum wage and do not take
to customarily and regularly tipped comments, which should include a tip credit, what portion reallocate tips,
employees) or when employers that supporting data whenever possible, on with other employees? And, among that
currently claim the section 3(m) tip tip pooling practices in workplaces population of employers, what portion
credit increase the cash wages of their where an employer pays tipped of the total tips do they retain or
tipped employees to at least the full employees a direct cash wage that is reallocate?
FLSA minimum wage and then utilize equal to or greater than the Federal 2. How prevalent are employer-
some or all of the tips received by required, or mandatory, tip pools? What
minimum wage. The Department uses
employees for purposes currently factors determine whether an employer
the term tip pooling to describe any
prohibited by the regulations.23 institutes a mandatory tip pool? What
The Department does not attempt to scenario in which a tip provided by a
customer to an employee or group of portion of the tips received by
definitively interpret individual state employees do employers anticipate
employees is redistributed, in whole or
22 An establishment is commonly understood as in part, with other employees.25 The being contributed to the tip pool? What
a single economic unit, such as a farm, a mine, a kinds of factors might influence an
factory, or a store, that produces goods or services. 24 See, e.g., Cal. Labor Code 351 (Every gratuity employers decision to exclude some
Establishments are typically at one physical is hereby declared to be the sole property of the tips from inclusion in a mandatory tip
location and engaged in one, or predominantly one, employee or employees to whom it was paid, given,
type of economic activity for which a single or left for.); N.Y. Lab. Law 196d (No employer
pool?
industrial classification may be applied. An . . . shall demand or accept, directly or indirectly, 3. Do tipped employees receiving
establishment is in contrast to a firm, or a company, any part of the gratuities, received by an employee, money from a mandatory tip pool
which is a business and may consist of one or more or retain any part of a gratuity or of any charge typically receive a fixed dollar amount,
establishments, where each establishment may purported to be a gratuity for an employee.). The
participate in a different predominant economic Department seeks comments regarding how certain
or a fixed percentage of the pool? Is it
activity. See Quarterly Census of Employment and state laws apply to the retention of tips when the common for some employees to receive
Wages: Concepts, https://www.bls.gov/opub/hom/ employer pays the full minimum wage directly and
cew/concepts.htm. does not take a tip credit. Such information may contribute a portion of her tips to a tip pool, but
23 Under the Departments proposed rule, assist the Department in providing a more detailed only if the pool is limited to employees who
employers that do take a tip credit will still be analysis in the final rule. customarily and regularly receive tips. Public Law
subject to section 3(m)s restrictions on the use of 25 Under the Departments current regulations, an 93259, 13(e), (i.e., a valid tip pool). See 531.54;
employee tips. employer can lawfully mandate that an employee Field Operations Handbook 30d04(a).
a larger share of the tip pool than iv. Estimated Costs and Cost Savings to familiarization occurs both the
others,26 or are tips typically distributed Employers headquarters and at the decentralized
on an even basis among all participants (i.e., establishment) level.
in the tip pool? In this subsection, the Department
addresses regulatory familiarization The Department assumes that all
4. If this proposed rule were adopted establishments will incur some
as proposed, what kinds of employees costs and recordkeeping costs and cost
savings attributable to the proposed regulatory familiarization costs
would employers choose to include in regardless of whether the employer
mandatory tip pools? rule. The Department also presents a
qualitative discussion of potential decides to change its tip practices as a
5. If this proposed rule were adopted
benefits and the impacts of the proposed result of the proposed rule. There may
as proposed, would customers tipping
rule on wages and employment, as well be differences in familiarization cost by
practices change?
6. If this proposed rule were adopted as possible changes to customers the size of establishments; however, our
as proposed, would some employers tipping behavior resulting from analysis does not compute different
respond by reallocating tipped income employers reallocating tips to other costs for establishments of different
to their non-tipped employees? Would employees. sizes. The estimate of regulatory
such a response reduce the disparity in familiarization cost in the analysis is
1. Regulatory Familiarization Costs assumed to be conservative. Further, the
take-home earnings between tipped and
non-tipped employees in service Regulatory familiarization costs change in this regulation is quite
industry establishments? represent direct costs on businesses straightforward and is unlikely to have
7. If this rule were adopted as associated with reviewing the new a major burden or cost.
proposed, what non-regulatory regulation. It is not clear whether To estimate the total regulatory
limitations would employers and regulatory familiarization costs are a familiarization costs, the Department
employees face when deciding whether function of the number of used: (1) The number of establishments
and how to design a tip pooling establishments or the number of firms. in the two industries, Drinking Places
arrangement? Are there any market It can be assumed that the headquarters (Alcoholic Beverages) and Full-service
norms or other behavioral reasons why of a firm will conduct the regulatory Restaurants, employing affected
some types of tip pooling are more review for businesses with multiple workers; (2) the wage rate for the
prevalent than others? To what extent is restaurants, and may also require chain employees reviewing the rule; and (3)
the endowment effect (that is, restaurants to familiarize themselves the number of hours that it estimates
customarily and regularly tipped with the regulation at the establishment employees will spend reviewing the
employees potentially valuing tips more level. To be conservative, the rule. Table 2 shows the number of
than wages of the same average amount) Department used the number of establishments in the two industries. To
relevant for explaining potential tip establishments in its cost estimate estimate the number of affected
behavior in a relatively less-regulated which is larger than the number of establishments, the Department used
market? firmsand assumes that regulatory data from BLSs QCEW.
TABLE 2NUMBER OF ESTABLISHMENTS WITH TIPPED WORKERS, 2016

Industry Establishments
NAICS 722410 (Drinking Places (Alcoholic Beverages)) .............................................................................................................. 43,152

NAICS 722511 (Full-service Restaurants) .................................................................................................................................... 238,776
Total ........................................................................................................................................................................................ 281,928

Source: QCEW, 2016.
For familiarization cost analysis, the cost per establishment is $12.17 for 15 2. Other Potential Costs or Cost Savings
Department assumes that a minutes of review time. The number of
Compensation/benefits specialist (SOC establishments in the selected industries If employers that are currently taking
131141) (or a staff member in a similar was 281,928 in 2016. Therefore, the section 3(m) tip credit continue to
position) with a median wage of $29.85 regulatory familiarization costs in Year do so, their recordkeeping
responsibilities under the FLSA
per hour in 2016 will review the rule.27 1 are estimated to be $3.431 million
regulation, 29 CFR 516.28, would not
Given the change proposed, the ($12.17 281,928 establishments),
change under the proposed rule.
Department assumes that it will take which amounts to a 10-year annualized
However, if employers decide to pay the
about 15 minutes to review the final cost of $390,510 at a discount rate of 3 full FLSA minimum wage in cash and
rule. Assuming benefits are paid at a percent or $456,548 at a discount rate of do not take a section 3(m) tip credit,
rate of 46 percent of the base wage, and 7 percent.28 Regulatory familiarization they may have cost savings, because
overhead costs are 17 percent of the costs in future years are assumed to be they will no longer need to keep the
base wage, the reviewers effective de minimis. specific records required under 29 CFR
hourly rate is $48.66; thus, the average
516.28.
26 Woody Woo, 596 F.3d 577, addressed the including reporting requirements; evaluates job Specialists, https://www.bls.gov/oes/current/
legality of a tip pool where between 55 to 70 positions, determining classification, exempt or oes131141.htm (last visited on July 20, 2017).
percent of the tip pool went to kitchen staff (e.g., non-exempt status, and salary; plans, develops, 28 This regulatory familiarization cost cannot be
dishwashers and cooks), with the remaining 30 to evaluates, improves, and communicates methods subtracted from any current compliance costs
45 percent returned to servers in proportion to their
and techniques for selecting, promoting, because there was no Regulatory Impact Analysis in
hours worked. Id. at 57879.
27 Compensation/benefits specialist ensures
compensating, evaluating, and training workers. the 2011 rule. Costs incurred in 2011 are sunk from
company compliance with federal and state laws, 131141 Compensation, Benefits, and Job Analysis the perspective of employers in 2017.
To the extent that some employers FLSA minimum wage in cash and not Department has not quantified a
choose to change their practices and pay take a section 3(m) tip credit is a choice monetary value for any additional costs
at least the full FLSA minimum wage in some employers may make in or cost savings in this NPRM. The
cash and not take a section 3(m) tip responding to the proposed rule, but is Department invites comments regarding
credit, they may have to revise their not a requirement of the regulation. Due any potential costs or cost savings
employee handbooks, adjust their to the many variables and assumptions attributable to the proposed rule.
payroll systems, and/or advise affected needed to estimate how employers will
employees. These are generally regarded respond to the proposed regulatory v. Summary of Familiarization Costs
as adjustment costs that would be changes and insufficient information at
imposed by changes in the regulations. this time regarding the costs that Below the Department provides a
The Department recognizes, however, employers may assume or not incur as summary table of the quantified costs
that deciding to pay at least the full a result of the proposed rule, the for the RIA.
TABLE 3REGULATORY FAMILIARIZATION COSTS

Disc rate = 3% Disc rate = 7%
First Year Costs ($ million) .......................................................................................................................... $3.431 $3.431

10-year Annualized Costs ($) ...................................................................................................................... 390,510 456,548
C. Discussion of Benefits and Other managements perspective, tip pooling employees. Reducing turnover may
Potential Impacts of the Proposed Rule may foster service that is customer- increase productivity, at least partially,
focused and promotes a setting where because new employees have less firm-
i. Benefits
employees get along well, and may specific capital (i.e., skills and
The purpose of section 3(m)s tip increase productivity.30 These studies knowledge that have productive value
credit provision is to allow an employer suggest that expanding the tip pool to in only one particular company) and
to subsidize a portion of its Federal include non-tipped employees may lead thus are less productive and require
minimum wage obligation through a to enhanced interaction and cooperation additional supervision and training.
credit against the tips given to between coworkers, and increased Replacing experienced workers with
employees by customers. If an employer quality of service. On the other hand, a new workers decreases productivity in
takes a tip credit against its wage recent meta-analysis indicates that tips the short term; avoiding the need to
obligations, section 3(m) applies, along may be more a function of server looks replace experienced workers may, thus,
with its attendant provisions that and friendliness, the customers mood, increase productivity. Reduced turnover
restrict the employers use of tips and even the weather than they are of should also reduce firms hiring and
received by employees, including the aspects of service quality that depend training costs, leading to increased
requirement that only tipped employees on cooks, dishwashers, or other back-of- profitability. Although there may be
be included in the tip pool. However, house staff who might newly be increased turnover among tipped
where an employer has paid employees included in tip pools as a result of this employees who would lose a portion of
a direct cash wage of at least the full proposed policy.31 Under the proposed the tips they currently receive, thus
Federal minimum wage, the proposed changes, the employer will be able to leading to effects that are opposite in
rule would allow the employer to distribute customer tips to non-tipped direction to the previously-discussed
reallocate tips received by its employees employees, possibly resulting in impacts, employers are best positioned
in a manner currently prohibited by increased earnings for those employees. to consider those issues and determine
regulation, including distributing tips to Also, research demonstrates a the optimum distribution of tipped
non-tipped employees (e.g., cooks or negative correlation between earnings income among their staff for the purpose
dishwashers) through a tip pool. The and employee turnover: As earnings of reducing employee turnover.
proposed rule, therefore, provides increase, employee turnover To the extent employers overall
employers greater flexibility in decreases.32 If earnings increase for decrease use of the tip credit for
determining the pay policies for tipped previously non-tipped employees who traditionally tipped employees because
and non-tipped workers. Theoretically, are newly added to a tip pool (or tip of this proposed rule change, that too
it additionally allows them to reduce pools), then employers may see a may provide benefits to traditionally
wage disparities among employees who decreased turnover rate amongst these tipped employees. A guaranteed direct
all contribute to the customers cash wage of at least the full federal
experience and incentivize all Laborers Perspective. (2004) available at http:// minimum wage will improve
employees to improve that experience
law.bepress.com/alea/14th/art54. traditionally tipped employees
30 Ofer H. Azar, The implications of tipping for
regardless of position. participation in various aspects of the
economics and management, 30 (10) International
marketplace that irregular income from
It is common in full-service Journal of Social Economics. 10841094 (2003).
31 Michael Lynn and Michael McCall, Beyond changes over time from tip income may
restaurants to have a tip pool. One study
Gratitude and Gratuity: A Meta-Analytic Review of impact adversely. As with the previous
suggests that tip pooling contributes to the Predictors of Restaurant Tipping. Cornell paragraph, the benefits to one subset of
increased service quality, along with University Working Paper (2016), available at employees (in this case, those who were
enhanced interaction and cooperation http://scholarship.sha.cornell.edu/cgi/
viewcontent.cgi?article=1021&context= previously paid a lower direct wage and
between coworkers, especially when
workingpapers. received tips and now receive an
team members rely on input or task 32 Rodger W. Griffeth, Peter W. Hom, and Stefan increased direct wage payment from the
completion from each other.29 From Gaertner. A Meta-Analysis of Antecedents and employer) may be accompanied by harm
Correlates of Employee Turnover: Update,
29 Samuel Estreicher and Jonathan Nash, Moderator Tests, and Research Implications for the
to another subset (those who newly
American Law & Economics Association Annual Next Millennium. 26 (3) Journal of Management. receive tips while experiencing an
Meetings, The Law and Economics of Tipping: The 463488 (2000). offsetting wage reduction).
To the extent employers may qualitative discussion of the possible it may increase the employers demand
otherwise make an arrangement to impacts of the proposed rule on for labor.34 35
allocate any customer tips to make employment and earnings and customer However, for reasons such as sticky
capital improvements to their tipping behavior. wages 36 in the short run and
establishments (e.g., enlarging the inflexibility in substituting between
1. Possible Employment and Earnings labor and capital, the above discussion
dining area to accommodate more
Impacts of the Transfer of Tips of the potential effect on employment
customers), lower restaurant menu
prices, provide new benefits to workers Research on how changes in the and wages in this analysis may be only
(e.g., paid time off), increase work minimum required cash wage for tipped valid in the medium to long run.
hours, or hire additional workers, these employees affect their earnings and Further, the overall consequences of this
are also potential benefits to employees employment is scarce, making the proposed rule on employment and
and the economy overall that may result effects of these policies difficult to earnings will be driven by the
under the proposed rule. The rules gauge. There is need for more research employers response to this rule; i.e.,
transfer impacts could be approached as tipped employment has been growing whether establishments continue taking
with a model of minimum wages being considerably. From 1990 to 2016 private the tip credit, and what proportion of
made less binding by the proposed sector employment grew by 31.8 employers switch from taking the tip
policy; as such, employment in the percent, while employment in full credit to not taking the tip credit.
affected industries and occupations service restaurants grew by 75 percent.33
Intuitively, the effect of this proposed 2. Possible Change in Customers
would, on net, be expected to increase. Tipping Behavior That Could Result
While some baseline workers could be rule will be driven by many economic
factors, such as the prevailing wages in From the Transfer of Tips From
harmed, due to lower overall Employees to Employers
compensation, both employers and the local area, the supply and demand
workers who would lack jobs in the elasticity for labor in the local markets, In the United States, tipping is a
relevant occupations in the absence of and the demand elasticity for the common practice in the eating and
the rule would experience benefits. restaurants product. For instance, in a drinking places industries. The main
Analysis of reduced deadweight loss given market, if the equilibrium cash reasons that a customer would tip are
would be a standard method for wage for tipped employees is above the future service, social norms and
quantifying the gains to society of minimum required cash wage, an fairness, and quality of service.37 The
increased employment resulting from a employer has less incentive to change theoretical economic justification for
policy such as the one proposed in this its behavior as a result of the changes tipping is that it incentivizes and
NPRM. proposed in the NPRM. Given that the rewards good service.38 From the
Finally, the proposed rule may result firm is in a perfectly competitive employers standpoint, tipping may also
in a reduction in litigation. As market, any deviation from the market be considered an efficient way of
explained in Part II, above, there has wage may cause the firm to lose its staff. monitoring the efforts of service
been a significant amount of private However, if the conditions in the market workers, and a screening device for
litigation in recent years involving the are such that the equilibrium cash wage identifying good and motivated
tip pooling and tip retention practices of for tipped workers is below the workers.39
employers that pay a direct cash wage minimum required cash wage, and a Although consideration of future
of at least the Federal minimum wage. worker earns sufficient tips that their service is a commonly-stated reason for
Much of that litigation involves the cash wage plus the tips that they receive tipping, evidence suggests that
application of the Departments 2011 tip is equal to or greater than the applicable customers do not necessarily regard
credit regulations providing that an full minimum wage, then their future service as the main reason for
employers ability to utilize tips employer may have an incentive to tipping. Even non-repeat customers tip.
received by its employees is restricted increase the wage to the applicable This leads to the other main cited
even when it has not taken a tip credit. minimum wage and share the tips that reason for tipping: Social norms
In several cases, employees alleged that tipped employees receive with, for surrounding tipping. Tipping may be
their employers, who had paid their instance, other lower-wage non-tipped the result of a positive utility from
tipped employees a direct cash wage of employees. In such a case, an increase feeling generous. In addition, customers
at least the Federal minimum wage, in the direct cash wage paid to the often feel empathy for the workers who
improperly retained some or all of the tipped workers and the transfer of tips serve them, and they want to show their
tips received by employees or mandated from workers to others can be associated
that they participate in a tip pool that with changes in employment. If the 34 Daniel Hamermesh. Econometric Studies of
employees new wage is lower than Labor Demand and Their Application to Policy
included non-tipped employees. The Analysis. The Journal of Human Resources, vol. 11,
proposed rule rescinds those portions of their prior wage plus tips, and if the tips no. 4, 1976, pp. 507525. JSTOR, www.jstor.org/
the 2011 regulations that restrict received by employees are not being stable/145429.
employer use of customer tips when the redistributed to them, then there may be 35 Deadweight loss analysis, discussed elsewhere
a decline in the quantity of supplied in this regulatory impact analysis, can be used to
employer pays at least the full Federal assess net effects where isolated partial views of the
minimum wage and does not claim a labor of tipped workers, and therefore in market seem to indicate opposing tendencies.
section 3(m) tip credit, likely reducing their employment. Alternatively, the 36 Sticky wages refers to the situation in which
litigation in this area. employer could effectively redistribute workers wages do not adjust quickly to changes in
tips to other employees and thus reduce the overall economy.
ii. Additional Discussions its overall wage bill. If it now requires

37 Ofer H. Azar, The implications of tipping for
economics and management, 30 (10) International

Reallocation of tips may have less direct wages to hire their workers, Journal of Social Economics. 10841094 (2003).
implications on employment and 38 Samuel Estreicher and Jonathan R. Nash, The
earnings, as well as some impact on the 33 See Bureau of Labor Statistics, Current Law and Economics of Tipping: The Laborers
tipping behavior of customers. Due to Employment Statistics, www.bls.gov/ces. The Perspective, American Law & Economics
implicit assumption is that the proportion of tipped Association Annual Meetings. 54 (2004).
data limitations, it is difficult to workers in these industries remained constant over 39 Ofer H. Azar, Optimal monitoring with external
quantify these impacts. Accordingly, in time, which then implies that there was an increase incentives: the case of tipping, Southern Economic
this section, the Department provides a in tipped employment. Journal. 170181 (2004).
gratitude by leaving a tip. Customers employers ability to utilize employee jurisdiction over the states of California,
may also tip as they believe that tips even when the employer claims a Nevada, Washington, Oregon, Alaska,
bartenders, waiters, waitresses, and section 3(m) tip credit. The alternatives Idaho, Montana, Hawaii, and Arizona;
other workers earn too little for their are discussed in more detail below. Guam; and the Northern Mariana
hard work and therefore want to reward Islands. The injunction itself does not
i. Alternative 1
them. Moreover, customers often feel prevent the Department from
obligated to tip because tips are a major Under the proposed rule, employers investigating cases that are outside the
source of income for the workers.40 41 would no longer be prohibited from scope of that limited injunctive relief.
From the employers standpoint, the utilizing tips received by employees For instance, the Department can
theoretical economic justification for more broadly so long as they pay at least lawfully investigate such cases
tipping is that it incentivizes and the full Federal minimum wage in cash involving employers located outside the
rewards good service; In other words, if and do not claim a section 3(m) tip Ninth Circuit and that are not members
workers who provide good service earn credit.
large tips, they are more likely to retain of the plaintiff associations involved in
their jobs, whereas those workers who For the first alternative, the the ORLA litigation. Making the
earn smaller tips are more likely to Department would make no regulatory Departments limited nonenforcement
choose to quit. Tipping can also be a changes and leave in place the limited policy permanent without issuing the
way of monitoring the efforts of service nonenforcement policy it announced in NPRM, however, would result in
workers. Firms find it difficult and July 2013. In Oregon Restaurant and different requirements for different
expensive to monitor and control the Lodging Association v. Solis, 948 F. geographic regions, or different
quality of intangible and highly Supp. 2d 1217 (D. Or. 2013), the U.S. employers depending on their
customized services that are rendered District Court for the District of Oregon membership in certain associations.
by their employees. Therefore, tipping declared invalid the Departments 2011 Such a situation, for example, could
can allow customers to directly monitor regulations that limit an employers use mean an employer that has locations
service providers at lower cost than if of its employees tips when the within, and outside of, the Ninth Circuit
employers had to directly monitor their employer has not taken a tip credit would have different compliance
employees.42 against its minimum wage obligations, requirements. Also, the limited
The potential impact of the proposed and imposed injunctive relief. As nonenforcement policy does not impact
rule on customers decisions to leave discussed above, on February 23, 2016, employees right to bring private actions
tips for bartenders and servers may the Court of Appeals for the Ninth under section 16(b) of the FLSA to
depend on how much information the Circuit reversed the judgment entered enforce the tip retention regulations,
customer has regarding the employers by the district court. See Oregon exposing employers to an uncertain
tip pooling policy. Assuming customers Restaurant and Lodging Assn et al. v. landscape. See 29 U.S.C. 216(b).
are aware of the employers policy, Perez, 816 F.3d 1080 (2016), pet. for
Moreover, taking no regulatory action
changes to tipping behavior, if they rehg and rehg en banc denied 843 F.3d
does not address the Departments
occur at all, may differ depending on 355 (Sept. 6, 2016). Notwithstanding the
concerns discussed above. See, supra,
whether the tips are redistributed into a Ninth Circuits decision, the Department
Need for Rulemaking.
tip pool that includes a broader group continues to be constrained by the
of employees, or otherwise utilized in injunctive relief entered by the district ii. Alternative 2
part (or in full) by the employer. court until the Ninth Circuit issues its
Tipping may also be affected if the mandate, which formally notifies the For the second alternative, the
change is not welcomed by the staff, district court of the court of appeals Department considered removing the
leading to poor morale and reduced decision. On September 13, 2016, the regulatory language that reiterates the
service quality. Ninth Circuit issued a Stay of the statutory restrictions in section 3(m)
Mandate until final disposition [of this addressing an employers ability to
D. Analysis of Regulatory Alternatives
litigation] by the Supreme Court. utilize tips received by employees even
Executive Orders 12866 and 13563 Oregon Restaurant and Lodging Assn et when the employer claims a tip credit.
direct agencies to assess all costs and al. v. Perez, No. 1335765 (9th Cir., The regulations from which the
benefits of available regulatory Sept. 13, 2016). For these reasons, the Department considered removing this
alternatives. Executive Order 13563 Department is currently prohibited from language include 29 CFR 531.52, 531.54,
emphasizes the importance of enforcing its tip retention requirements and 531.59. Under this alternative, for
quantifying both costs and benefits, against the Oregon Restaurant and employers that claim a tip credit, the
reducing costs, harmonizing rules, and Lodging Association plaintiffs (which Department would enforce the tip
promoting flexibility. The Department include several associations, one
considered two alternatives as part of retention requirements of section 3(m)
restaurant, and one individual) and based only on the text of the statute.
determining whether to issue this members of the plaintiff associations
NPRM: (1) Making no regulatory that can demonstrate that they were a There is a significant risk, however,
changes; and (2) Removing the member on June 24, 2013. As a matter that this alternative would create
regulatory language that addresses an of enforcement policy, the Department confusion as to tipped employees right
decided at the time the injunction was to retain tips when their employer
40 William E. Even and David A. Macpherson,
issued that while the injunction is in claims a tip credit. The removal of the
The effect of the tipped minimum wage on

employees in the US restaurant industry, 80(3) place it would not enforce its tip Departments current regulatory
Southern Economic Journal. 633655 (2014). retention requirements against any guidance could also increase the risk of
41 PayScales Restaurant Report: The Agony and
employer within the Ninth Circuits employer non-compliance with the
Ecstasy of Food Service Workers, http://
jurisdiction that has not taken a tip statute due to the lack of regulatory
www.payscale.com/data-packages/restaurant-
report/full-data. credit.43 The Ninth Circuit has appellate guidance.
42 Ofer H. Azar, Optimal Monitoring with External
Incentives: The Case of Tipping, Southern 43 As noted in section II and footnote 6, the nonenforcement position when it decided to pursue
Economic Journal 170181 (2004). Department expanded the scope of this initial this rulemaking.
E. Classification as a Deregulatory requires a federal agency to prepare, and whether the employer is circumventing
Action and Estimated Regulatory Cost make available for public comment, an the protections of Section 3(m) because
Savings initial regulatory flexibility analysis that it is utilizing tips received by its
Under the current regulations, describes the impact of the proposed employees towards its minimum wage
employers are prohibited from rule on small entities. 5 U.S.C. 603(a). obligations to a greater extent than
The Department has conducted, and permitted under the statute. Where,
reallocating tips or including non-
is publishing here, an initial regulatory however, an employer has paid
tipped employees in a mandatory tip
flexibility analysis to help small entities employees a direct cash wage of at least
pool whether or not the employer has
better understand the impacts of the the full Federal minimum wage and
taken a tip credit under section 3(m) of
proposed rule. The Department invites does not reallocate the employee tips
the FLSA. 29 CFR 531.52. This
comments on the number of small directly, but requires that employee tips
proposed rule would remove such entities affected by the proposed rules
restrictions on the treatment of tips be distributed to non-tipped employees
requirements, the compliance cost through a tip pool, there is a strong
when an employer does not take a tip estimates, and whether alternatives exist
credit, and would not introduce any argument that the statutory protections
that will reduce the burden on small
new regulatory requirements in of Section 3(m) are not circumvented.
entities.
replacement of the requirements
A. Why the Department Is Considering C. Description of the Number of Small
proposed for elimination. Therefore, it
Action Entities to Which the Proposed Rule
is expected that this proposed rule
Will Apply
would, if finalized as proposed, qualify As explained in greater detail earlier
as a deregulatory action for the in the analysis, the Department has This section describes the industry or
purposes of E.O. 13771. serious concerns that it incorrectly economic sector that will be affected by
As discussed earlier, the Department construed the statute in promulgating its the proposed rule in total and its small
estimates that this proposed rule would current tip regulations to apply to and large entity segments, includes a
result in Year 1 regulatory employers that have paid a direct cash description of the industry or sector at
familiarization costs of approximately wage of at least the full Federal the time of the proposal, and explains
$3.4 million. See, supra, Section VII.B.v. minimum wage to their tipped any existing dynamics, such as trends in
The Department expects that these employees and serious concerns about employment or birth of entities.
relatively modest familiarization costs those regulations as a policy matter. The
would be more than offset by greater Department is therefore proposing to i. Definition of a Small Entity
cost savings for employers attributable rescind those portions of its tip
to the elimination of existing regulatory A small entity is one that is
regulations at 29 CFR part 531, subpart
requirements, but, due to a lack of independently owned and operated
D that impose restrictions on employers
adequate information about the costs and which is not dominant in its field
that pay a direct cash wage of at least
employers presently bear in complying of operation. 44 The definition of
the full Federal minimum wage and do
with the regulations identified for small business varies from industry to
not claim a tip credit against their
elimination, cost savings have not been industry to properly reflect industry size
minimum wage obligations.
quantified in this Notice of Proposed differences. An agency must either use
Rulemaking. Additionally, the B. Statement of Objectives and Legal the Small Business Administration
Department notes that reduced Basis for the Proposed Rule (SBA) definition for a small entity or
deadweight loss in the affected labor The Departments regulations establish an alternative definition for
markets would likely significantly addressing the treatment of tipped the relevant industries to which a rule
outweigh the $3.4 million in estimated employees under federal law at 29 CFR applies.
regulatory familiarization costs. part 531, subpart D are derived from In our analysis, the Department uses
section 3(m) of the FLSA. See 29 U.S.C. the Small Business Administration
VIII. Initial Regulatory Flexibility 203(m). As explained earlier, the
Analysis (IRFA) (SBA) size standards, which determine
Department now has serious concerns when a business qualifies for small
The Regulatory Flexibility Act of 1980 that it incorrectly construed the statute business status.45 According to the 2017
(RFA), 5 U.S.C. 601 et seq., as amended in promulgating its current tip standards, Full-service Restaurants
by the Small Business Regulatory regulations to apply to employers that (NAICS 722511) and Drinking Places
Enforcement Fairness Act of 1996, do not take a tip credit, i.e., where an (Alcoholic Beverages) (NAICS 722410)
Public Law 104121 (March 29, 1996), employee receives at least the full $7.25 have a size standard of $7.5 million in
requires federal agencies engaged in Federal minimum wage directly from annual revenue.46 The Department used
rulemaking to consider the impact of the employer, and serious concerns this number to estimate the number of
their proposals on small entities, about the regulations as a policy matter, small entities in this analysis. Any firms
consider alternatives to minimize that especially in light of changed with annual sales revenue less than this
impact, and solicit public comment on circumstances.
their analyses. The RFA requires the The purpose of Section 3(m)s tip 44 The RFA adopts the definition of small
assessment of the impact of a regulation credit provision is to allow an employer business concern used in the Small Business Act,
on a wide range of small entities, to subsidize a portion of its Federal 15 U.S.C. 632(a)(1).
including small businesses, not-for- minimum wage obligation through a 45 U.S. Small Business Administration, Summary
profit organizations, and small credit against the tips given to of Size Standards by Industry Sector, February
2016. Retrieved June 21, 2017 from https://
governmental jurisdictions. employees by customers. If an employer www.sba.gov/contracting/getting-started-contractor/
Agencies must perform a review to pays its tipped employees a direct cash make-sure-you-meet-sba-size-standards/summary-
determine whether a proposed or final wage of at least the full Federal size-standards-industry-sector. See also full US
rule would have a significant economic minimum wage (currently $7.25 per SBA Size Standard listings at https://www.sba.gov/
contracting/getting-started-contractor/make-sure-
impact on a substantial number of small hour) but reallocates equal or greater you-meet-sba-size-standards/table-small-business-
entities. 5 U.S.C. 603 and 604. As part amount of the tips received by its size-standards.
of a regulatory proposal, the RFA employees, there is a question as to 46 Id., Subsector 722.
amount will be considered a small To obtain the number of bartenders & To determine the number of tipped
business entity in this analysis. waiters/waitresses in the two industries, bartenders & waiters/waitresses, the
ii. Data Sources and Methods the Department used the BLS industry- Department used 57 percent of all
occupation mix (2014).49 Using the bartenders and waiters/waitresses in
The Department used data from staffing mix of industries to estimate both industries, based on the share in
several different sources to estimate the bartenders and wait staff allows for use the CPS data that report usually
number of small entities to which the of the very latest industry data, which receiving tips.50
rule will apply, i.e., affected firms. The builds on the highly-regarded QCEW
Department used the U.S. Census The annual cost per firm is calculated
data set. About 42.9 percent of workers based on the regulatory familiarization
Bureau, 2012 Economic Census 47 to
in the Full-service Restaurant industry cost ($3.4 million), which amounts to
obtain the number of firms, total
(NAICS 722511) are bartenders or $12.17 per establishment. The
number of paid employees, and annual
waiters/waitresses (5 percent are Department applied this cost to all sizes
sales/receipts for the two industries in
the analysis: Full-service Restaurants bartenders; 37.9 percent are waiters/ of firms since this will be incurred by
(NAICS 722511) and Drinking Places waitresses). In Drinking Places each firm regardless of the number of
(Alcoholic Beverages) (NAICS 722410). (Alcoholic Beverages) (722410), about affected workers. Finally, the impact of
From annual receipts/sales, the 63.5 percent are bartenders and waiters/ this provision is calculated as the ratio
Department can estimate how many waitresses (46.1 percent are bartenders; of annual cost per firm to receipts per
firms fall under the size standard. Table 17.4 percent are waiters/waitresses). firm. As shown, the per-firm cost
4 below shows the number of private The Department applied these incurred in the first year ($12.17) is less
firms in the two industries by revenue. percentages uniformly to total paid than one percent of annual receipts per
The number of firms and number of employees in these two industries to small firm under this proposed rule;
employees are obtained directly from obtain the number of bartenders and thus, it does not have any significant
the U.S. Economic Census (2012) data.48 waiters/waitresses across all firm sizes. burden on small entities.
TABLE 4ANNUAL COST TO SMALL ENTITIES
Average Number of Number of Annual cost
Number annual Annual cost
Annual revenue/sales/receipts Number of bartenders tipped per firm as
of paid sales per firm
(2012) firms and bartenders percent of
employees per firm ($) b
servers a and servers sales/receipts
($)
Firms with revenue less than $100,000 ............................ 10,071 24,455 $61,885 10,491 5,246 $12.17 Less than 0.1%.
Firms with revenue of $100,000 to $249,999 ................... 28,344 129,413 175,461 55,518 27,759 12.17 Less than 0.1%.
Firms with revenue of $1,000,000 to $2,499,999 ............. 32,965 1,066,544 1,514,178 457,547 228,774 12.17 Less than 0.1%.
Firms with revenue of $2,500,000 to $4,999,999 ............. 7,806 499,989 3,330,922 214,495 107,248 12.17 Less than 0.1%.
Firms with revenue less than $100,000 ............................ 4,584 N/A 12.17
Firms with revenue of $2,500,000 to $4,999,999 ............. 668 36,013 3,370,838 22,868 11,434 12.17 Less than 0.1%.
Firms with revenue of $5,000,000 to $9,999,999 ............. 156 13,785 6,740,077 8,753 4,377 12.17 Less than 0.1%.
a Servers stands for waiters & waitresses; N/A Not available in Economic census, 2012, withheld to avoid disclosing data for individual companies; data are in-
cluded in higher level totals; value not calculated as one or more inputs are missing.
b The Annual Cost per firm is the regulatory familiarization cost per firm calculated in Section VII.B.iv.i.
D. Projected Reporting, Recordkeeping, employers to make, keep, and preserve Since the employees who may be
and Other Compliance Requirements of records of employees and of wages, impacted by the proposed changes to
the Proposed Rule hours, and other conditions of the regulations are those for whom the
The FLSA sets minimum wage, employment. Employers use the records employer pays a direct cash wage of at
overtime pay, and recordkeeping to document compliance with the FLSA, least the FLSA minimum wage under
requirements for employment subject to including showing the tips received is section 6(a)(1)(C) with no tip credit
its provisions. The FLSA allows an not less than the tip credit claimed. The taken, such employers would not face
employer to claim a tip credit, as Department has promulgated additional recordkeeping requirements
defined by section 3(m) of the statute, regulations at 29 CFR part 516 to within the scope of 29 CFR 516.28.
toward meeting its minimum wage establish the basic FLSA recordkeeping Therefore, there are no additional
obligation for employees who requirements; this proposal does not recordkeeping requirements beyond
customarily and regularly receive more alter these recordkeeping requirements. those required by other sections of the
than $30.00 per month in tips. FLSA The recordkeeping regulation at 29 CFR FLSA under the proposed rule.
section 11(c) requires all covered 516.28 applies to tipped employees. Similarly, the proposed rule does not
47 U.S. Census Bureau, 2012 Economic Census limitation because the 2012 Economic Census 50 As noted above, see, supra, section VII.B.ii,
https://factfinder.census.gov/faces/tableservices/jsf/ reported this category of $5 million$9 million and approximately 57 percent of waiters/waitresses and
pages/productview.xhtml?pid=ECN_2012_US_ not $5 million$7.5 million. Thus, the total number bartenders in the 2016 CPSMORG survey
72SSSZ1&prodType=table. of firms used in the calculation may be slightly responded affirmatively when asked if they usually
48 The small business size standard for the two higher.
receive tips or commissions. The Department
industries is $7.5 million in annual revenue. 49 BLS Industry-Occupation Matrix Data, By
considers employees who responded affirmatively
However, the final size category reported in the Industry, https://www.bls.gov/emp/ep_table_
table is $5 million$9 million. This is a data 109.htm. to this question to be tipped employees.
have reporting or other compliance existing recordkeeping and reporting benefits, before proposing any Federal
requirements. requirements. Accordingly, it is not mandate that may result in excess of
necessary to establish different $100 million (adjusted annually for
i. Costs to Small Entities
compliance or reporting requirements inflation) in expenditures in any one
The direct costs to employers, for small businesses. year by state, local, and tribal
specifically, regulatory familiarization, ii. The clarification, consolidation, or governments in the aggregate, or by the
are quantified in the Regulatory Impact simplification of compliance and private sector. This rulemaking is not
Analysis. Regulatory familiarization reporting requirements for small expected to affect state, local, or tribal
costs are the costs incurred to read and entities. The proposed rule imposes no governments. While this rulemaking
become familiar with the requirements new compliance or reporting would affect employers in the private
of the rule. Regardless of business size, requirements. The Department makes sector, it is not expected to result in
the Department estimates that each available a variety of resources to expenditures greater than $100 million
establishment will spend 15 minutes for employers for understanding their in any one year. Please see Section
regulatory familiarization. As a direct obligation and for achieving VII.BC for an assessment of anticipated
result of this proposed rule, the compliance. costs and benefits to the private sector.
Department expects total direct iii. The use of performance rather
employer costs (regulatory than design standards. Under the X. Executive Order 13132, Federalism
familiarization) of $2,362,866 will be proposed rule, employers may achieve The Department has (1) reviewed this
incurred by all small entities combined compliance through a variety of means. proposed rule in accordance with
in the first year after the promulgation Employers may elect to continue (or Executive Order 13132 regarding
of the proposed rule: $12.17the cost of not) to take a tip credit under section federalism and (2) determined that it
15 minutes of work by a Compensation/ 3(m) of the FLSA. For those employers does not have federalism implications.
benefits specialist (SOC 131141), see, who take such a tip credit, the statutory The proposed rule would not have
supra, VII.B.ivmultiplied by 194,155, restrictions on employer use of substantial direct effects on the States,
the number of small entities (see below). customer tips continue to apply. on the relationship between the national
Regulatory familiarization costs are only However, for those employers who pay government and the States, or on the
incurred in the first year. The per-firm at least the Federal minimum wage and distribution of power and
costs incurred in the first year ($12.17) do not take a section 3(m) tip credit, the responsibilities among the various
are less than one percent of the annual proposed rule rescinds those regulatory levels of government.
average revenue per firm for the small restrictions. The Department makes
entities shown in Table 4 in Section available a variety of resources to XI. Executive Order 13175, Indian
VIII.C.ii. employers for understanding their Tribal Governments
obligation and for achieving This proposed rule would not have
ii. Number of Small Entities Impacted compliance.
by the Proposed Rule substantial direct effects on one or more
iv. An exemption from coverage of the Indian tribes, on the relationship
As noted above, the SBA size rule, or any part thereof, for such small between the Federal Government and
standard for Full-service Restaurants entities. Creating an exemption from Indian tribes, or on the distribution of
(722511) and Drinking Places (Alcoholic coverage of the NPRM for small power and responsibilities between the
Beverages) (722410) is $7.5 million in businesses is not necessary as this Federal Government and Indian tribes.
annual revenue.51 There are 194,155 proposed rule proposes to rescind
small entities that fall below this size employer restrictions on employer use XII. Effects on Families
standard in these two selected of customer tips when the employer The undersigned hereby certifies that
industries, which accounts for 78 pays at least the Federal minimum wage the proposed rule would not adversely
percent of total number of firms in these in cash and does not take a section 3(m) affect the well-being of families, as
industries, employing about 3,237,535 tip credit. discussed under section 654 of the
employees. As per the calculation in F. Differing Compliance and Reporting Treasury and General Government
Section VIII.C, the Department estimates Requirements for Small Entities Appropriations Act, 1999.
the proposed rule would have no
significant negative impact. Due to the deregulatory nature of this XIII. Executive Order 13045, Protection
rulemaking, the Department does not of Children
E. Regulatory Alternatives That believe that different compliance and
Minimize the Impact on Small Entities reporting requirements for small entities This proposed rule would have no
are required. environmental health risk or safety risk
Section 603(c) of the RFA requires
that may disproportionately affect
that each initial regulatory flexibility G. Identification, to the Extent children.
analysis contain a description of any Practicable, of All Relevant Federal
significant alternatives to the proposal Rules That May Duplicate, Overlap, or XIV. Environmental Impact Assessment
that accomplish the statutory objectives Conflict With the Proposed Rule A review of this proposed rule in
and minimize the significant economic
The Department is not aware of any accordance with the requirements of the
impact of the proposal on small entities.
federal rules that duplicate, overlap, or National Environmental Policy Act of
The Department considered the
conflict with this NPRM. 1969 (NEPA), 42 U.S.C. 4321 et seq.; the
following alternatives:
regulations of the Council on
i. Differing compliance or reporting IX. Unfunded Mandates Reform Act Environmental Quality, 40 CFR part
requirements that take into account the Analysis 1500 et seq.; and the Departmental
resources available to small entities.
The Unfunded Mandates Reform Act NEPA procedures, 29 CFR part 11,
This NPRM makes no changes to
of 1995 (UMRA), 2 U.S.C. 1532, requires indicates that the rule would not have
51 Because of the limitations of the size-class data, that agencies prepare a written a significant impact on the quality of the
the analysis looks at firms with annual revenues up statement, which includes an human environment. There is, thus, no
to $9,999,999. assessment of anticipated costs and corresponding environmental
assessment or an environmental impact part 531 of the Code of Federal DEPARTMENT OF HOMELAND
statement. Regulations as follows: SECURITY
XV. Executive Order 13211, Energy PART 531WAGE PAYMENTS UNDER Coast Guard
Supply THE FAIR LABOR STANDARDS ACT
This proposed rule is not subject to OF 1938 33 CFR Part 165
Executive Order 13211. It will not have [Docket Number USCG20170964]
a significant adverse effect on the 1. The authority citation for part 531
supply, distribution, or use of energy. continues to read as follows: RIN 1625AA00
Authority: Sec. 3(m), 52 Stat. 1060; sec. 2,
XVI. Executive Order 12630, 75 Stat. 65; sec. 101, 80 Stat. 830; sec. 29(B), Safety Zone; Oregon Inlet, Dare
Constitutionally Protected Property 88 Stat. 55, Pub. L. 93259; Pub. L. 95151, County, NC
Rights 29 U.S.C. 203(m) and (t); Pub. L. 104188,
AGENCY: Coast Guard, DHS.
2105(b); Pub. L. 11028, 121 Stat. 112.
This proposed rule is not subject to ACTION: Notice of proposed rulemaking.
Executive Order 12630 because it does 2. Revise 531.52 to read as follows:
not involve implementation of a policy SUMMARY: The Coast Guard proposes to
531.52 General characteristics of tips. establish a temporary safety zone on the
that has takings implications or that
could impose limitations on private A tip is a sum presented by a navigable waters of Oregon Inlet in Dare
property use. customer as a gift or gratuity in County, North Carolina in support of
recognition of some service performed construction of the new Herbert C.
XVII. Executive Order 12988, Civil for him. It is to be distinguished from Bonner Bridge. This temporary safety
Justice Reform Analysis payment of a charge, if any, made for zone is intended to protect mariners,
This proposed rule was drafted and the service. Whether a tip is to be given, vessels, and construction crews from the
reviewed in accordance with Executive and its amount, are matters determined hazards associated with installing the
Order 12988 and will not unduly solely by the customer, who has the navigation span, and will restrict vessel
burden the Federal court system. The right to determine who shall be the traffic from the bridges navigation span
proposed rule was: (1) Reviewed to recipient of the gratuity. An employer as it is under construction by preventing
eliminate drafting errors and that takes a tip credit is prohibited from vessel traffic on a portion of Oregon
ambiguities; (2) written to minimize using an employees tips for any reason Inlet. Entry of vessels or persons into
litigation; and (3) written to provide a other than that which is statutorily this safety zone is prohibited. We invite
clear legal standard for affected conduct permitted in section 3(m): As a credit your comments on this proposed
and to promote burden reduction. against its minimum wage obligations to rulemaking.
the employee, or in furtherance of a
XVIII. Summary of Proposed Changes DATES: Comments and related material
valid tip pool. Only tips actually
must be received by the Coast Guard on
The Department proposes to remove received by an employee as money
or before December 20, 2017.
or amend the portions of 531.52, belonging to the employee may be
counted in determining whether the ADDRESSES: You may submit comments
531.54, and 531.59 that impose identified by docket number USCG
restrictions on employers that pay a person is a tipped employee within
the meaning of the Act and in applying 20170964 using the Federal
direct cash wage of least the Federal eRulemaking Portal at http://
minimum wage and do not claim the the provisions of section 3(m) which
govern wage credits for tips. www.regulations.gov. See the Public
section 3(m) tip credit. The proposed Participation and Request for
rule deletes the fourth sentence of * * * * * Comments portion of the
section 531.52, which currently states 3. Revise the last sentence of 531.54
SUPPLEMENTARY INFORMATION section for
that [t]ips are the property of the to read as follows: further instructions on submitting
employee whether or not the employer comments.
has taken a tip credit under section 3(m) 531.54 Tip pooling.
of the FLSA. The proposed rule also * * * However, an employer that FOR FURTHER INFORMATION CONTACT: If
revises the fifth sentence of sections takes a tip credit must notify its you have questions about this proposed
531.52, the last sentence of section employees of any required tip pool rulemaking, contact Petty Officer
531.54, and the final sentence of section contribution amount, may only take a Matthew Tyson, Waterways
531.59(b) to remove language placing tip credit for the amount of tips each Management Division, U.S. Coast Guard
restrictions on an employers use of tips employee ultimately receives, and may Sector North Carolina, Wilmington, NC;
when that employer has not taken a tip not retain any of the employees tips for telephone: (910) 7722221, email:
credit while retaining language that any other purpose. Matthew.I.Tyson@uscg.mil.
reflects the statutory restrictions on an 4. In 531.59, revise the last sentence SUPPLEMENTARY INFORMATION:
employers use of tips received by its of paragraph (b) to read as follows:
I. Table of Abbreviations
employees when it does take a tip
531.59 The tip wage credit. CFR Code of Federal Regulations
credit.
* * * * * DHS Department of Homeland Security
List of Subjects in 29 CFR Part 531 (b) * * * With the exception of tips FR Federal Register
contributed to a valid tip pool as NPRM Notice of proposed rulemaking

Employment, Labor, Minimum wages, Section
Wages. described in 531.54, the tip credit
U.S.C. United States Code
provisions of section 3(m) also require COTP Captain of the Port
Bryan L. Jarrett, employers that take a tip credit to
Acting Administrator, Wage and Hour permit employees to retain all tips II. Background, Purpose, and Legal
Division. received by the employee. Basis
For the reasons set forth above, the [FR Doc. 201725802 Filed 12417; 8:45 am] On October 10, 2017, the North
Department proposes to amend Title 29, BILLING CODE 451027P Carolina Department of Transportation

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DOL Tipping Rules How To Comment

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Federal Register / Vol. 82, No.

232 / Tuesday, December 5, 2017 / Proposed Rules 57395

practices, such as employee resistance

Alaska .................. 3690 1930 1550 1020 190 8380

Subtotal ......... 350870 86450 91420 86260 9420 624420

% U.S. total .......... 15.33% 16.88% 20.69% 22.05% 21.35% 16.97%

Alaska .................. 4260 1740 2540 920 90 9550

Arizona ................. 53580 11150 8340 9610 740 83420

Hawaii .................. 16110 3200 5470 5130 1380 31290

Subtotal ......... 770260 197440 149730 162090 16840 1296360

% U.S. total .......... 30.03% 32.73% 29.97% 38.31% 37.63% 31.35%

Total ..................................................................................................................... 2,265,705 1,298,231 57

TABLE 2NUMBER OF ESTABLISHMENTS WITH TIPPED WORKERS, 2016

NAICS 722410 (Drinking Places (Alcoholic Beverages)) .............................................................................................................. 43,152

Total ........................................................................................................................................................................................ 281,928

TABLE 3REGULATORY FAMILIARIZATION COSTS

First Year Costs ($ million) .......................................................................................................................... $3.431 $3.431

ii. Additional Discussions its overall wage bill. If it now requires

economics and management, 30 (10) International

The effect of the tipped minimum wage on

contributed to a valid tip pool as NPRM Notice of proposed rulemaking

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