New Omnibus Budget Bill Offers Mixed Bag for Restaurant Employees

In late-March, Congress passed the big $1.3 trillion budget bill. The bill is over 2,000 pages long, was passed within hours of its introduction, and is loaded with legislative “riders” that have no apparent connection to governmental spending. One such rider addresses the circumstances in which restaurants can keep servers’ tips.

The FLSA’s tip rules have been a hot topic lately. And there’s a lot of misinformation floating around out there. Here is an explanation of what Congress just did and how we got to this place:

The Tip Credit and Tip Sharing: The FLSA sets the minimum wage at $7.25/hour. Yet, many servers, bartenders, bussers, runners, and other customer service employees are paid an hourly wage of less than $7.25. That’s because, under the FLSA, restaurants can pay these “tipped employees” as little as $2.83/hour plus customer tips. When a restaurant does this, it is taking a “tip credit.” In other words, the restaurant is using customer tips as a “credit” against its minimum wage obligation to the tipped employee.

As you can see, the tip credit provides a big benefit to American restaurants. The customers primarily pay the employees. That’s a pretty sweet deal for the employer. And it really only happens here in the United States. (In Europe, by contrast, tipping is not expected because the server gets paid directly from the restaurant).

Traditionally, the have been several rules that restaurants must follow if they want to take the “tip credit.” One important rule is that tips may only be shared among restaurant employees who “customarily and regularly” receive tips. In other words, tips cannot be shared with managers or kitchen employees.

The 9th Circuit’s Cumbie v. Woody Woo Decision: In 2010, the Ninth Circuit Court of Appeals issued an opinion called Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9th Cir. 2010). In Cumbie, the restaurant did not take advantage of the tip credit. In other words, the restaurant paid the servers a minimum wage of 0ver $7.25/hour. The restaurant also required the servers to share some of their tips with kitchen employees.

The servers filed a lawsuit, arguing that the restaurant violated the rule that tips not be shared with kitchen employees. The restaurant disagreed, arguing that this rule applied only if it was taking advantage of the tip credit. The Ninth Circuit agreed with the restaurant. According to the Ninth Circuit, a restaurant that pays servers the full minimum wage can do whatever it wants with customer tips.

The Obama Administration’s 2011 Regulation Disagreeing with Cumbie: In response to Cumbie, the Department of Labor implemented a regulation (found at 29 CFR 531.52) in 2011 that disagreed with the Ninth Circuit’s Cumbie decision. Under the 2011 regulation, tips could never be shared with managers or kitchen staff, even if the restaurant paid the servers the full minimum wage and did not take advantage of the tip credit.

The Ninth Circuit Upholds the 2011 Regulation: In response to the DOL 2011 regulation, a trade association representing the restaurant industry started a lawsuit asserting that the DOL exceeded its regulatory authority by implementing the 2011 regulation. This lawsuit made its way to the Ninth Circuit. In 2016, the Ninth Circuit upheld the regulation in an opinion called Oregon Restaurant and Lodging Assoc. v. Perez, 816 F.3d 1080 (9th Cir. 2016).

So then, in the wake of the Ninth Circuit’s Oregon opinion, the law of the land was finally clear: Even restaurants that pay the full minimum wage to servers may not require tips to be shared with managers or kitchen staff.

The Trump Administration’s Proposed Regulation: In December 2017, the Trump Administration’s DOL started the an administrative rulemaking process that was clearly aimed at reversing the Obama Administration’s 2011 rule. The proposed rule can be found HERE. This rule was aimed at returning the law to the Crumbie-world in which a restaurant that pays the full minimum wage to servers may do whatever it wants with customer tips. This proposed regulation was met with some pretty stiff resistance, as indicated in a February 2018 New York Times Article.

The 2018 Omnibus Budget Bill Settles the Dispute with a Compromise: All of this brings us to the the 2,232-page Omnibus Budget Bill passed in late-March. Turning to pages 2,025-2,027, we find a section of the Bill headed “Tipped Employees.” Here is what the new legislation does in a nutshell: (1) it revokes the 2011 Obama regulations; (2) it allows tips to be shared with non-supervisory kitchen staff if, an only if, the restaurant pays servers the full minimum wage and does not take advantage of the tip credit; (3) it strictly prohibits tips from being shared with restaurant owners, managers, or supervisors under any circumstances; (4) it clarifies that a restaurant allowing tips to be shared with owners, managers, or supervisors must pay the aggrieved servers both the amount of the tip credit (if any) taken and the amount of the diverted tips; (5) it makes liquidated damaged (a.k.a. “double damages”) mandatory if the restaurant allows tips to be shared with owners, managers, or supervisors; and (6) it provides for a $1,100-per-violation-penalty where the restaurant allows tips to be shared with owners, managers, or supervisors.

My Takeaway: In my view, the 8-year saga described above demonstrates a big problem with the current state of affairs: Throughout the past three Administrations, the DOL’s Wage and Hour Division has sometimes been treated like a pawn in an ongoing chess match between workers’ rights advocates and the employer community. The regulations and guidance from one administration to another often seem irreconcilable, with one administration reversing the previous administration’s rules. All of this must be very demoralizing to the DOL investigators who are working in the field and probably would like to be guided by a consistent set of rules that do not change with every Presidential election. And fair-minded lawyers surely would prefer a set sensible and moderate rules that can withstand the test of time and foster a sense of consistency and predictability.

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