The federal minimum wage is $7.25 an hour, but federal law allows an employer to take a "tip credit" of up to $5.12 an hour for a "tipped employee." If the employer pays the tipped employee at least $2.13 an hour and the tipped employee effectively receives at least $7.25 an hour in combined wages and tips during the pay period, the arrangement generally will comply with federal law (unless the employee worked more than 40 hours in the workweek, in which case a more complicated formula for the applicable overtime rate would apply).
The employer, however, can lose the right to claim the tip credit if the employer uses an invalid "tip pool." Only employees who directly serve the public may be included in a "tip pool." A tip pool is where tips during a shift are pooled and then redistributed to employees, usually on a pro rata basis. Paying out part of a tip pool to employees who don't directly serve the public nullifies the employer's right to the tip credit, entitling all employees participating in the tip pool to be paid $7.25 per hour by their employer. (For example, some employers unlawfully include "expediters" in their tip pools. An expediter doesn't directly engage with the public, but performs "quality control" prior to food being served to customers, making sure that orders are filled correctly and plates are appetizingly presented.)
Where an employer does not claim a tip credit for its minimum wage obligations, issues have arisen as to whether an invalid tip pool (for example one that "tips out" to employees who don't directly serve the public) or "tip skimming" (where the employer, its owners or its managers keep some of the tips for themselves) violate federal labor laws. Federal courts have split on this issue. Some courts have concluded that the applicable federal statute, the Fair Labor Standards Act (FLSA), only requires the employer to pay the minimum wage and otherwise doesn't prohibit the employer's hand from the tip jar. According to those courts, where the employer directly pays the full minimum wage and claims no tip credit, rules on valid tip pools, which by definition also prohibit tip skimming, don't apply for purposes of violations of the FLSA. Other courts have looked to the purpose and legislative history of the 1974 amendments to Section 3(m) of the FLSA to conclude that the statute was intended to prohibit invalid tip pools or tip skimming whether or not the employer claims a tip credit. Under that view, the statute creates a per se right of tipped employees to keep their tips, and prohibits forcing tipped employees to share their tips, via a tip pool or otherwise, with either the employer or "non-tipped employees" who do not directly serve the public. Under that view, tip skimming is a violation of tipped employees' rights, whether or not the employer takes a tip credit.
On April 5, 2011, the U.S. Department of Labor published final regulations to formalize its long-held position, in agreement with the latter view of the federal courts noted above, that the FLSA prohibits both tip skimming and forcing tipped employees to share tips with "non-tipped" employees period. In explaining its position, the DOL relied, in part, on a Senate Report stating that the 1974 amendment to Section 3(m) of the FLSA was intended to "requir[e] that all tips received be paid out to tipped employees." In conformity with that statutory intent, and pursuant to the DOL's express authority to issue regulations under the FLSA, the DOL explained the effect of the new regulations on this issue as follows: "[T]he Department is amending [its prior regulations] to make clear that tips are the property of the employee, and that section 3(m) sets forth the only permitted uses of an employee's tips--either through a tip credit or a valid tip pool--whether or not the employer has elected the tip credit." [Emphasis added.] The Department explained that the revised regulation is intended to make clear that "an employer in all cases is prohibited from using an employee's tips for any reason other than as a tip credit to make up the difference between the required cash wage paid and the minimum wage or in furtherance of a valid tip pool." Stated conversely, in the DOL's view, any tip skimming or any invalid tip pooling amounts to an employer's unlawful diversion of tips from tipped employees in violation of the tipped employees' rights to receive their tips under Section 3(m) of the FLSA.
In sum, the DOL has taken the view that under federal law, tips belong to tipped employees--no exceptions--and the employer can't convert them for the employer's use. A tip of the hat goes out to the Obama DOL for standing up to corporate lobbyists and weighing in on the side of thousands of hardworking waitpersons, bartenders, carwash attendants, and other tipped employees throughout the nation.