Tip Regulations Under the Fair Labor Standards Act (FLSA), 53956-53980 [2019-20868]

Download as PDF 53956 Federal Register / Vol. 84, No. 195 / Tuesday, October 8, 2019 / Proposed Rules DEPARTMENT OF LABOR Wage and Hour Division 29 CFR Parts 10, 516, 531, 578, 579, and 580 RIN 1235–AA21 Tip Regulations Under the Fair Labor Standards Act (FLSA) Wage and Hour Division, Department of Labor. ACTION: Notice of proposed rulemaking; withdrawal of proposed rulemaking; request for comments. AGENCY: In the Consolidated Appropriations Act, 2018 (CAA), Congress amended section 3(m) of the Fair Labor Standards Act (FLSA) to prohibit employers from keeping tips received by their employees, regardless of whether the employers take a tip credit under section 3(m). In this Notice of Proposed Rulemaking (NPRM), the Department proposes to amend its tip regulations to address this Congressional action. The Department also proposes to codify policy regarding the tip credit’s application to employees who performed tipped and non-tipped duties. This NPRM also withdraws the Department’s December 5, 2017 NPRM proposing changes to the Department’s tip regulations, as the CAA has superseded it. DATES: Comments must be received on or before December 9, 2019. The proposed rule Tip Regulations under the Fair Labor Standards Act, published December 5, 2017 at 82 FR 57395, is withdrawn as of October 8, 2019. SUMMARY: To facilitate the receipt and processing of written comments on this NPRM, the Department encourages interested persons to submit their comments electronically. You may submit comments, identified by Regulatory Information Number (RIN) 1235–AA21, by either of the following methods: Electronic Comments: Follow the instructions for submitting comments on the Federal eRulemaking Portal https://www.regulations.gov. Mail: Address written submissions to Amy DeBisschop, Acting Director of the Division of Regulations, Legislation, and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S– 3502, 200 Constitution Avenue NW, Washington, DC 20210. Instructions: This NPRM is available through the Federal Register and the https://www.regulations.gov website. You may also access this document via jbell on DSK3GLQ082PROD with PROPOSALS4 ADDRESSES: VerDate Sep<11>2014 21:16 Oct 07, 2019 Jkt 250001 the Wage and Hour Division’s (WHD) website at https://www.dol.gov/whd/. All comment submissions must include the agency name and Regulatory Information Number (RIN 1235–AA21) for this NPRM. Response to this NPRM is voluntary. The Department requests that no business proprietary information, copyrighted information, or personally identifiable information be submitted in response to this NPRM. Submit only one copy of your comment by only one method (e.g., persons submitting comments electronically are encouraged not to submit paper copies). Anyone who submits a comment (including duplicate comments) should understand and expect that the comment will become a matter of public record and will be posted without change to https://www.regulations.gov, including any personal information provided. All comments must be received by 11:59 p.m. on the date indicated for consideration in this NPRM; comments received after the comment period closes will not be considered. Commenters should transmit comments early to ensure timely receipt prior to the close of the comment period. Electronic submission via https://www.regulations.gov enables prompt receipt of comments submitted as the Department continues to experience delays in the receipt of mail in our area. For access to the docket to read background documents or comments, go to the Federal eRulemaking Portal at https:// www.regulations.gov. FOR FURTHER INFORMATION CONTACT: Amy DeBisschop, Director of the Division of Regulations, Legislation, and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S– 3502, 200 Constitution Avenue NW, Washington, DC 20210, telephone: (202) 693–0406 (this is not a toll-free number). Copies of this NPRM may be obtained in alternative formats (Large Print, Braille, Audio Tape or Disc), upon request, by calling (202) 693–0675 (this is not a toll-free number). TTY/TDD callers may dial toll-free (877) 889–5627 to obtain information or request materials in alternative formats. Questions of interpretation and/or enforcement of the agency’s existing regulations may be directed to the nearest WHD district office. Locate the nearest office by calling the WHD’s tollfree help line at (866) 4US–WAGE ((866) 487–9243) between 8 a.m. and 5 p.m. in your local time zone, or log onto WHD’s website at https://www.dol.gov/whd/ america2.htm for a nationwide listing of WHD district and area offices. SUPPLEMENTARY INFORMATION: PO 00000 Frm 00002 Fmt 4701 Sfmt 4702 I. Executive Summary The FLSA generally requires covered employers to pay employees at least a Federal minimum wage, which is currently $7.25 per hour. See 29 U.S.C. 206(a)(1). Section 3(m) of the FLSA allows an employer that meets certain requirements to count a limited amount of the tips its ‘‘tipped employees’’ receive as a credit toward its Federal minimum wage obligation (known as a ‘‘tip credit’’). See 29 U.S.C. 203(m)(2)(A). An employer may take a tip credit only for ‘‘tipped employees’’, and only if, among other things, its tipped employees retain all their tips. Id. This requirement, however, does not preclude an employer that takes a tip credit from implementing a tip pool in which tips are shared only among those employees who ‘‘customarily and regularly receive tips.’’ Id. In 2011, the Department revised its tip regulations to reflect its view at the time that the FLSA required that tipped employees retain all tips received by them, except for tips distributed through a tip pool limited to employees who customarily and regularly receive tips, regardless of whether their employer takes a tip credit. See, e.g., 29 CFR 531.52. On December 5, 2017, the Department published an NPRM, 82 FR 57,395, which proposed to rescind the parts of its tip regulations that applied to employers that pay a direct cash wage of at least the full Federal minimum wage and do not take a tip credit. On March 23, 2018, Congress amended section 3(m) of the FLSA in the CAA, Public Law 115–141, Div. S., Tit. XII, § 1201, 132 Stat. 348, 1148–49 (2018). Among other things, the CAA revised section 3(m) by renumbering the existing tip credit provision as section 3(m)(2)(A). Significantly, the CAA added a new section 3(m)(2)(B), which prohibits employers, whether or not they take a tip credit, from keeping their employees’ tips ‘‘for any purposes, including allowing managers or supervisors to keep any portion of employees’ tips.’’ The CAA amended sections 16(b) and 16(c) of the FLSA to permit private parties and the Department to recover any tips unlawfully kept by an employer in violation of section 3(m)(2)(B), in addition to an equal amount of liquidated damages. The CAA also amended section 16(e) of the FLSA to provide the Department discretion to impose civil money penalties (CMPs) up to $1,100 when employers unlawfully keep employee’s tips. Congress specified in the CAA that the portions of the 2011 final rule that ‘‘are not addressed by section 3(m) . . . E:\FR\FM\08OCP4.SGM 08OCP4 jbell on DSK3GLQ082PROD with PROPOSALS4 Federal Register / Vol. 84, No. 195 / Tuesday, October 8, 2019 / Proposed Rules (as such section was in effect on April 5, 2011), shall have no further force or effect until any future action taken by [the Department of Labor].’’ As the Department explained in a Field Assistance Bulletin (FAB) published shortly thereafter, that statement applies to those portions of the Department’s regulations at §§ 531.52, 531.54, and 531.59 that restricted tip pooling when employers pay tipped employees a direct cash wage of at least the full FLSA minimum wage and do not claim a tip credit. FAB No. 2018–3 (Apr. 6, 2018), available at https://www.dol.gov/ whd/FieldBulletins/fab2018_3.pdf. Because the Congressional amendments to the FLSA directly impacted the subject of the Department’s 2017 NPRM, this document withdraws that proposal. This document also explains the impact of the 2018 CAA amendments on the Department’s current tip pooling regulations. The CAA did not change the existing rules that apply to employers that take a tip credit, now in section 3(m)(2)(A) of the FLSA, which provide that such employers may institute a mandatory, ‘‘traditional’’ tip pool that is limited to employees who ‘‘customarily and regularly’’ receive tips. But the CAA did eliminate the regulatory restrictions on an employer’s ability to require tip pooling when it does not take a tip credit: Such employers may now implement mandatory, ‘‘nontraditional’’ tip pools in which employees who do not customarily and regularly receive tips, such as cooks and dishwashers, may participate. The CAA also created a new statutory provision, 3(m)(2)(B), which applies to all employers regardless of whether they take a tip credit, and provides that employers may not keep employees’ tips and may not allow managers or supervisors to keep employees’ tips. Among other things, this new statutory provision prohibits employers, managers, and supervisors from receiving employees’ tips from any tip pooling arrangement. As explained further herein, section 3(m)(2)(B) also prohibits employers from operating tip pools in a manner such that they ‘‘keep’’ tips. The Department is proposing to update its tip regulations to incorporate the CAA’s amendments to the FLSA. Although the CAA renumbered the FLSA’s existing tip credit provision as section 3(m)(2)(A), it did not substantively change that provision. Therefore, this rulemaking does not address the Department’s existing regulations and guidance implementing 3(m)(2)(A) that apply to employers that VerDate Sep<11>2014 21:16 Oct 07, 2019 Jkt 250001 take a tip credit unless it is necessary to clarify how those provisions relate to the statutory amendment. The Department is proposing to incorporate the new statutory provision, section 3(m)(2)(B)—which applies regardless of whether the employer takes a tip credit—into its existing regulations and is proposing to incorporate a new recordkeeping provision to assist the Department with its administration of that provision. The Department is additionally proposing, consistent with Congressional action, to remove the portions of its regulations that prohibited employers that pay their tipped employees a direct cash wage of at least the full Federal minimum wage and do not take a tip credit against their minimum wage obligations from including employees who do not customarily and regularly receive tips, such as cooks and dishwashers, in mandatory tip pooling arrangements. The Department is also proposing to amend its tip regulations to reflect recent guidance explaining that an employer may take a tip credit for any amount of time that an employee in a tipped occupation performs related, non-tipped duties contemporaneously with his or her tipped duties, or for a reasonable time immediately before or after performing the tipped duties. The proposed regulation would also address which non-tipped duties are related to a tip-producing occupation. The Department is also proposing to incorporate the FLSA’s new CMP provision into its existing regulations. Since the Department is proposing to revise its CMP regulations to reflect the statutory amendments, the Department also proposes to revise portions of its CMP regulations to address courts of appeals’ decisions that have raised concerns that some of the regulations’ statements regarding willful violations are inconsistent with Supreme Court authority and how the Department actually litigates willfulness. Finally, the Department is proposing to amend the provisions of its regulations that address the payment of tipped employees under Executive Order 13658 (Establishing a Minimum Wage for Contractors) to reflect the rescissions proposed in the FLSA regulations for tipped employees, to incorporate the Department’s guidance on when an employee performing nontipped work is a tipped employee, and to otherwise align those regulations with the authority provided in the Executive Order. The Department estimates the rule updating WHD’s regulations to reflect the CAA amendments, if finalized as proposed, could result in a potential PO 00000 Frm 00003 Fmt 4701 Sfmt 4702 53957 transfer of $107 million, as tip pools are expanded to share tips among both front-of-the-house and back-of-thehouse employees. The directlyobservable transfer would only occur among employees because section 3(m)(2)(B) prohibits employers from participating in these tip pools or otherwise keeping employee’s tips. However, because back-of-the-house workers may now be receiving tips, employers may offset this increase in total compensation by reducing the direct wage that they pay back-of-thehouse workers (as long as they do not reduce their wage below the applicable minimum wage). This could allow employers to capture some of the transfer. The Department estimates that regulatory familiarization costs associated with this proposed rule would be $3.86 million in the first year. For purposes of Executive Order 13771, it is expected that this proposed rule would, if finalized as proposed, qualify as a deregulatory action. II. Background A. Section 3(m) As explained above, the FLSA generally requires covered employers to pay employees at least the Federal minimum wage, which is currently $7.25 per hour. Section 3(m) (now 3(m)(2)(A)) of the FLSA, however, permits an employer to count a limited amount of an employee’s tips (up to $5.12 per hour) as a partial credit, called a ‘‘tip credit,’’ to satisfy the difference between the direct cash wage paid and the Federal minimum wage. This partial credit is known as a tip credit. An employer may take a tip credit only for a ‘‘tipped employee,’’ which section 3(t) of the FLSA defines as ‘‘any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.’’ In addition, an employer may take a tip credit under section 3(m)(2)(A) only if, among other things, the tipped employees retain all the tips they receive. An employer taking a tip credit is allowed, however, to implement a mandatory tip pool in which tips are shared only among employees who ‘‘customarily and regularly receive tips.’’ Section 3(m)(2)(B) of the FLSA, added through the CAA, provides that ‘‘an employer may not keep tips received by its employees for any purposes, including allowing managers or supervisors to keep any portion of employees’ tips.’’ See Div. S., Tit. XII, § 1201. Importantly, section 3(m)(2)(B) applies regardless of whether an employer takes a tip credit. E:\FR\FM\08OCP4.SGM 08OCP4 53958 Federal Register / Vol. 84, No. 195 / Tuesday, October 8, 2019 / Proposed Rules B. Statutory and Regulatory History i. 1966 and 1974 Amendments to the FLSA 1 Congress created the FLSA’s tip credit provision within the definition of ‘‘wages’’ in section 3(m) in 1966. See Public Law 89–601, 101(a), 80 Stat. 830 (1966). In 1974, Congress amended section 3(m) to provide that an employer could not credit tips received by its employees toward its Federal minimum wage obligation unless, among other things: all tips received by such employee have been retained by the employee, except that this subsection shall not be construed to prohibit the pooling of tips among employees who customarily and regularly receive tips. jbell on DSK3GLQ082PROD with PROPOSALS4 Public Law 93–259, 13(e), 88 Stat. 55 (1974). As a result of the amendment, an employer that takes a tip credit can require a tipped employee to share tips with other employees in occupations in which they customarily and regularly receive tips, but it cannot use employees’ tips for any other purpose or require tipped employees to share them with employees who do not customarily and regularly receive tips. As the text of the statute makes plain, Congress only intended to regulate employers who take a tip credit, stating that those employers cannot take employees’ tips except to pool them among employees who customarily and regularly receive them. The text contains no indication that Congress intended to regulate employers who do not take a tip credit and who use tip pools for other purposes, such as by sharing tips with ‘‘back of the house’’ employees like cooks and dishwashers. The Department promulgated its initial tip regulations in 1967, one year after Congress created the tip credit. See 32 FR 13,575 (Sept. 28, 1967). Consistent with the Department’s understanding of the 1966 amendments, the 1967 tip regulations permitted agreements under which tips received by employees would be transferred to the employer. Immediately after the 1974 amendments, the Department’s WHD stated in a number of opinion letters that its 1967 regulations were superseded to the extent they conflicted with those amendments. See, e.g., WHD Opinion Letter WH–310, 1975 WL 40934 (Feb. 18, 1974), at *1. 1 Congress amended section 3(m)’s tip credit provision three times between 1974 and 2018, in 1977, 1989, and 1996. These amendments changed only the applicable amount of tips received by employees that could be used as a credit against an employer’s minimum wage obligations. See Public Law 95–151, 3(b), 91 Stat. 1245 (1977); Public Law 101–157, 5, 103 Stat. 938 (1989); Public Law 104– 188, 2105(b), 110 Stat. 1755 (1996). VerDate Sep<11>2014 21:16 Oct 07, 2019 Jkt 250001 In 2010, the Ninth Circuit analyzed section 3(m) and observed that ‘‘nothing in the text of the FLSA purports to restrict employee tip-pooling arrangements when no tip credit is taken.’’ Cumbie v. Woody Woo, Inc., 596 F.3d 577, 583 (9th Cir. 2010). The Ninth Circuit reasoned that section 3(m)’s ‘‘plain text’’ merely ‘‘imposes conditions on taking a tip credit and does not state freestanding requirements pertaining to all tipped employees.’’ Id. at 580–81. The contrary position, the court concluded, would render Section 203(m)’s ‘‘reference to the tip credit, as well as its conditional language and structure, superfluous.’’ Id. at 581. The court thus held that the employer, which did not take a tip credit, did not violate section 203(m) by requiring its tipped employees to contribute to a tip pool that included employees who were not customarily and regularly tipped. See id. ii. 2011 Regulations In 2011, however, the Department revised its 1967 tip regulations to reflect its view of the 1974 amendments to the FLSA. See 76 FR 18,832, 18,854–56 (Apr. 5, 2011). Notwithstanding the Cumbie decision, the 2011 regulations prohibited employers from, among other things, establishing mandatory tip pools that include employees who are not customarily and regularly tipped— regardless of whether employers took a tip credit. See 29 CFR 531.52 (2011) (‘‘The employer is prohibited from using an employee’s tips, whether or not it has taken a tip credit, for any reason other than that which is statutorily permitted in section 3(m): As a credit against its minimum wage obligations to the employee, or in furtherance of a valid tip pool.’’); see also § 531.54 (providing that ‘‘an employer . . . may not retain any of the employees’ tips’’); § 531.59 (‘‘With the exception of tips contributed to a valid tip pool as described in § 531.54, the tip credit provisions of section 3(m) also require employers to permit employees to retain all tips received by the employee.’’). The Department acknowledged that section 3(m) did not expressly address the use of an employee’s tips when an employer does not take a tip credit and pays a direct cash wage equal to or greater than the Federal minimum wage, but stated that the regulation would fill a ‘‘gap’’ that the Department then believed to exist in the statutory scheme. 76 FR at 18,841–42. Multiple lawsuits have involved challenges to the Department’s authority under section 3(m) to regulate employers that pay a direct cash wage of at least the Federal minimum wage. PO 00000 Frm 00004 Fmt 4701 Sfmt 4702 The parties challenging the validity of the 2011 regulations argued, and courts ruling in favor of such parties have held, that the text of section 3(m) reflected Congress’ intent to impose conditions only on employers that take a tip credit. See, e.g., Trinidad v. Pret A Manger (USA) Ltd., 962 F. Supp. 2d 545, 562 (S.D.N.Y. 2013) (‘‘Although the Court need not resolve this issue definitively . . . [it] finds Pret’s argument more persuasive: The DOL regulations are contrary to the plain language of § 203(m).’’). On February 23, 2016, a divided Ninth Circuit panel upheld the validity of the 2011 regulations. See Oregon Rest. & Lodging Ass’n (ORLA) v. Perez, 816 F.3d 1080, 1090 (9th Cir. 2016). Although the Ninth Circuit declined en banc review of the decision, ten judges dissented on the ground that the FLSA authorized the Department to address tip pooling and tip retention only when an employer takes a tip credit. See ORLA, 843 F.3d 355, 356 (9th Cir. 2016) (O’Scannlain, J., dissenting from denial of reh’g en banc). The dissent noted the Ninth Circuit’s decision in Cumbie that the FLSA ‘‘clearly and unambiguously permits employers who forgo a tip credit to arrange their tip-pooling affairs however they see fit.’’ Id. at 358 (citing Cumbie, 596 F.3d at 579 n.6, 581, 581 n.11, 582, 583). The dissent therefore concluded that ‘‘because the Department has not been delegated authority to ban tip pooling by employers who forgo the tip credit, the Department’s assertion of regulatory jurisdiction is manifestly contrary to the statute and exceeds its statutory authority.’’ Id. at 363 (internal quotation marks omitted). On January 19, 2017, the National Restaurant Association, on behalf of itself and other ORLA plaintiffs, sought Supreme Court review. See Pet’n for Writ of Cert., ORLA sub nom. Nat’l Rest. Ass’n v. U.S. DOL, (Jan. 19, 2017) (No. 16–920). On June 30, 2017, the Tenth Circuit ruled that the Department’s 2011 tip regulations were invalid to the extent they barred an employer from using or sharing tips with employees who do not customarily and regularly receive tips when the employer pays a direct cash wage of at least the Federal minimum wage and does not take a section 3(m) tip credit. See Marlow v. New Food Guy, Inc., 861 F.3d 1157, 1159 (10th Cir. 2017). The Tenth Circuit held that the text of the FLSA limits an employer’s use of tips only when the employer takes a tip credit, ‘‘leaving [the Department] without authority to regulate to the contrary.’’ See Marlow, 861 F.3d at 1163–64. E:\FR\FM\08OCP4.SGM 08OCP4 jbell on DSK3GLQ082PROD with PROPOSALS4 Federal Register / Vol. 84, No. 195 / Tuesday, October 8, 2019 / Proposed Rules On July 20, 2017, the Department adopted a nationwide ‘‘nonenforcement policy’’ under which the Department would ‘‘not enforce’’ the 2011 regulations in any context in which an employer pays its employees a direct cash wage of at least the Federal minimum wage. See 82 FR 57395, 57399 (Dec. 5, 2017). On May 22, 2018, the government responded to the petition for certiorari in ORLA, then captioned as Nat’l Rest. Ass’n (NRA) et al. v. Dept. of Labor et al, explaining that the Department had reconsidered its defense of the 2011 regulations in light of the ten-judge dissent from denial of rehearing in ORLA and the Tenth Circuit’s decision in Marlow, and that it believed that it had exceeded its statutory authority in promulgating the 2011 regulations as they apply to employers that do not take a tip credit against their Federal minimum wage obligations. The government explained that ‘‘until the 2018 [congressional] amendments, Section 203(m) placed limits only on employers that took a tip credit,’’ and that ‘‘[n]either Section 203(m) nor any other provision of the FLSA prevents an employer that pays at least the minimum wage from instituting a nontraditional tip pool [that includes back-of-the-house employees like cooks and janitors] for employees’ tips.’’ Br. for the Respondents at 26–27, NRA (No. 16–920). On June 25, 2018, the Supreme Court denied the petition for certiorari. such as dishwashers or cooks. See, e.g., 82 FR 57399. A number of commenters on the NPRM supported allowing employers to establish these tip pools. Several commenters pointed out that these workers contribute to each customer’s overall service, which directly affects the size of the customer’s tip. Many commenters, however, expressed concern that without regulatory protections in place, an employer would take tips received by employees for its own purposes. During a hearing on March 6, 2018, before the Subcommittee on Labor, Health and Human Services, and Education of the U.S. House of Representatives Committee on Appropriations, Secretary of Labor R. Alexander Acosta was asked about the proposed rulemaking. The Secretary explained that the Tenth Circuit had made clear in Marlow, in reasoning the Secretary found persuasive, that the Department lacked statutory authority for its 2011 regulations at issue, and that the Secretary had concluded that Congress has not authorized the Department to fully regulate in this space. The Secretary, however, explained that Congress had the authority to implement a solution, and he suggested that Congress enact legislation providing that establishments, whether or not they take a tip credit, may not keep any portion of employees’ tips.2 iii. 2017 Notice of Proposed Rulemaking C. The CAA’s Amendments to the FLSA On December 5, 2017, the Department published an NPRM proposing to rescind the portions of its 2011 tip regulations that imposed restrictions on employers that pay a direct cash wage of at least the full Federal minimum wage and do not take a tip credit against their minimum wage obligations. See 82 FR 57395 (Dec. 5, 2017). The Department issued the 2017 NPRM in part because of its concerns, in light of the ORLA rehearing dissent and the Tenth Circuit’s decision in Marlow, that it had misconstrued the statute when it promulgated the 2011 regulations. 82 FR 57399. The Department stated that where ‘‘an employer has paid a direct cash wage of at least the full Federal minimum wage and does not take the employee tips directly, a strong argument exists that the statutory protections of section 3(m) do not apply.’’ 82 FR 57402. The Department also proposed allowing these employers to establish tip pools that include employees who contribute to the customers’ experience but do not customarily and regularly receive tips— On March 23, 2018, Congress amended the FLSA through the CAA to further address employers’ practices with respect to their employees’ tips. Public Law 115–141, Div. S., Tit. XII, sec. 1201. The Department issued a FAB that provided guidance concerning WHD enforcement of the CAA amendments on April 6, 2018. See FAB No. 2018–3 (Apr. 6, 2018). VerDate Sep<11>2014 21:16 Oct 07, 2019 Jkt 250001 i. Amendments to Section 3(m) of the FLSA The CAA left unchanged the existing text of section 3(m), but recodified it as section 3(m)(2)(A). Thus, the CAA did not alter the FLSA’s longstanding requirements that apply to employers that take a tip credit. The CAA did, however, add new requirements for all employers. The CAA added a new section to the FLSA, 3(m)(2)(B). This provision expressly prohibits employers—regardless of whether they take a tip credit under 2 A recording of the testimony is available at: https://www.congress.gov/committees/video/houseappropriations/hsap00/6Weo1vfNM1k. PO 00000 Frm 00005 Fmt 4701 Sfmt 4702 53959 section 3(m)—from keeping tips received by their employees, including by distributing them to managers or supervisors: ‘‘An employer may not keep tips received by its employees for any purposes, including allowing managers or supervisors to keep any portion of employees’ tips, regardless of whether or not the employer takes a tip credit.’’ CAA, Div. S, Tit. XII, § 1201(a) (codified as amended at 29 U.S.C. 203(m)(2)(B)); see FAB No. 2018–3. ii. Effect on Regulations The CAA amendments also expressly addressed the portions of the Department’s 2011 regulations that restricted tip pooling when employers pay tipped employees a direct cash wage of at least the full FLSA minimum wage and do not take a tip credit. CAA, Div. S, Tit. XII, § 1201(c). Section 1201(c) of the CAA provides that the portions of WHD’s regulations at 29 CFR 531.52, 531.54, and 531.59 that were ‘‘not addressed by section 3(m) . . . (as such section was in effect on April 5, 2011), shall have no further force or effect until any future action taken by [the Department of Labor].’’ The Department explained in a FAB that this statutory language had the effect of depriving of any further force or effect the Department’s existing regulations prohibiting employers that pay tipped employees the full Federal minimum wage from including back-of-the-house workers, such as cooks and dishwashers, in a tip pool. See FAB No. 2018–3. iii. Amendments to Section 16 of the FLSA The CAA also amended section 16(b) of the FLSA, which provides in part that an employee may sue for unpaid minimum wages or overtime compensation. The amendment to this provision states that ‘‘[a]ny employer who violates section 3(m)(2)(B) shall be liable to the employee or employees affected in the amount of the sum of any tip credit taken by the employer and all such tips unlawfully kept by the employer, and in an additional equal amount as liquidated damages.’’ CAA, Div. S, Tit. XII, sec. 1201(b)(1). The amendment thus permits employees to sue for double the sum of any tips illegally kept by their employer and the amount of any tip credit taken by such employer. Section 16(c) of the FLSA authorizes the Department to enforce the proper payment of unpaid minimum wages and/or unpaid overtime compensation. The CAA amended section 16(c) by adding to the Department’s enforcement authority: ‘‘The authority and E:\FR\FM\08OCP4.SGM 08OCP4 53960 Federal Register / Vol. 84, No. 195 / Tuesday, October 8, 2019 / Proposed Rules requirements described in this subsection shall apply with respect to a violation of section 3(m)(2)(B), as appropriate, and the employer shall be liable for the amount of the sum of any tip credit taken by the employer and all such tips unlawfully kept by the employer, and an additional equal amount as liquidated damages.’’ CAA, Div. S, Tit. XII, sec. 1201(b)(2). Accordingly, when an employer unlawfully keeps an employee’s tips in violation of section 3(m)(2)(B), the Department may recover on behalf of the employee the same doubled sum of any tips kept and tip credit taken by the employer. Section 16(e)(2) provides that any person who repeatedly or willfully violates the minimum wage or overtime provisions of the FLSA shall be subject to a civil money penalty not to exceed $1,100 for each such violation.3 The CAA amended this section to add: ‘‘Any person who violates section 3(m)(2)(B) shall be subject to a civil penalty not to exceed $1,100 for each such violation, as the Secretary determines appropriate, in addition to being liable to the employee or employees affected for all tips unlawfully kept, and an additional equal amount as liquidated damages[.]’’ CAA, Div. S, Tit. XII, sec. 1201(b)(3). The amendment thus added a new civil money penalty for violations of section 3(m)(2)(B). III. Withdrawal of the 2017 NPRM As noted above, on December 5, 2017, the Department published an NPRM which proposed to rescind the parts of its tip regulations that applied to employers that pay a direct cash wage of at least the full Federal minimum wage and do not take a tip credit. The CAA amendments to the statutory text of the FLSA, which were signed into law on March 23, 2018, directly impacted the subject of the 2017 proposed rulemaking—employers that pay at least the full Federal minimum wage and do not take a tip credit under section 3(m). For that reason, the Department is withdrawing the 2017 NPRM and is addressing the 2018 CAA amendments through this rulemaking. jbell on DSK3GLQ082PROD with PROPOSALS4 IV. Section-by-Section Analysis of Proposed Regulatory Revisions This section describes in detail the Department’s proposed changes to its 3 The Federal Civil Penalties Inflation Adjustment Act of 1990 (Pub. L. 101–410), as amended by the Debt Collection Improvement Act of 1996 (Pub. L. 104–134, sec. 31001(s)) and the Federal Civil Penalties Inflation Adjustment Act Improvement Act of 2015 (Publ. L. No. 114–74, sec. 701), requires that inflationary adjustments be made annually in these civil money penalties according to a specified cost-of-living formula. VerDate Sep<11>2014 21:16 Oct 07, 2019 Jkt 250001 tip regulations to implement the CAA amendments and address other issues. As discussed above, the CAA amendments deprived of any further force or effect the portions of the Department’s 2011 regulations that restricted tip pooling when employers pay tipped employees a direct cash wage of at least the full FLSA minimum wage and do not take a tip credit, until future action by the WHD Administrator. At the same time, the CAA amendments expressly prohibit employers from keeping tips received by their employees for any purposes, regardless of whether the employer takes a tip credit. Pursuant to section 1201(c) of the CAA amendments and consistent with its position articulated in the 2017 NPRM, the Department proposes to strike the portions of its current regulations that prohibit employers that pay their tipped employees a direct cash wage at least equal to the Federal minimum wage and do not take a tip credit from establishing mandatory tip pools with employees who do not customarily and regularly receive tips, such as dishwashers and cooks. The Department also proposes to amend § 531.52 to implement newly added section 3(m)(2)(B), which prohibits employers—regardless of whether they take a tip credit—from keeping employees’ tips for any purposes, including allowing managers and supervisors to keep the tips. The proposed regulation defines an individual who is a manager or supervisor, and therefore may not keep employees’ tips under section 3(m)(2)(B), as an individual who meets the duties test at § 541.100(a)(2)–(4) or § 541.101. The Department also proposes to amend § 531.54 to reflect the new statutory provision, section 3(m)(2)(B). Proposed § 531.54(b) clarifies that section 3(m)(2)(B)’s prohibition on keeping tips applies regardless of whether the employer takes a tip credit and precludes employers from including themselves, managers, and/or supervisors in employer-mandated tip pools. Proposed § 531.54(b) also explains that although section 3(m)(2)(B) prohibits employers from sharing employees’ tips with supervisors, managers, and employers, an employer may institute a mandatory tip pool that requires employees to share or pool tips with other eligible employees. Proposed § 531.54(b) further provides that any employer that collects tips to facilitate a mandatory tip pool must fully redistribute the tips, no less often than when it pays wages, to avoid PO 00000 Frm 00006 Fmt 4701 Sfmt 4702 ‘‘keep[ing]’’ the tips in violation of section 3(m)(2)(B). Proposed §§ 531.54(c) and (d) would also set forth the different tip pooling requirements for employers that take a tip credit and for those that do not. Because the CAA did not substantively amend the statutory requirements under 3(m)(2)(A) that apply to employers that take a tip credit, the Department does not propose to change its existing tip pooling requirements in § 531.54 that apply to those employers. Those existing requirements, in relevant part, state that employers can only require tipped employees to contribute tips to a ‘‘traditional’’ tip pool, comprised of employees who customarily and regularly receive tips. In contrast, under the CAA amendments, an employer that chooses not to take a tip credit may require tipped employees to contribute tips to a ‘‘nontraditional’’ pool that includes employees, such as dishwashers and cooks, who are not employed in an occupation in which employees customarily and regularly receive tips. The proposed regulation clarifies that an employer that requires such a tip pool must pay a direct cash wage of at least the full Federal minimum wage to any tipped employee who contributes tips to the pool. The Department is also proposing to amend § 531.56(e) to reflect recent guidance that an employer may take a tip credit for time that an employee in a tipped occupation performs related, non-tipped duties contemporaneously with or a reasonable time immediately before or after performing the tipped duties. The proposed regulation would also address which non-tipped duties are related to a tip-producing occupation. The Department additionally proposes incorporating into its regulations the CAA amendments that provide for civil money penalties for violations of section 3(m)(2)(B). Since the Department is proposing to revise its regulations to reflect this new CMP provision, which, as proposed, would apply only to repeated and willful violations, the Department also proposes to revise its existing CMP regulations to address courts of appeals’ decisions that have raised concerns that some of the regulations’ statements regarding willful violations are inconsistent with Supreme Court authority and how the Department actually litigates willfulness. Finally, the Department proposes to amend the provisions of § 10.28, which addresses the payment of tipped employees under Executive Order 13658 (Establishing a Minimum Wage for Contractors), to make them consistent E:\FR\FM\08OCP4.SGM 08OCP4 Federal Register / Vol. 84, No. 195 / Tuesday, October 8, 2019 / Proposed Rules with its proposed rescissions to the FLSA regulations, to remove similar restrictions on an employer’s use of nontraditional tip pools, to otherwise align those regulations with the authority provided in the Executive Order, and to incorporate the Department’s recent guidance on when an employee performing non-tipped work is a tipped employee. The Department seeks public comment on these proposed regulatory changes. The Department asks commenters to define in their comments any terms they use to describe practices regarding tips. This NPRM uses the term ‘‘tip pooling’’ to describe any scenario in which a tip provided by a customer is shared, in whole or in part, among employees. The Department recognizes, however, that in some workplaces or under state laws, the term ‘‘tip pooling’’ may refer to a narrower set of practices, and that employers and workers may use other terms—for example ‘‘tip out,’’ ‘‘tip sharing,’’ or ‘‘tip jar’’—to describe certain practices regarding tips. A. Rescission of Portions of Sections 531.52, 531.54, and 531.59 jbell on DSK3GLQ082PROD with PROPOSALS4 As noted above, section 1201(c) of the CAA provides that the portions of the Department’s regulations at 29 CFR 531.52, 531.54, and 531.59 that were ‘‘not addressed by section 3(m)’’ ‘‘shall have no further force or effect[.]’’ CAA, Div. S, Tit. XII, sec. 1201(c). This statutory language deprives of any further force or effect the portions of §§ 531.52, 531.54, and 531.59 that impose restrictions on an employer’s use of employees’ tips when the employer does not take a tip credit. As the Department explained in its FAB, under the CAA amendments, employers that do not take a tip credit may now establish mandatory tip pools that include employees who do not customarily and regularly receive tips, such as back-of-the-house workers like cooks and dishwashers. See FAB No. 2018–3. Section 1201(c) of the CAA did not impact the portions of §§ 531.52, 531.54, and 531.59 that apply to employers that do take a tip credit. Consistent with the statutory language, as well as the Department’s statements in the 2017 NPRM,4 the Department proposes to rescind the language in § 531.52 that bars employers 4 As explained above, the government’s brief in response to the petition for certiorari in the NRA litigation explained that the Department had reconsidered its defense of the 2011 regulations, and that it believed that it had exceeded its statutory authority in promulgating the 2011 regulations as they apply to employers that do not take a tip credit against their Federal minimum wage obligations. VerDate Sep<11>2014 21:16 Oct 07, 2019 Jkt 250001 from establishing mandatory tip pools that include employees who are not customarily and regularly tipped, ‘‘whether or not it takes a tip credit,’’ and to make additional minor clarifying edits; to revise §§ 531.54 to clarify that the restrictions and notice requirements for tip pools apply only to employers that take a tip credit; and to revise § 531.59 to provide that the bar on including employees who are not customarily and regularly tipped in a mandatory tip pool applies only to employers that take a tip credit. B. Proposed Section 531.52—General Restrictions on an Employer’s Use of Its Employees’ Tips i. An Employer May Not Keep Tips, Regardless of Whether It Takes a Tip Credit Section 3(m)(2)(B) prohibits an employer, regardless of whether it takes a tip credit, from ‘‘keeping’’ tips received by its employees ‘‘for any purposes, including allowing managers and supervisors to keep any portion of employees’ tips.’’ Under the amended statute, an employer does not ‘‘keep’’ employees’ tips in violation of section 3(m)(2)(B) merely by requiring an employee who receives a tip to share it with other eligible employees who also contributed to the service provided to the customer. In those circumstances, the employees, not the employer, keep the tips. Section 3(m)(2)(B), however, prohibits an employer from using its employees’ tips for any other purpose. An employer would ‘‘keep’’ tips, for example, by using tips to cover its own general operating expenses, using tips to pay for capital improvements, or directing the tips to an individual who is not an employee, such as a vendor. This is true for tips provided through a credit card transaction, as well as for cash tips. The Department proposes to amend § 531.52 to include the new statutory language prohibiting an employer from keeping employees’ tips, and to clarify that an employer may exert control over employees’ tips only to distribute tips to the employee who received them, require employees to share tips with other eligible employees, or, where the employer facilitates tip pooling by collecting and redistributing employees’ tips, distribute tips to employees in a tip pool. The statutory language prohibits an ‘‘employer’’ from ‘‘keep[ing] tips received by its employees.’’ The term ‘‘employer’’ is defined in section 3(d) of the FLSA to mean ‘‘any person [or entity] acting directly or indirectly in the interest of an employer in relation to an employee . . . .’’ Therefore, a PO 00000 Frm 00007 Fmt 4701 Sfmt 4702 53961 person or entity that meets the definition of a section 3(d) employer may not keep or receive tips from a tip pool. ii. Managers and Supervisors May Not Keep Tips As explained above, section 3(m)(2)(B) prohibits employers, regardless of whether they take a tip credit, from keeping tips, ‘‘including allowing managers or supervisors to keep any portion of employees’ tips.’’ 29 U.S.C. 203(m)(2)(B). This prohibition applies to managers or supervisors obtaining employees’ tips directly or indirectly, such as via a tip pool. The Department’s current enforcement policy under FAB No. 2018–3 is to use the duties test under the executive employee exemption of FLSA section 13(a)(1), as defined at 29 CFR 541.100(a)(2)–(4), to determine whether an employee is a manager or supervisor for purposes of section 3(m)(2)(B). Proposed § 531.52 would reflect this policy. Because an employee who satisfies the executive duties test manages and supervises other employees, the test effectively identifies those employees whom Congress sought to preclude from keeping tips. The Department does not propose to use the salary requirements at § 541.100(a)(1) to help determine whether an employee is a manager or supervisor for purposes of section 3(m)(2)(B). Accordingly, this proposal would interpret the terms ‘‘manager’’ and ‘‘supervisor’’ under section 3(m)(2)(b) more broadly—and to encompass more employees—than the term ‘‘executive’’ as used in Section 13(a)(1). Sections 541.100(a)(2)–(4) provide that a manager or supervisor satisfies the duties test of the executive employee exemption if (1) the employee’s primary duty is managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise (see § 541.100(a)(2)); (2) the employee customarily and regularly directs the work of at least two or more other fulltime employees or their equivalent (see § 541.100(a)(3)); and (3) the employee has the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees are given particular weight (see § 541.100(a)(4)). In addition, an employee who owns at least a bona fide 20-percent equity interest in the enterprise in which she is employed, regardless of the type of business organization (e.g., corporation, partnership, or other), and who is E:\FR\FM\08OCP4.SGM 08OCP4 53962 Federal Register / Vol. 84, No. 195 / Tuesday, October 8, 2019 / Proposed Rules actively engaged in its management, as defined under 29 CFR 541.101, would be considered a manager or supervisor for purposes of section 3(m)(2)(B). The Department believes that these wellestablished criteria would effectively identify employees who manage or supervise other employees and therefore those whom Congress sought to prevent from keeping other employees’ tips. The Department additionally believes that employers can readily use these criteria to determine whether an employee is a manager or supervisor for purposes of section 3(m)(2)(B) because employers are generally familiar with these longstanding regulations. Moreover, the Department’s staff is highly trained, and has extensive experience, in applying and enforcing these longstanding regulations. The Department requests comments regarding whether other criteria may also be appropriate to determine whether an employee is a manager or supervisor for purposes of section 3(m)(2)(B), particularly in the varied situations where tipping is common. jbell on DSK3GLQ082PROD with PROPOSALS4 C. Proposed Section 531.54—Tip Pooling The Department also proposes to amend § 531.54, which generally addresses tip pooling, to reflect the CAA amendments. Proposed § 531.54 incorporates section 3(m)(2)(B)’s prohibition on employers keeping tips, including allowing managers or supervisors to keep employees’ tips. This prohibition applies regardless of whether the employer takes a tip credit, and therefore governs any employer that facilitates or operates a mandatory tip pool. Proposed § 531.54 also contains other specific requirements for employers that establish mandatory tip pools, depending on whether they include employees who do not customarily and regularly receive tips. i. Requirements When an Employer Collects and Redistributes Tips The Department recognizes that employers operate a variety of tip pooling and tip sharing arrangements and that some employers may wish to pool tips received by one set of employees and redistribute them to another. Section 3(m)(2)(B) does not prohibit an employer from doing so, as long as the employer fully redistributes the tips no less often than when it pays wages. In those circumstances, the employees’ tips are only temporarily within the employer’s possession, and the employer does not ‘‘keep’’ the tips. When an employer collects employees’ tips but fails to distribute them within this time period, however, and instead VerDate Sep<11>2014 21:16 Oct 07, 2019 Jkt 250001 holds the tips, the employer ‘‘keeps’’ them in violation of section 3(m)(2)(B). For example, an employer may not maintain a reserve of collected tips from one pay period to pay out in a subsequent pay period. Proposed § 531.54(b)(1) provides that an employer that collects tips to administer a tip pool must fully distribute any tips the employer collects at the regular payday for the workweek, or when the pay period covers more than a single workweek, at the regular payday for the period in which the particular workweek ends. To the extent that it is not possible for an employer to ascertain the amount of tips received or how tips should be distributed prior to processing payroll, the proposed rule requires the distribution of those tips to employees as soon as practicable after the regular payday. Thus, for a twoweek pay period, an employer must fully distribute any tips the employer collects during those two weeks on the regular payday for that period, or to the extent that it is not possible to ascertain the amount or distribution of the tips, as soon as possible following that payday. This proposed requirement aligns with the Department’s current guidance on how soon an employer must provide tips charged on credit cards to tipped employees. See WHD Field Operations Handbook (FOH) 30d05. Because the proposal defines ‘‘keep’’ within the meaning of section 3(m)(2)(B), the proposed requirement that an employer fully and promptly distribute any tips it collects would apply regardless of whether the employer takes a tip credit, and regardless of whether the employer requires employees to participate in a ‘‘traditional’’ tip pool or in a ‘‘nontraditional’’ tip pool. The Department requests comments on this proposed requirement, and requests information about how this requirement might affect employers’ current practices for administering tip pools and tip distribution. ii. Additional Requirements for Mandatory Tip Pools When an Employer Takes a Tip Credit Current § 531.54 provides that an employer, regardless of whether it takes a tip credit, may only require its tipped employees to share tips with other employees who customarily and regularly receive tips. The employer also must notify its employees of any required tip pool contribution amount, may only take a tip credit for the amount of tips each employee ultimately receives, and may not retain any of the employees’ tips for any other purpose. Although, as discussed above, PO 00000 Frm 00008 Fmt 4701 Sfmt 4702 the CAA amendments deprived of any further force or effect these regulatory tip pooling requirements as they apply to employers that do not take a tip credit, the CAA did not affect these requirements as they apply to employers that do take a tip credit. Therefore, proposed § 531.54(c) retains these requirements but clarifies that they apply only to employers that take a tip credit. iii. Conditions Under Which an Employer May Mandate Participation in a Nontraditional Tip Pool As explained above, as a result of the CAA amendments to the FLSA, employers that do not take a tip credit may now require tipped employees to participate in nontraditional tip pools that include employees who do not customarily and regularly receive tips, such as cooks and dishwashers, so long as the pools do not include employers, managers, or supervisors. Proposed § 531.54(d) implements these conditions. As explained above, the CAA did not substantively amend the FLSA’s existing tip credit provision, which states that employers may only take a tip credit against their minimum wage obligations to employees who are employed in an occupation in which they customarily and regularly receive tips, such as bussers and servers, and that employers that take a tip credit may only require tip pooling among such employees. See 29 U.S.C. 203(m)(2)(A). Over the years, the Department has developed guidance for itself on how to identify customarily and regularly tipped employees. See, e.g., WHD Opinion Letter FLSA 2009–12, 2009 WL 649014 (Jan. 15, 2009); WHD Opinion Letter FLSA 2008–18, 2008 WL 5483058 (Dec. 19, 2008); WHD FOH 30d04(b), (f) (listing occupations that do, and do not, meet these criteria). This guidance is based in large part on the legislative history of the FLSA’s tip credit provision. See S. Rep. No. 93–690, at 43 (1974).5 According to this guidance, employers may not take a tip credit for back-of-the-house employees who receive tips through a tip pool because those employees are not employed in an occupation in which they customarily and regularly receive tips. Similarly, employers may not include those noncustomarily and regularly tipped employees in a traditional section 3(m)(2)(A) tip pool. 5 Since the CAA did not change the FLSA’s existing tip credit provision, that guidance is still applicable to an employer that takes a tip credit. E:\FR\FM\08OCP4.SGM 08OCP4 Federal Register / Vol. 84, No. 195 / Tuesday, October 8, 2019 / Proposed Rules jbell on DSK3GLQ082PROD with PROPOSALS4 D. Proposed Section 516.28— Recordkeeping Requirements for Employers That Have Employees Who Receive Tips The Department is proposing revisions to the recordkeeping requirements in § 516.28 to provide consistent and effective administration of section 3(m)(2)(B) of the FLSA. Section 516.28 imposes certain recordkeeping requirements on only those employers that take a tip credit. Among other things, § 516.28(a) requires that the employer identify each employee for whom the employer takes a tip credit (see § 516.28(a)(1)) and maintain records regarding the weekly or monthly amount of tips received, as reported by the employee to the employer (see § 516.28(a)(2)). The employer may use information on IRS Form 4070 (Employee’s Report of Tips to Employer) to satisfy the requirements under § 516.28(a)(2).6 The Department proposes to apply similar recordkeeping requirements for employers that do not take a tip credit but still collect employees’ tips to operate a mandatory tip pool. Proposed § 516.28(b)(1) would require these employers to identify on their payroll records each employee who receives tips. Proposed § 516.28(b)(2) would require employers that do not take a tip credit but that collect tips to operate a mandatory tip pool to keep records of the weekly or monthly amount of tips received by each employee as reported by the employee to the employer (this may consist of reports from the employees to the employer on IRS Form 4070). The proposed recordkeeping requirements would help the Department determine whether employers are complying with their tip pooling obligations. The Department requests comments on these proposed requirements. E. Proposed Section 531.56(e)—Dual Jobs The Department proposes to amend § 531.56(e) to reflect recent guidance, which addresses whether an employer can take a tip credit for the time that a tipped employee spends performing duties in a tipped occupation that do not produce tips. Section 3(t) of the FLSA defines a ‘‘tipped employee’’ for whom an employer may take a tip credit under section 3(m) as ‘‘any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.’’ 29 U.S.C. 203(t). Current § 531.56(e) recognizes 6 For information regarding IRS Form 4070, see https://www.irs.gov/pub/irs-access/f4070_ accessible.pdf. VerDate Sep<11>2014 21:16 Oct 07, 2019 Jkt 250001 that an employee may be employed both in a tipped occupation and in a nontipped occupation, providing that in such a ‘‘dual jobs’’ situation, the employee is a ‘‘tipped employee’’ for purposes of section 3(t) only while he or she is employed in the tipped occupation, and that an employer may only take a tip credit against its minimum wage obligations for the time the employee spends in that tipped occupation. In addition to addressing dual jobs, the current regulation also recognizes that an employee in a tipped occupation may perform related duties that are ‘‘themselves not directed toward producing tips,’’ such as, for example, a server ‘‘who spends part of her time’’ performing non-tipped duties, such as ‘‘cleaning and setting tables, toasting bread, making coffee, and occasionally washing dishes or glasses.’’ The regulation distinguishes this situation, in which the employee is still engaged in the tipped occupation of serving, from a dual jobs situation, in which the employee is engaged part of the time in a non-tipped occupation. 29 CFR 531.56(e). The Department has in the past provided enforcement guidance on whether and to what extent an employer can take a tip credit for a tipped employee who is performing non-tipped duties related to the tipped occupation. Previously, the Department advised that an employer may not take a tip credit for the time an employee spent performing related duties that do not produce tips if that time exceeded 20 percent of the employee’s workweek. However, this policy was difficult for employers to administer and led to confusion, in part because employers lacked guidance to determine whether a particular non-tipped duty is ‘‘related’’ to the tip-producing occupation. One court described it as ‘‘infeasible,’’ observing that the policy would ‘‘present a discovery nightmare’’ and require employers to ‘‘keep the employee under perpetual surveillance or require them to maintain precise time logs accounting for every minute of their shifts.’’ Pellon v. Bus. Representation Int’l, Inc., 528 F. Supp. 2d 1306, 1314 (S.D. Fla. 2007), aff’d, 291 F. App’x 310 (11th Cir. 2008). The Department believes that such a situation would help neither employer nor employee. See WHD Opinion Letter FLSA 2018– 27, 2018 WL 5921455, at *3 (Nov. 8, 2018). In November 2018, the Department issued an opinion letter addressing these issues.7 The Department 7 The Department had provided the same guidance initially in WHD Opinion Letter PO 00000 Frm 00009 Fmt 4701 Sfmt 4702 53963 subsequently issued a FAB and revised its Field Operations Handbook (FOH) to reflect the interpretation of related duties in the opinion letter. See FAB 2019–2 (Feb. 15, 2019); WHD FOH 30d00(f). In these guidance documents, the Department explained that it would no longer prohibit an employer from taking a tip credit for the time an employee performs related, non-tipped duties—as long as those duties are performed contemporaneously with, or for a reasonable time immediately before or after, tipped duties. See FAB 2019–2, at *2 (Feb. 15, 2019) (‘‘[Section] 531.56(e) includes non-tipped duties in the tip credit unless they are unrelated to the tipped occupation or part of a separate, non-tipped occupation in a ‘dual job’ scenario. Accordingly, an employer may take a tip credit for any duties that an employee performs in a tipped occupation that are related to that occupation and either performed contemporaneous with the tipproducing activities or for a reasonable time immediately before or after the tipped activities.’’); see also WHD FOH 30d00(f) WHD Opinion Letter FLSA2018–27, 2018 WL 5921455, at *3– 4 (Nov. 8, 2018). The Department believes this policy is consistent with the plain statutory text, which permits employers to take a tip credit based on whether an employee is engaged in a tipped ‘‘occupation,’’ not on whether the employee is performing certain kinds of duties within the tipped occupation. In its recent guidance, the Department also explained that, in addition to the examples listed in 531.56(e), it would use the Occupational Information Network (O*NET) to determine whether a tipped employee’s non-tipped duties are related to their tipped occupation. O*NET is a comprehensive database of worker attributes and job characteristics, and is available to the public online at www.onetonline.com. O*NET includes information on work activities for over 900 occupations based on the Standard Occupational Classification system, a statistical standard used by federal agencies to classify workers into occupational categories for the purpose of collecting, calculating, or disseminating data. The Department is proposing to revise § 531.56(e) to reflect the guidance on related duties in the recent opinion letter, FAB, and FOH revisions. Proposed § 531.56(e) would retain current language on dual jobs providing that when an individual is employed in FLSA2009–23, which was issued on January 16, 2009 and was withdrawn on March 2, 2009 ‘‘for further consideration.’’ E:\FR\FM\08OCP4.SGM 08OCP4 53964 Federal Register / Vol. 84, No. 195 / Tuesday, October 8, 2019 / Proposed Rules jbell on DSK3GLQ082PROD with PROPOSALS4 a tipped occupation and a non-tipped occupation, the tip credit is available only for the hours the employee spends working in the tipped occupation. It would also continue to distinguish such a dual jobs scenario from one in which an employee performs duties that are related to her tipped occupation but not themselves directed toward producing tips. The proposed regulation would clarify that an employer may take a tip credit for any amount of time that an employee performs related, non-tipped duties contemporaneously with his or her tipped duties, or for a reasonable time immediately before or after performing the tipped duties. Proposed § 531.56(e) would also provide that, in addition to the examples listed in the regulation, a non-tipped duty is related to a tip-producing occupation if the duty is listed as a task of the tipproducing occupation in the Occupational Information Network (O*NET). The Department requests comments on these proposed changes to § 531.56(e). The Department is particularly interested in comments on how to identify related duties for occupations that may qualify as tipped occupations, but which lack a description in the O*NET database, perhaps because they are newly emerging. In its enforcement guidance, the Department has stated that when an O*NET description does not exist for an occupation, the Department will consider any duties usually and customarily performed by employees in that occupation to be related duties so long as the duties are consistent with the related duties for similar occupations listed in O*NET. F. Proposed Parts 578, 579, and 580— Civil Money Penalties Section 1201(b)(3) of the CAA amended FLSA section 16(e)(2) by adding a new penalty provision: ‘‘Any person who violates section 3(m)(2)(B) shall be subject to a civil penalty not to exceed $1,100 for each such violation, as the Secretary determines appropriate, in addition to being liable to the employee or employees affected for all tips unlawfully kept, and an additional equal amount as liquidated damages, as described in subsection (b).’’ The CAA thus provides the Department with discretion to impose CMPs up to $1,100 8 when employers unlawfully keep employee tips, including when they allow managers or supervisors to keep any portion of 8 This number is adjusted by inflation annually as required by the authorities in footnote 5 of this NPRM. VerDate Sep<11>2014 21:16 Oct 07, 2019 Jkt 250001 employees’ tips. See 29 U.S.C. 203(m)(2)(B). In assessing CMPs for violations of section 3(m)(2)(B) under amended section 16(e)(2), the Department proposes to follow the same guidelines and procedures that it follows for assessing CMPs for violation of the minimum wage (section 6) and overtime (section 7) provisions of the FLSA, and to issue CMPs only when it determines there has been a willful or repeated violation of section 3(m)(2)(B). The Department has been assessing CMPs for repeated or willful violations of the minimum wage and overtime provisions of the FLSA using the guidelines in part 578 and procedures in part 580 for nearly three decades. As such, employers are generally familiar with these regulations, and the Department’s staff and Administrative Law Judges have experience applying them. Part 578 of the Department’s regulations (§§ 578.1–578.4) sets out the criteria the Department uses when determining whether a minimum wage or overtime violation is repeated or willful and thus subject to a CMP, as well as the amount of any CMP it assesses, and part 580 (§§ 580.1–580.18) sets out the procedures for assessing and contesting CMPs. Additionally, § 579.1(a) lists the maximum allowable CMPs for violations of the FLSA’s child labor, minimum wage, and overtime provisions. See 29 CFR 579.1. The Department proposes to revise § 578.1 to provide that section 1201 of the CAA authorizes the Department to issue CMPs for violations of section 3(m)(2)(B); to revise § 578.3(a)(1) to provide that any person who willfully or repeatedly violates section 3(m)(2)(B) shall be subject to a CMP not to exceed $1,100 (as adjusted for inflation under the IAA); to revise §§ 578.3(b)–(c) to provide that the Department will use the criteria therein to determine whether an employer’s violation of section 3(m)(2)(B) is repeated or willful and thus subject to a civil penalty; and to revise § 578.4 to provide that the Department will determine the amount of the penalty for repeated or willful violations of section 3(m)(2)(B) according to the guidelines set forth in that section. The Department proposes to revise §§ 579.1(a) and 579.1(a)(2) to provide that, consistent with the CAA amendments, any person who willfully or repeatedly violates section 3(m)(2)(B) shall be subject to a CMP not to exceed $1,100. Additionally, the Department proposes to revise §§ 580.2, 580.3, 580.12, and 580.18 to provide that the assessment of civil penalties for violations of section 3(m)(2)(B) shall be PO 00000 Frm 00010 Fmt 4701 Sfmt 4702 governed by the rules and procedures set forth therein. Finally, the Department proposes additional, nonsubstantive changes to § 578.1 to better reflect the history of amendments to the civil money penalty for violations of section 6 (minimum wage) and section 7 (overtime) of the Act. Since the Department is proposing to revise parts 578 and 579 to reflect the new CMP provision that the CAA added to the FLSA, the Department also proposes to revise §§ 578.3(c)(2) and (3), and identical language in § 579.2, to address courts of appeals’ concerns that some of the regulations’ statements regarding willful violations are inconsistent with Supreme Court authority and how the Department actually litigates willfulness. When it initially promulgated § 578.3(c) to provide guidance for assessing CMPs for violations of the FLSA’s minimum wage or overtime pay requirements, the Department based its definition of a ‘‘willful’’ violation on the Supreme Court’s decision in McLaughlin v. Richland Shoe Co., 486 U.S. 128 (1988). See 57 FR 49,129 (Oct. 29, 1992). In Richland Shoe, the Supreme Court held that a violation is willful if the employer ‘‘knew or showed reckless disregard’’ for whether its conduct was prohibited by the FLSA. 486 U.S. at 133. Section 578.3(c)(1) incorporates this holding and provides that ‘‘[a]ll of the facts and circumstances surrounding the violation shall be taken into account in determining whether a violation was willful.’’ Section 578.3(c)(2) provides that ‘‘an employer’s conduct shall be deemed knowing’’ if the employer received advice from the WHD that its conduct is unlawful. Section 578.3(c)(3) provides that ‘‘an employer’s conduct shall be deemed to be in reckless disregard’’ of the FLSA’s requirements if the employer should have inquired further into whether its conduct complied with the FLSA and failed to make adequate further inquiry. An appellate court has identified an ‘‘incongruity’’ between §§ 578.3(c)(2) and (3) and ‘‘the Richland Shoe standard on which the regulation is based.’’ Baystate Alt. Staffing, Inc. v. Herman, 163 F.3d 668, 680 (1st Cir. 1998). The court expressed ‘‘significant reservations about [§ 578.3(c)(2)’s] blanket assertion that a party’s decision not to comply with [WHD’s] advice constitutes a ‘knowing’ violation’’ under Richland Shoe. Id. The court further stated that § 578.3(c)(3) ‘‘by its terms— specifically, that a party ‘should have inquired further’ about the legality of its conduct—embraces a negligence standard of liability,’’ which Richland Shoe ‘‘expressly rejected.’’ Id. at 680–81 E:\FR\FM\08OCP4.SGM 08OCP4 jbell on DSK3GLQ082PROD with PROPOSALS4 Federal Register / Vol. 84, No. 195 / Tuesday, October 8, 2019 / Proposed Rules (citing 486 U.S. at 133–35). Describing §§ 578.3(c)(2) and (3) as ‘‘incomplete’’ and ‘‘unhelpful,’’ the court urged the Department ‘‘to reconsider [them] to ensure that they comport with the Court’s reading of . . . ‘willful’ in Richland Shoe.’’ Id. at 681 n.16. In several cases addressing this issue, the Department has argued that advice from WHD to an employer that its conduct was unlawful ‘‘would not necessarily be dispositive of willfulness’’ in a future enforcement action, and that the employer would have the opportunity ‘‘to contest the assertion that the violation was willful notwithstanding its receipt of such advice.’’ See, e.g., Br. for Appellee at 22–23, Rhea Lana, Inc. v. DOL, 824 F.3d 1023 (DC Cir. 2016) (No. 15–5014), 2015 WL 4052846, at *22–23. The Department stated that § 578.3(c)(2) ‘‘simply reflects the commonsense principle that, in the absence of persuasive and relevant evidence presented by an employer, notice from the agency of a FLSA violation may be used to establish willfulness,’’ and that such notice is ‘‘but one piece of evidence.’’ Id. at 26. In Rhea Lana, the court did not reject outright the Department’s reading of § 578.3(c), but pointed out that it was possible to read the regulation as ‘‘a stand-alone trigger for willfulness penalties’’ in a future enforcement action against the employer. 824 F.3d at 1031–32. In light of Baystate, Rhea Lana, and § 578.3(c)(1)’s command that ‘‘[a]ll of the facts and circumstances surrounding the violation shall be taken into account in determining whether a violation was willful,’’ the Department proposes to revise §§ 578.3(c)(2) and (3) to clarify that no single fact or circumstance is automatically dispositive as to willfulness to the exclusion of consideration of all other facts and circumstances. Revising §§ 578.3(c)(2) and (3) as proposed would ensure consistency between the regulation and how the Department litigates and briefs the issue of willfulness under the FLSA; resolve concerns that the regulation is inconsistent with Richland Shoe; and provide greater clarity to the regulated community regarding the standard for willfulness under the FLSA, including by specifying that no one fact or circumstance will preclude an employer from arguing that its conduct was not willful. To ensure consistent guidance regarding willful violations, the Department proposes to similarly revise identical language in § 579.2 addressing the proper assessment of CMPs for willful violations of the FLSA’s child labor provisions. VerDate Sep<11>2014 21:16 Oct 07, 2019 Jkt 250001 G. Additional Proposed Regulatory Revisions Section 531.50 currently sets forth the provisions of the FLSA that apply to tips and tipped employees. The Department proposes to revise § 531.50 to reflect the language that the CAA added to the FLSA. The Department also proposes to update §§ 531.50, 531.51, 531.52, 531.55, 531.56, 531.59, and 531.60 to reflect the new statutory citation to the FLSA’s existing tip credit provision, previously cited as section 3(m), as section 3(m)(2)(A). The Department also proposes to clarify references in §§ 531.56(d), 531.59(a) and (b), and 531.60 to the amount an employer can take as a tip credit under section 3(m) (now 3(m)(2)(A)). The Department’s regulations currently state that the an employer can take a tip credit for each employee equal to the difference between the minimum wage required by section 6(a)(1) of the FLSA (currently $7.25 an hour) and $2.13 an hour. To ensure that the Department’s regulations clearly state employers’ obligations under the FLSA, the Department proposes to revise §§ 531.56(d), 531.59(a) and (b), and 531.60 to provide, consistent with the text of the statute, that the tip credit permitted by section 3(m)(2)(A) is equal to the difference between the Federal minimum wage and the cash wage paid by the employer. That cash wage must be at least $2.13 per hour, but the statute does not preclude an employer from paying more. Finally, the Department proposes to amend the tip provisions of its Executive Order 13658 regulations. Executive Order 13658 raised the hourly minimum wage paid by contractors to workers performing work on or in connection with covered Federal contracts. The Executive Order also established a tip credit for workers covered by the Order who are tipped employees pursuant to section 3(t) of the FLSA. Section 4(c) of the Executive Order encourages the Department, when promulgating regulations under that Order, to incorporate existing ‘‘definitions, procedures, remedies, and enforcement processes’’ from a number of laws that the agency enforces, including the FLSA. The Department’s current Executive Order 13658 regulations are modeled after the Department’s current FLSA tip regulations, and prohibit covered employers from implementing tip pools that include employees who are not customarily and regularly tipped. The Department proposes to amend § 10.28, consistent with its proposed rescissions to portions of the Department’s FLSA PO 00000 Frm 00011 Fmt 4701 Sfmt 4702 53965 regulations, to remove similar restrictions on an employer’s use of such tip pools and to otherwise align those regulations with the authority provided in the Executive Order. Federal contractors covered by the FLSA would, of course, also be subject to the FLSA regulations proposed herein. The Department also proposes to amend § 10.28, consistent with its proposed revisions to § 531.56(e), to reflect its current guidance on when an employee performing non-tipped work constitutes a tipped employee for the purposes of 3(t). V. Paperwork Reduction Act The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq., and its attendant regulations, 5 CFR part 1320, require the Department to consider the agency’s need for its information collections, their practical utility, as well as the impact of paperwork and other information collection burdens imposed on the public, and how to minimize those burdens. The PRA typically requires an agency to provide notice and seek public comments on any proposed collection of information contained in a proposed rule.9 Persons are not required to respond to the information collection requirements until the Office of Management and Budget (OMB) approves them under the PRA. This NPRM would revise the existing information collection burden estimates previously approved under OMB control number 1235–0018 (Records to be Kept by Employers—Fair Labor Standards Act) because employers may choose to pay the full Federal minimum wage and not take a tip credit, and collect tips to operate an employerrequired, mandatory tip pooling arrangement, thereby triggering the recordkeeping requirement in proposed § 516.28(b). The Department has opened OMB control number 1235–0NEW for this action. As the PRA requires, the Department has submitted the information collection revisions to OMB for review to reflect changes that would result from this proposed rule. The Department proposes a slight burden increase for employers keeping records concerning employees who receive tips, as well as a regulatory familiarization burden. Summary: FLSA section 11(c) requires covered employers to make, keep, and preserve records of employees and their wages, hours, and other conditions of employment, as prescribed by regulation. The Department’s regulations at 29 CFR part 516 establish the basic FLSA 9 See E:\FR\FM\08OCP4.SGM 44 U.S.C. 3506(c)(2)(B); 5 CFR 1320.8. 08OCP4 jbell on DSK3GLQ082PROD with PROPOSALS4 53966 Federal Register / Vol. 84, No. 195 / Tuesday, October 8, 2019 / Proposed Rules recordkeeping requirements. Section 516.28(a) currently requires employers to keep certain records concerning tipped employees for whom the employer takes a tip credit under the FLSA. Among other things, § 516.28(a) requires that the employer identify each employee for whom the employer takes a tip credit, identify the hourly tip credit for each such employee, and maintain records regarding the weekly or monthly amount of tips received (which may consist of IRS Form 4070) as reported by the employee to the employer. The adoption of proposed § 516.28(b)(1) and (b)(2) would require an employer that does not take a tip credit, but that collects employees’ tips to operate a mandatory tip pooling arrangement, to indicate on its pay records each employee who receives tips and to maintain records of the weekly or monthly amount of tips that each such employee receives (this may consist of reports that the employees make to the employer on IRS Form 4070). The increase in the number of respondents and, accordingly, the burden hours associated with records to be kept under the proposed § 516.28(b)(1)–(2), is attributable to an expanding economy increasing the number of establishments employing individuals who receive tips since the last PRA revision of this recordkeeping requirement. Purpose and Use: WHD and employees use employer records to determine whether covered employers have complied with various FLSA requirements. Employers use the records to document compliance with the FLSA, and in the case of this NPRM, the Department would use the records regarding employees who receive tips to determine compliance with sections 3(m)(2)(A) and 3(m)(2)(B). Technology: The regulations prescribe no particular order or form of records, and employers may preserve records in forms of their choosing, provided that facilities are available for inspection and transcription of the records. Minimizing Small Entity Burden: Although the FLSA recordkeeping requirements do involve small businesses, including small state and local government agencies, the Department minimizes respondent burden by requiring no specific order or form of records in responding to this information collection. Public Comments: As part of its continuing effort to reduce paperwork and respondent burden, the Department conducts a preclearance consultation program to provide the general public and Federal agencies with an opportunity to comment on proposed VerDate Sep<11>2014 21:16 Oct 07, 2019 Jkt 250001 and continuing collections of information in accordance with the PRA. This program helps to ensure that requested data can be provided in the desired format, reporting burden (time and money) is minimized, collection instruments are clearly understood, and the impact of collection requirements on respondents can be properly assessed. The Department seeks public comments regarding the burdens imposed by the information collections associated with this NPRM. Commenters may send their views about this information collection to the Department in the same manner as all other comments (e.g., through the regulations.gov website). All comments received will be made a matter of public record and posted without change to https://www.regulations.gov and https:// www.reginfo.gov, including any personal information provided. As previously noted, an agency may not conduct an information collection unless it has a currently valid OMB approval, and the Department has submitted information-collection requests under OMB control number 1235–0NEW to update them to reflect this rulemaking and provide interested parties a specific opportunity to comment under the PRA. See 44 U.S.C. 3507(d); 5 CFR 1320.11. Interested parties may receive a copy of the full supporting statement by sending a written request to the mail address shown in the ADDRESSES section at the beginning of this preamble. In addition to having an opportunity to file comments with the Department, comments about the paperwork implications may be addressed to OMB. Comments to OMB should be directed to: Office of Information and Regulatory Affairs, Attention OMB Desk Officer for the Wage and Hour Division, Office of Management and Budget, Room 10235, 725 17th Street NW, Washington, DC 20503; by Fax: 202–395–5806 (this is not a toll-free number); or by email: OIRA_submission@omb.eop.gov. OMB will consider all written comments that the agency receives within 30 days of publication of this proposed rule. Commenters are encouraged, but not required, to send the Department a courtesy copy of any comments sent to OMB. The courtesy copy may be sent via the same channels as comments on the rule. The Department is particularly interested in comments that: • Evaluate whether the proposed collections of information are necessary for the proper performance of the functions of the agency, including whether the information will have practical utility; PO 00000 Frm 00012 Fmt 4701 Sfmt 4702 • Evaluate the accuracy of the agency’s estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used; • Enhance the quality, utility, and clarity of the information to be collected; and • Minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology, e.g., permitting electronic submission of responses. Total annual burden estimates, which reflect both the existing and new responses for the recordkeeping information collection, are summarized as follows: Type of Review: Revision of a currently approved collection. Agency: Wage and Hour Division, Department of Labor. Title: Records to be Kept by Employers—Fair Labor Standards Act. OMB Control Number: 1235–0NEW. Affected Public: Private Sector: businesses or other for-profits, farms, and not-for-profit institutions: State, Local and Tribal governments; and individuals or households. Estimated Number of Respondents: 3,860,288 (102,994 from this rulemaking). Estimated Number of Responses: 43,799,221 (248,032 from this rulemaking). Estimated Burden Hours: 1,007,512 hours (24,593 from this rulemaking). Estimated Time per Response: Various (unaffected by this rulemaking). Frequency: Various (unaffected by this rulemaking). Other Burden Cost: $0. VI. Analysis Conducted in Accordance With Executive Order 12866, Regulatory Planning and Review, Executive Order 13563, Improved Regulation and Regulatory Review, and Executive Order 13771, Reducing Regulation and Controlling Regulatory Costs A. Introduction Under Executive Order 12866, OMB’s Office of Information and Regulatory Affairs determines whether a regulatory action is significant and, therefore, subject to the requirements of the Executive Order and OMB review.10 Section 3(f) of Executive Order 12866 defines a ‘‘significant regulatory action’’ as an action that is likely to result in a 10 58 E:\FR\FM\08OCP4.SGM FR 51735 (Sept. 30, 1993). 08OCP4 Federal Register / Vol. 84, No. 195 / Tuesday, October 8, 2019 / Proposed Rules rule that: (1) Has an annual effect on the economy of $100 million or more, or adversely affects in a material way a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local or tribal governments or communities (also referred to as economically significant); (2) creates serious inconsistency or otherwise interferes with an action taken or planned by another agency; (3) materially alters the budgetary impacts of entitlement grants, user fees, or loan programs, or the rights and obligations of recipients thereof; or (4) raises novel legal or policy issues arising out of legal mandates, the President’s priorities, or the principles set forth in the Executive Order. Because the annual effect of this proposed rule would be greater than $100 million, this proposed rule would be economically significant under section 3(f) of Executive Order 12866. Executive Order 13563 directs agencies to propose or adopt a regulation only upon a reasoned determination that its benefits justify its costs; that it is tailored to impose the least burden on society, consistent with achieving the regulatory objectives; and that, in choosing among alternative regulatory approaches, the agency has selected the approaches that maximize net benefits. Executive Order 13563 recognizes that some benefits are difficult to quantify and provides that, when appropriate and permitted by law, agencies may consider and discuss qualitatively values that are difficult or impossible to quantify, including equity, human dignity, fairness, and distributive impacts. This proposed rule is expected to be an Executive Order 13771 deregulatory action, because it provides more flexibility to employers in structuring their employee tip pools. Details on the estimated costs and transfers, as well as qualitative discussions of cost savings of this proposed rule, can be found in the economic analysis below. The unquantified cost savings are expected to outweigh the quantified costs. Cost savings include reduced turnover of back-of-the-house employees, greater flexibility for tip pooling, and reduced effort spent ensuring that the tip pool is limited to only customarily and regularly tipped employees. jbell on DSK3GLQ082PROD with PROPOSALS4 B. Economic Analysis i. Introduction In March 2018, Congress amended section 3(m) and sections 16(b), (c), and (e) of the FLSA to prohibit employers from keeping their employees’ tips, to permit recovery of tips that an employer unlawfully keeps, and suspend the VerDate Sep<11>2014 21:16 Oct 07, 2019 Jkt 250001 operations of the portions of the 2011 final rule that restricted tip pooling when employers do not take a tip credit. This analysis examines the economic impact associated with the Department’s proposed implementation of those amendments, specifically the transfers resulting from employers that do not claim a tip credit and previously did not have a mandatory tip pool, or that only had a traditional tip pool limited to ‘‘front-of-the-house’’ employees (i.e., servers and bartenders) implementing a nontraditional tip pool that includes ‘‘back-of-the-house’’ employees (i.e., janitors, chefs, dishwashers, and foodpreparation workers). Thus, a transfer of tip income will occur from ‘‘front-ofthe-house’’ employees. The Department also quantified rule familiarization costs and qualitatively discusses additional costs, cost savings, and benefits. To perform this analysis, the Department compares the impact relative to a prestatutory baseline (i.e., before Congress amended the FLSA in March 2018). If the Department were to look at economic impacts relative to a poststatutory baseline, there would likely be no impact aside from rule familiarization costs, as the transfers arise from the changes put forth in the statute. The Department is also proposing to amend its regulations to reflect guidance which provides that an employer may take a tip credit for any amount of time that an employee in a tipped occupation performs related, non-tipped duties contemporaneously with his or her tipped duties, or for a reasonable time immediately before or after performing the tipped duties. This interpretation was promulgated in a November 2018 opinion letter and subsequent FAB, and reflects WHD’s enforcement position. As explained below, the Department lacks data to quantify any potential costs, benefits, or transfers which may be associated with the implementation of this policy; therefore, the Department discusses potential costs, benefits, and transfers qualitatively. The Department welcomes comments on the impact of this proposal, including data on employers’ responses to the codification of this policy. The economic analysis covers employees in two industries and in two occupations within those industries. The two industries are classified under the North American Industry Classification System (NAICS) as 722410 (Drinking Places (Alcoholic Beverages)) and 722511 (Full-service Restaurants); referred to in this analysis as ‘‘restaurants and drinking places.’’ The two occupations are classified under Bureau of Labor Statistics (BLS) PO 00000 Frm 00013 Fmt 4701 Sfmt 4702 53967 Standard Occupational Classification (SOC) codes SOC 35–3031 (Waiters and Waitresses) and SOC 35–3011 (Bartenders).11 The Department considered these two occupations because they constitute a large percentage of total tipped workers and a large percentage of the workers in these occupations receive tips (see Table 1 for shares of workers in these employees who may receive tips). The Department understands that there are other occupations beyond servers and bartenders with tipped workers, such as SOC 35–9011 (Dining room and Cafeteria Attendants and Bartender Helpers), SOC 35–9031 (Hosts and Hostesses, Restaurant, Lounge, and Coffee Shop), and others, as well as other industries that employ workers who receive tips, such as NAICS 722515 (snack and nonalcoholic beverage bars), NAICS 722513 (limited service restaurants), NAICS 721110 (hotels and motels), and NAICS 713210 (casinos); thus, the Department welcomes comments and suggestions on whether this analysis should extend to such occupations and industries. The analysis covers ten years to ensure that it captures major costs and transfers. When summarizing the costs and transfers of the proposed rule, the Department presents the first year’s impact, as well as the 10-year annualized costs and transfers with 3 percent and 7 percent discounting.12 ii. Estimated Transfers Under the regulations proposed in this NPRM, transfers would arise when employers that already pay the full Federal minimum wage and previously did not have a mandatory tip pool or only had a traditional tip pool institute nontraditional tip pools in which tipped employees such as servers and bartenders are required to share tips with employees who do not customarily and regularly receive tips, such as cooks and dishwashers. The Department believes that including back-of-thehouse workers in tip pools could help equalize income among the employees within the establishment, and could also help promote cooperation and collaboration among employees. Because the statute prohibits employers from keeping employee tips, directlyobservable transfers will only occur 11 In the Current Population Survey, these occupations correspond to Bartenders (Census Code 4040) and Waiters and Waitresses (Census Code 4110). The industries correspond to Restaurants and Other Food Services (Census Code 8680) and Drinking Places, Alcoholic Beverages (Census Code 8690). 12 Discount rates are directed by OMB. See Circular A–4, OMB (Sept. 17, 2003). E:\FR\FM\08OCP4.SGM 08OCP4 jbell on DSK3GLQ082PROD with PROPOSALS4 53968 Federal Register / Vol. 84, No. 195 / Tuesday, October 8, 2019 / Proposed Rules among employees. However, because back-of-the-house workers could now be receiving tips, employers may offset this increase in total compensation by reducing the direct wage that they pay back-of-the-house workers (as long as they do not reduce these employees’ wages below the applicable minimum wage); offsets of this type are implied in the model underlying the quantitative estimates below. To the extent that wages are sticky in the short run, backof-the-house employees are recipients of transfers, but across a longer time horizon, market adjustments increasingly allow employers to capture the transfer. The analysis assumes that employers will institute nontraditional tip pools with employees who do not customarily and regularly receive tips only in situations that are beneficial to them. Accordingly, it assumes that employers will include back-of-the-house employees in their tip pools only if they believe that they can do so without losing their front-of-the-house staff. To attract and retain the tipped workers that they need, employers must pay these workers as much as their ‘‘outside option,’’ or the hourly earnings that they could receive in a non-tipped job with a similar skill level requirement to their current position. For each tipped worker, the Department assumes a transfer will occur only if their total earnings, including tips, is greater than the predicted outside-option wage from a non-tipped job. This methodology was informed by comments submitted as part of the Department’s 2017 NPRM that discussed using outside options to determine potential transfer of tips. The transfer calculation excludes any workers who are paid a direct cash wage below the full FLSA minimum wage of $7.25, because under the amended statute and the Department’s proposed rule, employers who do take a tip credit are still subject to section 3(m)(2)(A)’s restrictions on tip pools. Some employers may begin paying their tipped workers a direct cash wage of at least the full FLSA minimum wage in order to institute a tip pool with backof-the-house workers. This potential transfer is not quantified due to uncertainty regarding how many employers would choose to no longer use the tip credit. Choosing to no longer take a tip credit would require a change to employers’ payroll systems and methods of compensation to which employers and employers are accustomed, which could discourage employers from making this change. The Department requests comments on the prevalence of this adjustment. VerDate Sep<11>2014 21:16 Oct 07, 2019 Jkt 250001 The transfer calculation also excludes any workers who are paid a direct cash wage by their employers, exclusive of any tips received, that exceeds the applicable minimum wage (either the Federal or applicable State minimum wage). The Department assumes that because these employers are already paying more than required under applicable law for these workers, any reduction in compensation would result in these workers leaving that employment. These employees will therefore not have their tips redistributed through a nontraditional tip pool. The Department requests comments and data on this assumption. The Department does not attempt to definitively interpret individual state law; it is assumed, however, that some wait staff and bartenders work in a state that either prohibits mandatory tip pooling or imposes stricter limits on who can participate in a mandatory tip pool than are proposed in this NPRM,13 or in a state that is in the Tenth Circuit 14 where, as a result of Marlow v. New Food Guy, Inc., 861 F.3d at 1159, employers that do not take a tip credit were already permitted to institute nontraditional tip pools at the time Congress amended the FLSA. The transfer estimate excludes tipped employees in these states whom the changes proposed in this NPRM may not affect—amounting to about 43 percent of a $0.5 billion intermediate estimate of the potential transfer amount.15 Thus, the Department first determined total transfers for all wait staff and bartenders using the methodology described above. The Department then excluded workers whom the proposed changes will not affect due to their respective state laws. The Department welcomes comments with more information regarding the 13 See, e.g., Minn. Stat. § 177.24, subd. 3 (‘‘No employer may require an employee to contribute or share a gratuity received by the employee with the employer or other employees or to contribute any or all of the gratuity to a fund or pool operated for the benefit of the employer or employees.’’); Mass. Gen. Laws ch. 149, § 152A(c) (‘‘No employer or person shall cause, require or permit any wait staff employee, service employee, or service bartender to participate in a tip pool through which such employee remits any wage, tip or service charge, or any portion thereof, for distribution to any person who is not a wait staff employee, service employee, or service bartender.’’) 14 The jurisdiction of the Tenth Circuit includes the six states of Oklahoma, Kansas, New Mexico, Colorado, Wyoming, and Utah. See About Us, The United States Court of Appeals for the Tenth Circuit, https://www.ca10.uscourts.gov/clerk (last visited May 9, 2019). 15 Arkansas, California, Colorado, Delaware, Hawaii, Kansas, Kentucky, Massachusetts, Minnesota, New Hampshire, New Mexico, New York, North Carolina, North Dakota, Oklahoma, Utah, and Wyoming. PO 00000 Frm 00014 Fmt 4701 Sfmt 4702 effects of this proposed rule in specific states. Finally, the Department further reduced the total transfer amount to account for the fact that an uncertain number of employers will decline to change their tip pooling practices even when it is seemingly economically beneficial for them to do so because it will require changes to practices to which employees are accustomed, as well as payroll and recordkeeping changes. To compute potential tip transfers, the Department used individual-level microdata from the 2017 Current Population Survey (CPS), a monthly survey of about 60,000 households that is jointly sponsored by the U.S. Census Bureau and BLS. Households are surveyed for four months, excluded from the survey for eight months, surveyed for an additional four months, and then permanently dropped from the sample. During the last month of each rotation in the sample (month 4 and month 16), employed respondents complete a supplementary questionnaire in addition to the regular survey. These households and questions form the CPS Merged Outgoing Rotation Group (CPS–MORG) and provide more detailed information about those surveyed.16 The Department used 2017 CPS data to calculate the transfer because the CAA went into effect in March 2018. Although 2018 CPS data is available, 2017 is the most recent full year of data that is prior to the statutory change. In this analysis, 2017 wage data are inflated to $2018 using the GDP deflator. For purposes of rule familiarization costs, the Department used the most recent year of data (2018) to reflect employers reading the rule after it is published. The CPS asks respondents whether they usually receive overtime pay, tips, and commissions (OTTC), which allows the Department to estimate the number of bartenders and wait staff in restaurants and drinking places who receive tips.17 CPS data are not available 16 See Current Population Survey, U.S. Census Bureau, https://www.census.gov/programs-surveys/ cps.html (last visited August 13, 2019); CPS Merged Outgoing Rotation Groups, NBER, https:// www.nber.org/data/morg.html (last visited August 13, 2019). 17 This question is only asked of hourly employees and consequently nonhourly workers are excluded from the transfer estimate. The Department did not quantify transfers from nonhourly workers because without knowing the prevalence of tipped income among nonhourly workers, the Department cannot accurately estimate potential transfers from these workers. However, the Department believes the transfer from nonhourly workers will be small because only 13 percent of wait staff and bartenders in restaurants and drinking places are nonhourly and the Department believes nonhourly workers may have a lower probability of receiving tips. E:\FR\FM\08OCP4.SGM 08OCP4 53969 Federal Register / Vol. 84, No. 195 / Tuesday, October 8, 2019 / Proposed Rules separately for overtime pay, tips, and commissions, but the Department assumes very few bartenders and wait staff at restaurants and drinking places receive commissions, and the number who receive overtime pay but not tips is also assumed to be minimal.18 Therefore, when bartenders and wait staff responded affirmatively to this question, the Department assumed that they receive tips. All data tables in this analysis include estimates for the year 2017 as the baseline. Table 1 presents the estimates of the share of bartenders and wait staff in restaurants and drinking places who reported that they usually earned OTTC in 2017. Approximately 64 percent of bartenders and 55 percent of wait staff reported usually earning OTTC in 2017. These numbers include workers in all states, including states whom the changes proposed in this NPRM may not affect. These numbers also include workers who are paid a direct cash wage below the full FLSA minimum wage of $7.25 (i.e., employers whose employers are using a tip credit). Both these populations are excluded from the transfer calculation. TABLE 1—SHARE OF BARTENDERS AND WAITERS/WAITRESSES IN RESTAURANTS AND DRINKING PLACES WHO EARNED OVERTIME PAY, TIPS, OR COMMISSIONS Total workers (millions) Occupation Total ................................................................................................................. Bartenders ................................................................................................ Waiters/Waitresses ................................................................................... Workers responding to question on OTTC (millions) 2.21 0.34 1.88 1.92 0.27 1.65 Report Earning OTTC Workers (millions) Percent 1.08 0.17 0.91 56.5 63.5 55.4 Source: CEPR, 2017 CPS–MORG. 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). Of the 1.08 million bartenders and wait staff who receive OTTC, only 688,000 reported the amount received in OTTC. Therefore, the Department imputed OTTC for those workers who did not report the amount received in OTTC. As shown in Table 2, 54 percent of bartenders’ earnings (an average of $276 per week) and 49 percent of waiters’ and waitresses’ earnings (an average of $234 per week) were from overtime pay, tips, and commissions in 2017. For workers who reported receiving tips but did not report the amount, the ratio of OTTC to total earnings for the sample who reported their OTTC amounts (54 or 49 percent) was applied to their weekly total income to estimate weekly tips. Nonhourly workers, who are not asked the question on receipt of OTTC, are assumed to not be tipped employees. TABLE 2—PORTION OF INCOME FROM OVERTIME PAY, TIPS, AND COMMISSIONS FOR BARTENDERS AND WAITERS/ WAITRESSES IN RESTAURANTS AND DRINKING PLACES Those who report the amount earned in OTTC Occupation Workers Total ................................................................................................................. Bartenders ................................................................................................ Waiters and waitresses ............................................................................ 688,171 105,787 582,384 Average weekly earnings $478.34 512.29 472.17 Average weekly OTTC Percent of earnings attributable to OTTC $240.15 275.65 233.71 50% 54 49 Source: CEPR, 2017 CPS–MORG, inflated to $2018 using the GDP deflator. 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). As discussed above, to determine potential transfers of tips, the Department assumes that employers will only redistribute tips from tipped employees to employees who are not customarily and regularly tipped in a nontraditional tip pool if the tipped employee’s total earnings, including the tips the employee retains, are greater than the ‘‘outside-option wage’’ that the tipped employee could earn in a nontipped job. To model a worker’s outsideoption wage, the Department used robust quartile regression analysis to predict the wage that these workers would earn in a non-tipped job. Hourly wage was regressed on age, age squared, age cubed, education, gender, race, ethnicity, citizenship, marital status, veteran status, metro area status and state for a sample of non-tipped 18 According to BLS Current Population Survey data, in 2017, workers in service occupations worked an average of 35 hours per week. See https://www.bls.gov/cps/aa2017/cpsaat23.htm. 19 For workers who had missing values for one or more of these explanatory variables we imputed the missing value as the average value for tipped/nontipped workers. jbell on DSK3GLQ082PROD with PROPOSALS4 1. Outside-Option Wage Calculation VerDate Sep<11>2014 21:16 Oct 07, 2019 Jkt 250001 PO 00000 Frm 00015 Fmt 4701 Sfmt 4702 workers.19 The Department restricted the regression sample to workers earning at least the Federal minimum wage of $7.25 per hour (inclusive of OTTC), and those who are employed. This analysis excludes states where the law prohibits non-tipped back-of-thehouse employees from being included in the tip pool, and states governed by the Marlow decision were also excluded from the regression analysis. E:\FR\FM\08OCP4.SGM 08OCP4 53970 Federal Register / Vol. 84, No. 195 / Tuesday, October 8, 2019 / Proposed Rules jbell on DSK3GLQ082PROD with PROPOSALS4 In calculating the outside-option wage for tipped workers, the Department defined the comparator sample for tipped workers in two different ways: (1) All non-tipped workers (i.e., workers who are either not waiters/waitresses or bartenders, or do not work in restaurants or drinking places), and (2) Non-tipped workers in a set of occupations that are likely to represent outside options. The Department determined the list of relevant occupations by exploring the similarity between the knowledge, activities, skills, and abilities required by the occupation to that of servers and bartenders. The Department searched the Occupational Information Network (O*NET) system for occupations that share important similarities with waiters and waitresses and bartenders— the occupations had to require ‘‘customer and personal service’’ knowledge and ‘‘service orientation’’ skills.20 The list was further reduced by eliminating occupations that are not comparable to the waitress and bartender occupations in terms of education and training, as waiter and waitress and bartender occupations do not require formal education or training. See Appendix Table 1 for a list of these occupations. The transfer estimates presented in this analysis use this sample of limited occupations to predict each tipped worker’s outside-option wage, that is, the wage that the tipped worker could earn in a non-tipped job. The Department also ran the regression to predict the outside-option wage using all non-tipped workers as the outsideoption sample, and found that transfers are approximately 30 percent lower in that specification. The regression calculates a distribution of outside-option wages for each worker. The Department considered two methods: (1) Using the 50th percentile and (2) using the same percentile for each worker as they currently earn in the distribution of wages for wait staff and bartenders in restaurants and drinking places in the state where they live.21 The second method accounts for the fact that two workers may have the exact same characteristics (age, race, education, 20 For a full list of all occupations on O*NET, see https://www.onetcenter.org/taxonomy/2010/ updated.html. 21 Because of the uncertainty in the estimate of the percentile ranking of the worker’s current wage, the Department used the midpoint percentile for workers in each decile. For example, workers whose current wage was estimated to be in the zero to tenth percentile range were assigned the predicted fifth percentile outside-option wage, those with wages estimated to be in the eleventh to twentieth percentile were assigned the predicted fifteenth percentile outside-option wage, etc. VerDate Sep<11>2014 21:16 Oct 07, 2019 Jkt 250001 etc.), but one worker may have a higher or lower outside-option wage because he or she is a more or less effective employee. This method assumes that a worker’s position in the wage distribution for wait staff and bartenders in restaurants and drinking places reflects their position in the wage distribution for the outside-option occupations. The Department believes this method is more appropriate than the 50th percentile method.22 2. Transfer Calculation After determining each tipped worker’s outside-option wage, the Department calculated the potential transferrable tips as the lesser of the following four numbers: 1. The positive differential between a worker’s current earnings (wage plus tips) and their predicted outside-option wage, 2. The positive differential between a worker’s current earnings and the state minimum wage, 3. The total tips earned by the worker, or 4. Zero if the worker currently earns a direct cash wage above the full applicable minimum wage. The second number is included for cases where the outside-option wage predicted by the analysis is below the state minimum wage, because the worker will not earn less than their applicable state minimum wage. The third number is included because the maximum potential tips that can be transferred from an employee cannot be greater than their total tips. Total tips for each worker were calculated from the OTTC variable in the CPS data. For hourly-paid workers, the Department subtracted predicted overtime pay to better estimate total tips.23 For workers who reported receiving overtime, tips, and commissions, but did not report the amount they earned, the Department applied the ratio of tipped earnings to total earnings for all waiters and waitresses and bartenders in their state (see Table 2). The Department set the transfer to zero if the worker currently earns a direct cash wage above the full applicable minimum wage. If the employer is paying a tipped employee a direct cash wage above the required full minimum wage, this indicates the wage is set at the market clearing wage and any reduction in the wage (e.g., by requiring tips to be transferred to backof-the-house workers) would cause the 22 The 50th percentile method results in a higher transfer estimate ($173 million compared with $107 million). 23 Predicted overtime pay is calculated as (1.5 × base wage) × weekly hours worked over 40. PO 00000 Frm 00016 Fmt 4701 Sfmt 4702 employee to quit and look for other work. Therefore, where an employer is paying a tipped employee above the full applicable minimum wage, the employer would generally not require the employee to contribute tips to a nontraditional tip pool. To determine the annual total tip transfer, the Department first multiplied a weighted sum of weekly tip transfers for all wait staff and bartenders who work at full-service restaurants and bars in the United States by 45.2 weeks—the average weeks worked in a year for waiters and waitresses and bartenders in the 2017 CPS Annual Social and Economic Supplement. The Department then reduced this total by 43 percent to account for wait staff and bartenders who work in a state that prohibits mandatory tip pooling or imposes stricter limits on who can participate in a mandatory tip pool than the limits proposed in this NPRM or a state that is in the Tenth Circuit. Using this methodology, the total potential transfer from front-of-the-house employees associated with this proposed rule is $213.4 million. This represents the transfers that the Department expects would occur if every employer that does not take a tip credit, and for whom it was economically beneficial, instituted tip pools that include back-of-the-house workers. In reality, even when it is seemingly economically beneficial, many employers may not change their tip pooling practices, because it would require changes to the current practice to which their employees are accustomed, as well as their payroll and recordkeeping systems. The Department was unable to determine what proportion of the total tips estimated to be potentially transferred from these workers will realistically be transferred. The Department assumes that the likely potential transfers are somewhere between a minimum of zero and a maximum of $213.4 million, and therefore used the midpoint as a better estimate of likely transfers. The Department accordingly estimates that transfers of tips from front-of-the-house workers will be around $107 million in the first year that this rule is effective. Assuming these transfers occur annually, and there is no real wage growth, this results in 10-year annualized transfers of $107 million at both the 3 percent and 7 percent discount rates. The Department requests comments on whether the midpoint is the appropriate adjustment. The Department acknowledges that some employers could respond to the proposed rule by decreasing back-of-thehouse workers’ wages, as the rule will E:\FR\FM\08OCP4.SGM 08OCP4 Federal Register / Vol. 84, No. 195 / Tuesday, October 8, 2019 / Proposed Rules allow employers to supplement these employees’ wages with tips. Some employers may consider exchanging back-of-the-house workers’ hourly wages for tips, but tips fluctuate at any given time. Thus, employers’ ability to do so would be limited by market forces, such as, potentially, workers’ aversion to risk and the endowment effect (workers potentially valuing their set wages more than tips of the same average amount). Because of a lack of data to quantify the extent to which this will occur, the Department has not included this possibility in the present analysis. The Department welcomes comments and information regarding whether and to what extent employers will choose to expand existing tip pools to include back-of-the-house employees or otherwise change their current compensation structures. iii. Estimated Costs, Cost Savings, and Benefits In this subsection, the Department addresses costs attributable to the proposed rule, by quantifying regulatory familiarization costs and qualitatively discussing additional recordkeeping costs. The Department qualitatively discusses benefits and cost savings associated with this proposed rule. Lastly, the Department qualitatively discusses the potential costs, transfers, and benefits associated with its proposed revision to its regulations to reflect its guidance that an employer may take a tip credit for any amount of time that an employee in a tipped occupation performs related, non-tipped duties performed contemporaneously with his or her tipped duties, or for a reasonable time immediately before or after performing the tipped duties. 1. Regulatory Familiarization Costs Regulatory familiarization costs represent direct costs to businesses associated with reviewing the new regulation. It is not clear whether regulatory familiarization costs are a function of the number of establishments or the number of firms.24 Presumably, the headquarters of a firm will conduct the regulatory review for businesses with multiple restaurants, and may also require chain restaurants to familiarize themselves with the regulation at the establishment level. To be conservative, the Department used the number of establishments in its cost estimate—which is larger than the 53971 number of firms—and assumes that regulatory familiarization occurs at both the headquarters and establishment levels. The Department assumes that all establishments will incur some regulatory familiarization costs regardless of whether the employer decides to change its tip pooling practices as a result of the proposed rule.25 There may be differences in familiarization cost by the size of establishments; however, our analysis does not compute different costs for establishments of different sizes. To estimate the total regulatory familiarization costs, the Department used (1) the number of establishments in the two industries, Drinking Places (Alcoholic Beverages) and Full-Service Restaurants; (2) the wage rate for the employees reviewing the rule; and (3) the number of hours that it estimates employers will spend reviewing the rule. Table 3 shows the number of establishments in the two industries. To estimate the number of potentially affected establishments, the Department used data from BLS’s Quarterly Census of Employment and Wages (QCEW) for 2018. TABLE 3—NUMBER OF ESTABLISHMENTS WITH TIPPED WORKERS Industry Establishments NAICS 722410 (Drinking Places (Alcoholic Beverages)) .............................................................................................................. NAICS 722511 (Full-service Restaurants) .................................................................................................................................... 42,826 247,237 Total ........................................................................................................................................................................................ 290,063 jbell on DSK3GLQ082PROD with PROPOSALS4 Source: QCEW, 2018 The Department assumes that a Compensation, Benefits, and Job Analysis Specialist (SOC 13–1141) (or a staff member in a similar position) with a mean wage of $32.65 per hour in 2018 will review the rule.26 Given the change proposed, the Department assumes that it will take on average about 15 minutes to review the final rule. The Department has selected a small time estimate because it is an average for both establishments making changes to their compensation structure and those who are not (and consequently will have negligible or no regulatory familiarization costs). Further, the change effected by this regulation is unlikely to cause major burdens or costs. Assuming benefits are paid at a rate of 46 percent of the base wage, and overhead costs are 17 percent of the base wage, the reviewer’s effective hourly rate is $53.22; thus, the average cost per establishment is $13.30 for 15 minutes of review time. The number of establishments in the selected industries was 290,063 in 2018. Therefore, regulatory familiarization costs in Year 1 are estimated to be $3.86 million ($13.30 × 290,063 establishments), which amounts to a 10-year annualized cost of $452,422 at a discount rate of 3 percent or $549,471 at a discount rate of 7 percent. Regulatory familiarization costs in future years are assumed to be de minimis. 24 An establishment is commonly understood as a single economic unit, such as a farm, a mine, a factory, or a store, that produces goods or services. Establishments are typically at one physical location and engaged in one, or predominantly one, type of economic activity for which a single industrial classification may be applied. An establishment is in contrast to a firm, or a company, which is a business and may consist of one or more establishments, where each establishment may participate in a different predominant economic activity. See BLS, ‘‘Quarterly Census of Employment and Wages: Concepts,’’ https:// www.bls.gov/opub/hom/cew/concepts.htm. 25 This includes establishments in states excluded from the transfer calculation. 26 A Compensation/Benefits Specialist ensures company compliance with federal and state laws, including reporting requirements; evaluates job positions, determining classification, exempt or non-exempt status, and salary; plans, develops, evaluates, improves, and communicates methods and techniques for selecting, promoting, compensating, evaluating, and training workers. See BLS, ‘‘13–1141 Compensation, Benefits, and Job Analysis Specialists,’’ https://www.bls.gov/oes/ current/oes131141.htm (last visited August 14, 2019). VerDate Sep<11>2014 21:16 Oct 07, 2019 Jkt 250001 PO 00000 Frm 00017 Fmt 4701 Sfmt 4702 2. Other Costs The Department also assumes that there will be a minimal increase in recordkeeping costs associated with this proposed rule. Under the Department’s current regulations, employers are only required to keep records of which employees receive tips and how much each employee receives if the employer takes a tip credit. If this rule is finalized as proposed, employers that do not take E:\FR\FM\08OCP4.SGM 08OCP4 53972 Federal Register / Vol. 84, No. 195 / Tuesday, October 8, 2019 / Proposed Rules a tip credit but collect tips to institute a mandatory tip pool must keep records showing which employees are included in the tip pool, and the amount of tips they receive, as reported by employees to the employer. As such records are already required under IRS Form 4070, there will be minimal recordkeeping costs for employers that pay the full Federal minimum wage in direct cash wages and choose to institute a nontraditional tip pool. Employers may incur some training costs associated with familiarizing first line managers and staff with the proposed rule; however, the Department believes these costs will be de minimis. The Department welcomes data on these costs. jbell on DSK3GLQ082PROD with PROPOSALS4 3. Benefits Section 3(m)’s tip credit provision allows an employer to meet a portion of its Federal minimum wage obligation from the tips customers give employees. If an employer takes a tip credit, section 3(m)(2)(A) applies, along with its requirement that only employees who customarily and regularly receive tips be included in any mandatory tip pool. When an employer does not take a tip credit, however, the proposed rule would allow the employer to act in a manner currently prohibited by regulation—that is, by distributing tips to employees who are employed in occupations in which they do not customarily and regularly receive tips (e.g., cooks or dishwashers) through a tip pool. The proposed rule, therefore, provides employers greater flexibility in determining their pay policies for tipped and non-tipped workers. Full-service restaurants commonly have a tip pool. One study suggests that tip pooling contributes to increased service quality, along with enhanced interaction and cooperation between coworkers, especially when team members rely on input or task completion from each other.27 Another study indicates that tip pooling may foster customer-focused service, promote employee camaraderie, and increase productivity.28 Additionally, under the proposed changes, the employer will be able to distribute customer tips to back-of-the-house employees like cooks and dishwashers, possibly resulting in increased earnings 27 Samuel Estreicher & Jonathan Nash, The Law and Economics of Tipping: The Laborer’s Perspective, Am. Law & Econ. Ass’n Annual Meetings. (2004), https://law.bepress.com/cgi/ viewcontent.cgi?referer=&httpsredir=1& article=1068&context=alea. 28 Ofer H. Azar, The Implications of Tipping for Economics and Management, 30 (10) Int’l J. Soc. Econ., 1084–94 (2003), https:// individual.utoronto.ca/diep/c/azar2003.pdf. VerDate Sep<11>2014 21:16 Oct 07, 2019 Jkt 250001 for those employees. The Department believes that allowing employers to expand tip pools beyond customarily and regularly tipped workers like servers and bartenders could help incentivize back-of-the-house workers, which may improve the customer’s experience. 4. Cost Savings The cost savings associated with this rule would result from the increased earnings for back-of-the-house employees. Higher earnings for these employees could result in reduced turnover, which reduces hiring and training costs for employers. This proposed rule would also give employers greater flexibility for tip pooling, and could reduce effort spent ensuring that the tip pool is limited to only customarily and regularly tipped employees. The Department believes that the cost savings would outweigh any increased rule-familiarization and recordkeeping costs. This rule may also reduce deadweight loss. Deadweight loss is the loss of economic efficiency that occurs when the perfectly competitive equilibrium in a market for a good or service is not achieved. Minimum wages may prevent the market from reaching equilibrium and thus result in fewer hours worked than would otherwise be efficient. Allowing nontraditional tip pools may cause a shift in the labor demand and/ or supply curves for wait staff and bartenders. This could result in the market moving closer to the competitive market equilibrium. The Department did not quantify the potential reduction in deadweight loss because of uncertainty (e.g., what are the appropriate demand and supply elasticities). 5. Costs, Benefits, and Potential Transfers Associated With Revision to Dual Jobs Regulation The Department proposes to amend its regulations to reflect its recent guidance removing the limit on the amount of time that an employee for whom an employer takes a tip credit can perform related, non-tipped duties has potential benefits. Under the previous guidance, in order to ensure they were in compliance, employers may have tracked how tipped employees were spending their time, which could be difficult and costly. Removing the time requirement will eliminate this monitoring cost. Additionally, the revisions add clarity by providing a reference list of applicable related duties through O*NET. Although employers will reference this list of duties to ensure that their employees’ PO 00000 Frm 00018 Fmt 4701 Sfmt 4702 non-tipped duties are related to their tipped occupations, this would likely be less of a burden than constantly monitoring their employee’s time. The removal of the twenty percent time limit may result in tipped workers such as wait staff and bartenders performing more of these non-tipped duties such as ‘‘cleaning and setting tables, toasting bread, making coffee, and occasionally washing dishes or glasses.’’ Consequently, employment of workers currently performing these duties, such as dishwashers and cooks, may fall, possibly resulting in a transfer of employment-related producer surplus from those non-tipped workers to tipped workers who work longer hours. However, tipped workers might lose tipped income by spending more of their time performing duties where they are not earning tips, while still receiving cash wages of less than minimum wage. For example, assume that prior to this change, a restaurant server spends 12 minutes each hour of their shift (i.e., 20 percent) performing related, non-tipped duties (e.g., clearing tables, washing dishes, etc.), and 48 minutes providing direct customer service. Assume the server earns $12 per hour in tips (i.e., $0.25 per minute of customer service work). With no 20 percent limit on the performance of related, non-tipped duties, an employee might spend more than 12 minutes per hour performing related, non-tipped duties, as long as they still receive enough tips to earn at least $7.25 per hour for the shift. Thus, if an employee now spends 20 minutes performing non-tipped work (i.e., 33 percent of their shift) and 40 minutes interacting with customers, they would be expected to lose $2 per hour in tips, a decrease accounting for eight fewer minutes per hour spent performing tipgenerating work (i.e., 8 minutes × $0.25 per minute). Similarly, employers that had been paying the full minimum wage to tipped employees performing related, non-tipped duties could potentially pay the lower direct cash wage for this time and could pass these reduced labor cost savings on to consumers. As mentioned above, the Department lacks data to quantify this potential reduction in tips. For instance, data does not exist on the amount of time that tipped employees currently spend on tipped duties or related, nontipped duties. Absent such a baseline, the Department cannot quantify how time spent by tipped employees on related, nontipped duties would change as a result of this proposed rule. The Department welcomes feedback on how employers would adjust employees’ schedules as a result of this recent guidance. E:\FR\FM\08OCP4.SGM 08OCP4 Federal Register / Vol. 84, No. 195 / Tuesday, October 8, 2019 / Proposed Rules iv. Summary of Transfers and Costs 53973 transfers and costs for the RIA. Transfer costs in years two through ten are assumed to be the same as in Year 1. Below the Department provides a summary table of the quantified TABLE 4—SUMMARY OF TRANSFERS AND COSTS CALCULATIONS [2018 dollars] Potential tip transfers (Millions) Year 1: Preferred Estimate ................................................................................................................................ Lower-Bound ........................................................................................................................................ Upper-Bound ........................................................................................................................................ 10-year Annualized Transfers (Preferred Est.): 3% Discount Rate ........................................................................................................................................ 7% Discount Rate ........................................................................................................................................ jbell on DSK3GLQ082PROD with PROPOSALS4 v. Additional Potential Impacts of This Rulemaking The Department believes that by implementing section 3(m)(2)(B) and providing clarification on tip pooling, this proposal could affect the number of employers who choose to implement tip pools or otherwise affect their practices. Because of the lack of data to determine how employers would behave, the Department welcomes comments that provide insight into employers’ decisions to implement tip pools, and how these decisions affect both employers and employees. C. Analysis of Regulatory Alternatives In developing this NPRM, the Department considered a regulatory alternative that would be less restrictive than what is currently proposed and one that would be more restrictive. For the less-restrictive option, the Department considered excluding employers that do not take a tip credit from the requirement to keep records of the weekly or monthly amount of tips received by each employee as reported by the employee to the employer.29 The Department concluded, however, that requiring all employers with tip pools to keep records of the weekly or monthly amount of tips received by employees would ensure uniformity among these employers and help the Department administer section 3(m)(2)(B). For a more restrictive alternative, the Department considered requiring employers that collect cash tips for a mandatory tip pool to fully distribute the tips on a daily basis. The Department concluded, however, that this requirement would be unnecessarily onerous for employers. 29 Current § 516.28(a) requires employers that take a tip credit under the FLSA to keep records of the weekly or monthly amount of tips received by employees. VerDate Sep<11>2014 21:16 Oct 07, 2019 Jkt 250001 The Department’s proposal for full distribution of cash and credit-card tips on the regular payday or, in certain cases, as soon as practicable afterward, would be simpler for employers to follow. It would align the policy for cash tips with the current policy for credit-card tips and allow employers to pay tips the same day they otherwise pay their employees. The Department believes that the current proposal will ensure that employers do not operate tip pools in such a manner that they ‘‘keep’’ tips. VII. Regulatory Flexibility Analysis The Regulatory Flexibility Act of 1980 (RFA), 5 U.S.C. 601 et seq., as amended by the Small Business Regulatory Enforcement Fairness Act of 1996, Public Law 104–121 (1996), requires federal agencies engaged in rulemaking to consider the impact of their proposals on small entities, consider alternatives to minimize that impact, and solicit public comment on their analyses. The RFA requires the assessment of the impact of a regulation on a wide range of small entities, including small businesses, not-for-profit organizations, and small governmental jurisdictions. Accordingly, the Department examined the regulatory requirements of the proposed rule to determine whether they would have a significant economic impact on a substantial number of small entities. In its analysis, the Department used the Small Business Administration size standards, which determine whether a business qualifies for small-business status.30 According to the 2017 standards, Full-service Restaurants (NAICS 722511) and Drinking Places (Alcoholic Beverages) (NAICS 722410) 30 SBA, Summary of Size Standards by Industry Sector, 2017, www.sba.gov/document/supporttable-size-standards. PO 00000 Frm 00019 Fmt 4701 Sfmt 4702 Regulatory familiarization costs (Millions) $106.7 0.0 213.4 $3.9 N/A N/A 106.7 106.7 0.5 0.5 have a size standard of $7.5 million in annual revenue.31 The Department used this number to estimate the number of small entities. Any establishments with annual sales revenue less than this amount were considered small entities. The Department used the U.S. Census Bureau’s 2012 Economic Census to obtain the number of establishments (operating the entire year) and annual sales/receipts for the two industries in the analysis: Full-service Restaurants and Drinking Places (Alcoholic Beverages).32 From annual receipts/ sales, the Department can estimate how many establishments fall under the size standard. Table 5 shows the number of private, year-round establishments in the two industries by revenue.33 The annual cost per establishment is the regulatory familiarization cost of $13.30 per establishment calculated in section V.B.iii.1. The Department applied this cost to all sizes of establishments since each establishment would incur this cost regardless of the number of affected workers. Finally, the impact of this provision was calculated as the ratio of annual cost per establishment to average sales receipts per establishment. As shown, the annual cost per establishment is less than 0.03 percent of average annual sales for establishments in all small 31 Id., Subsector 722. Census Bureau, 2012 Economic Census, Accommodation and Food Services: Subject Series—Estab & Firm Size: Summary Statistics by Sales Size of Establishments for the U.S.: 2012. https://factfinder.census.gov/faces/tableservices/jsf/ pages/productview.xhtml?src=bkmk. 33 The small-business size standard for the two industries is $7.5 million in annual revenue. However, the final size category reported in the table is $5 million–$9 million. This is a data limitation because the 2012 Economic Census reported this category of $5 million–$9 million and not $5 million–$7.5 million. Thus, the total number of firms shown may be slightly higher than the actual number of small entities. 32 U.S. E:\FR\FM\08OCP4.SGM 08OCP4 53974 Federal Register / Vol. 84, No. 195 / Tuesday, October 8, 2019 / Proposed Rules entity size classes. The impact of this proposed rule on small establishments will be de minimis. The Department certifies that the proposed rule will not have a significant economic impact on a substantial number of small entities. TABLE 5—COSTS TO SMALL ENTITIES Annual revenue/sales/receipts Number of establishments Average annual sales per establishment ($) Annual cost per establishment ($) [a] [b] [c] Annual cost per establishment as percent of sales/receipts 722511 Full-service Restaurants < $100,000 ............................................................................... 100,000 to 499,999 .................................................................. 250,000 to 499,999 .................................................................. 500,000 to 999,999 .................................................................. 1,000,000 to 2,499,999 ............................................................ 2,500,000 to 4,999,999 ............................................................ 5,000,000 to 9,999,999 ............................................................ 10,211 28,651 39,554 46,793 45,173 17,039 3,531 $68,356 193,823 405,727 792,561 1,729,025 3,750,831 7,128,700 $13.30 13.30 13.30 13.30 13.30 13.30 13.30 0.02 0.01 0.00 0.00 0.00 0.00 0.00 13.30 13.30 13.30 13.30 13.30 13.30 13.30 0.02 0.01 0.00 0.00 0.00 0.00 0.00 722410 Drinking Places (Alcoholic Beverages) < 100,000 ................................................................................. 100,000 to 249,999 .................................................................. 250,000 to 499,999 .................................................................. 500,000 to 999,999 .................................................................. 1,000,000 to 2,499,999 ............................................................ 2,500,000 to 4,999,999 ............................................................ 5,000,000 to 9,999,999 ............................................................ 4,622 11,610 9,059 5,138 3,386 755 164 69,775 188,975 387,358 762,365 1,665,727 3,708,103 7,318,368 jbell on DSK3GLQ082PROD with PROPOSALS4 [a] Limited to establishments operated for the entire year. [b] Inflated to $2018 using the GDP deflator. [c] The annual cost per establishment is the regulatory familiarization cost per establishment calculated in section V.B.iii.1. VIII. Unfunded Mandates Reform Act Analysis The Unfunded Mandates Reform Act of 1995, 2 U.S.C. 1532, requires agencies to prepare a written statement, which includes an assessment of anticipated costs and benefits, before proposing any Federal mandate that may result in excess of $100 million (adjusted annually for inflation) in expenditures in any one year by state, local, and tribal governments in the aggregate, or by the private sector. This rulemaking is not expected to affect state, local, or tribal governments. While this rulemaking would affect employers in the private sector, it is not expected to result in expenditures greater than $100 million in any one year. See section V.B for an assessment of anticipated costs and benefits to the private sector. X. Executive Order 13175, Indian Tribal Governments IX. Executive Order 13132, Federalism The Department has (1) reviewed this proposed rule in accordance with Executive Order 13132 regarding federalism and (2) determined that it does not have federalism implications. The proposed rule would not have substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. 29 CFR Part 531 VerDate Sep<11>2014 21:16 Oct 07, 2019 Jkt 250001 This proposed rule would not have substantial direct effects on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes. List of Subjects 29 CFR Part 10 Administrative practice and procedure, Construction industry, Government procurement, Law enforcement, Reporting and recordkeeping requirements, Wages For the reasons set forth above, the Department proposes to amend Title 29, Parts 10, 516, 531, 578, 579, and 580 of the Code of Federal Regulations as follows: PART 10—ESTABLISHING A MINIMUM WAGE FOR CONTRACTORS 1. The authority citation for Part 10 is revised to read as follows: ■ Authority: 4 U.S.C. 301; section 4, E.O 13658, 79 FR 9851; Secretary of Labor’s Order No. 01–2014 (Dec. 19, 2014), 79 FR 77527 (Dec. 24, 2014). 2. Amend § 10.28 by revising paragraphs (b)(2), (c), (e), and (f) to read as follows: ■ 29 CFR Part 516 § 10.28 Minimum wages, Reporting and recordkeeping requirements, Wages * Wages 29 CFR Part 578 Penalties, Wages 29 CFR Part 579 Child labor, Penalties 29 CFR Part 580 Administrative practice and procedure, Child labor, Penalties, Wages. PO 00000 Frm 00020 Fmt 4701 Sfmt 4702 Tipped employees. * * * * (b) * * * (2)(i) In some situations an employee is employed in a dual job, as for example, where a maintenance person in a hotel also works as a server. In such a situation the employee, if he or she customarily and regularly receives more than $30 a month in tips for his or her work as a server, is a tipped employee only with respect to his or her employment as a server. The employee is employed in two occupations, and no tip credit can be taken for his or her hours of employment in the occupation of maintenance person. E:\FR\FM\08OCP4.SGM 08OCP4 jbell on DSK3GLQ082PROD with PROPOSALS4 Federal Register / Vol. 84, No. 195 / Tuesday, October 8, 2019 / Proposed Rules (ii) Such a situation is distinguishable from that of an employee who spends time performing duties that are related to his or her tip-producing occupation but not themselves directed toward producing tips. For example, a server may spend part of his or her time cleaning and setting tables, toasting bread, making coffee and occasionally washing dishes or glasses. Likewise, a counter attendant may also prepare his or her own short orders or may, as part of a group of counter attendants, take a turn as a short order cook for the group. An employer may take a tip credit for any amount of time that an employee performs related, non-tipped duties contemporaneously with his or her tipped duties, or for a reasonable time immediately before or after performing the tipped duties. (iii) ‘‘Related’’ duties defined. In addition to the examples described in (e)(ii), a non-tipped duty is related to a tip-producing occupation if the duty is listed as a task in the description of the tip-producing occupation in the Occupational Information Network (O*NET) at www.onetonline. Occupations not listed in O*NET may qualify as tipped occupations. For those occupations, duties usually and customarily performed by employees are related duties as long as they are included in the list of duties performed in similar O*NET occupations. (c) Characteristics of tips. A tip is a sum presented by a customer as a gift or gratuity in recognition of some service performed for the customer. It is to be distinguished from payment of a fixed charge, if any, made for the service. Whether a tip is to be given, and its amount, are matters determined solely by the customer. Customers may present cash tips directly to the employee or may designate a tip amount to be added to their bill when paying with a credit card or by other electronic means. Special gifts in forms other than money or its equivalent such as theater tickets, passes, or merchandise, are not counted as tips received by the employee for purposes of determining wages paid under the Executive Order. * * * * * (e) Tip pooling. Where tipped employees share tips through a tip pool, only the amounts retained by the tipped employees after any redistribution through a tip pool are considered tips in applying the provisions of FLSA section 3(t) and the wage payment provisions of section 3 of the Executive Order. There is no maximum contribution percentage on mandatory tip pools. However, an employer must notify its employees of any required tip pool contribution VerDate Sep<11>2014 21:16 Oct 07, 2019 Jkt 250001 amount, may only take a tip credit for the amount of tips each employee ultimately receives, and may not retain any of the employees’ tips for any other purpose. (f) Notice. An employer is not eligible to take the tip credit unless it has informed its tipped employees in advance of the employer’s use of the tip credit. The employer must inform the tipped employee of the amount of the cash wage that is to be paid by the employer, which cannot be lower than the cash wage required by paragraph (a)(1) of this section; the additional amount by which the wages of the tipped employee will be considered increased on account of the tip credit claimed by the employer, which amount may not exceed the value of the tips actually received by the employee; that all tips received by the tipped employee must be retained by the employee except for a tip pooling arrangement; and that the tip credit shall not apply to any worker who has not been informed of these requirements in this section. PART 516—RECORDS TO BE KEPT BY EMPLOYERS 3. Revise the authority section for Part 516 to read: ■ Authority: Sec. 11, 52 Stat. 1066, as amended, 29 U.S.C. 211. Section 516.28 also issued under 29 U.S.C. 203(m), as amended by sec. 2105(b), Pub. L. 104–188, 110 Stat. 1755; sec. 8102(a), Pub. L. 110–28, 121 Stat. 112; and sec. 1201, Div. S., Tit. XII, Pub. L. 115–141, 132 Stat. 348. Section 516.33 also issued under 52 Stat. 1060, as amended; 29 U.S.C. 201 et seq. Section 516.34 also issued under Sec. 7, 103 Stat. 944, 29 U.S.C. 207(q). 4. Amend § 516.28 by revising the section heading and paragraph (b) to read as follows: ■ § 516.28 Tipped employees and employeradministered tip pools. * * * * * (b) With respect to employees who receive tips but for whom a tip credit is not taken under section 3(m)(2)(A), any employer that collects tips received by employees to operate a mandatory tippooling or tip-sharing arrangement shall maintain and preserve payroll or other records containing the information and data required in § 516.2(a) and, in addition, the following: (1) A symbol, letter, or other notation placed on the pay records identifying each employee who receive tips. (2) Weekly or monthly amount reported by the employee, to the employer, of tips received (this may consist of reports made by the employees to the employer on IRS Form 4070). PO 00000 Frm 00021 Fmt 4701 Sfmt 4702 53975 PART 531—WAGE PAYMENTS UNDER THE FAIR LABOR STANDARDS ACT OF 1938 5. Revise the authority citation for Part 531 to read as follows: ■ Authority: 29 U.S.C. 203(m) and (t), as amended by sec. 3(m), Pub. L. 75–718, 52 Stat. 1060; sec. 2, Pub. L. 87–30, 75 Stat. 65; sec. 101, sec. 602, Pub. L. 89–601, 80 Stat. 830; sec. 29(B), Pub. L. 93–259, 88 Stat. 55 sec. 3, sec. 15(c), Pub. L. 95–151, 91 Stat 1245; sec. 2105(b), Pub. L. 104–188, 110 Stat 1755; sec. 8102, Pub. L. 110–28, 121 Stat. 112; and sec. 1201, Div. S., Tit. XII, Pub. L. 115–141, 132 Stat. 348. 6. Amend § 531.50 by: a. Revising paragraph (a) introductory text and adding paragraph (a)(3); ■ b. Redesignating paragraph (b) as paragraph (c); and ■ c. Adding a new paragraph (b). The revisions and additions read as follows: ■ ■ § 531.50 Statutory provisions with respect to tipped employees. (a) With respect to tipped employees, section 3(m)(2)(A) provides that, in determining the wage an employer is required to pay a tipped employee, the amount paid such employee by the employee’s employer shall be an amount equal to— * * * (3) Section 3(m)(2)(A) also provides that an employer that takes a tip credit against its minimum wage obligations to its tipped employees must inform those employees of the provisions of that subsection, and that the employees must retain all of their tips, although the employer may require those employees to participate in a tip pool with other tipped employees that customarily and regularly receive tips. (b) Section 3(m)(2)(B) provides that an employer may not keep tips received by its employees for any purposes, including allowing managers and supervisors to keep any portion of employees’ tips, regardless of whether the employer takes a tip credit under section 3(m)(2)(A). * * * * * ■ 7. Revise the first sentence of § 531.51 to read as follows: § 531.51 Conditions for taking tip credits in making wage payments. The wage credit permitted on account of tips under section 3(m)(2)(A) may be taken only with respect to wage payments made under the Act to those employees whose occupations in the workweeks for which such payments are made are those of ‘‘tipped employees’’ as defined in section 3(t). * * * E:\FR\FM\08OCP4.SGM 08OCP4 53976 ■ Federal Register / Vol. 84, No. 195 / Tuesday, October 8, 2019 / Proposed Rules 8. Revise § 531.52 to read as follows: § 531.52 General restrictions on an employer’s use of its employees’ tips. (a) A tip is a sum presented by a customer as a gift or gratuity in recognition of some service performed for the customer. It is to be distinguished from payment of a charge, if any, made for the service. Whether a tip is to be given, and its amount, are matters determined solely by the customer. An employer that takes a tip credit against its minimum wage obligations is prohibited from using an employee’s tips for any reason other than that which is statutorily permitted in section 3(m)(2)(A): As a credit against its minimum wage obligations to the employee, or in furtherance of a tip pool limited to employees who customarily and regularly receive tips. Only tips actually received by an employee as money belonging to the employee may be counted in determining whether the person is a ‘‘tipped employee’’ within the meaning of the Act and in applying the provisions of section 3(m)(2)(A) which govern wage credits for tips. (b) Section 3(m)(2)(B) of the Act provides that an employer may not keep tips received by its employees for any purposes, regardless of whether the employer takes a tip credit. (1) An employer may exert control over an employee’s tips only to distribute tips to the employee who received them, require employees to share tips with other employees in compliance with § 531.54, or, where the employer facilitates tip pooling by collecting and redistributing employees’ tips, distribute tips to employees in a tip pool in compliance with § 531.54. (2) An employer may not allow managers and supervisors to keep any portion of an employee’s tips, regardless of whether the employer takes a tip credit. For purposes of section 3(m)(2)(B), the term ‘‘manager’’ or ‘‘supervisor’’ shall mean any employee whose duties match those of an executive employee as described in § 541.100(a)(2) through (4) or § 541.101. ■ 9. Revise § 531.54 to read as follows: jbell on DSK3GLQ082PROD with PROPOSALS4 § 531.54 Tip pooling. (a) Monies counted as tips. Where employees practice tip splitting, as where waiters give a portion of their tips to the busser, both the amounts retained by the waiters and those given the bussers are considered tips of the individuals who retain them, in applying the provisions of sections 3(m)(2)(A) and 3(t). Similarly, where an accounting is made to an employer for his information only or in furtherance of a pooling arrangement whereby the VerDate Sep<11>2014 21:16 Oct 07, 2019 Jkt 250001 employer redistributes the tips to the employees upon some basis to which they have mutually agreed among themselves, the amounts received and retained by each individual as his own are counted as his tips for purposes of the Act. Section 3(m)(2)(A) does not impose a maximum contribution percentage on mandatory tip pools. (b) Meaning of ‘‘keep.’’ Section 3(m)(2)(B)’s prohibition against keeping tips applies regardless of whether an employer takes a tip credit. Section 3(m)(2)(B) expressly prohibits employers from requiring employees to share tips with managers or supervisors, as defined in § 531.52(b)(2), or employers, as defined in 29 U.S.C. 203(d). An employer does not violate section 3(m)(2)(B)’s prohibition against keeping tips if it requires employees to share tips with other employees who are eligible to receive tips. (1) Full and prompt distribution of tips. An employer that facilitates tip pooling by collecting and redistributing employees’ tips does not violate section 3(m)(2)(B)’s prohibition against keeping tips if it fully distributes any tips the employer collects no later than the regular payday for the workweek in which the tips were collected, or when the pay period covers more than a single workweek, the regular payday for the period in which the workweek ends. To the extent that it is not possible for an employer to ascertain the amount of tips that have been received or how tips should be distributed prior to processing payroll, tips must be distributed to employees as soon as practicable after the regular payday. (c) Employers that take a section 3(m)(2)(A) tip credit. When an employer takes a tip credit pursuant to section 3(m)(2)(A): (1) The employer may require an employee for whom the employer takes a tip credit to contribute tips to a tip pool only if it is limited to employees who customarily and regularly receive tips; and (2) The employer must notify its employees of any required tip pool contribution amount, may only take a tip credit for the amount of tips each employee ultimately receives, and may not retain any of the employees’ tips for any other purpose. (d) Employers that do not take a section 3(m)(2)(A) tip credit. An employer that pays its tipped employees the full minimum wage and does not take a tip credit may impose a tip pooling arrangement that includes dishwashers, cooks, or other employees in the establishment who are not employed in an occupation in which employees customarily and regularly PO 00000 Frm 00022 Fmt 4701 Sfmt 4702 receives tips. An employer may not participate in such a tip pool, and may not include supervisors and managers in the pool. ■ 10. Revise § 531.55(a) to read as follows: § 531.55 Examples of amounts not received as tips. (a) A compulsory charge for service, such as 15 percent of the amount of the bill, imposed on a customer by an employer’s establishment, is not a tip and, even if distributed by the employer to its employees, cannot be counted as a tip received in applying the provisions of sections 3(m)(2)(A) and 3(t). Similarly, where negotiations between a hotel and a customer for banquet facilities include amounts for distribution to employees of the hotel, the amounts so distributed are not counted as tips received. * * * * * ■ 11. Amend § 531.56 by revising the second and third sentences in paragraph (a), and paragraphs (d) and (e) to read as follows: § 531.56 ‘‘More than $30 a month in tips.’’ (a) In general. * * * An employee employed in an occupation in which the tips he receives meet this minimum standard is a ‘‘tipped employee’’ for whom the wage credit provided by section 3(m)(2)(A) may be taken in computing the compensation due him under the Act for employment in such occupation, whether he is employed in it full time or part time. An employee employed full time or part time in an occupation in which he does not receive more than $30 a month in tips customarily and regularly is not a ‘‘tipped employee’’ within the meaning of the Act and must receive the full compensation required by its provisions in cash or allowable facilities without any deduction for tips received under the provisions of section 3(m)(2)(A). * * * * * (d) Significance of minimum monthly tip receipts. More than $30 a month in tips customarily and regularly received by the employee is a minimum standard that must be met before any wage credit for tips is determined under section 3(m)(2)(A). It does not govern or limit the determination of the appropriate amount of wage credit under section 3(m)(2)(A) that may be taken for tips under section 6(a)(1) (tip credit equals the difference between the minimum wage required by section 6(a)(1) and the cash wage paid (at least $2.13 per hour)). (e) Dual jobs. (1) In some situations an employee is employed in a dual job, as for example, where a maintenance E:\FR\FM\08OCP4.SGM 08OCP4 Federal Register / Vol. 84, No. 195 / Tuesday, October 8, 2019 / Proposed Rules person in a hotel also works as a server. In such a situation the employee, if he or she customarily and regularly receives more than $30 a month in tips for his or her work as a server, is a tipped employee only with respect to his or her employment as a server. The employee is employed in two occupations, and no tip credit can be taken for his or her hours of employment in the occupation of maintenance person. (2) Such a situation is distinguishable from that of an employee who spends time performing duties that are related to his or her tip-producing occupation but not themselves directed toward producing tips. For example, a server may spend part of his or her time cleaning and setting tables, toasting bread, making coffee and occasionally washing dishes or glasses. Likewise, a counter attendant may also prepare his or her own short orders or may, as part of a group of counter attendants, take a turn as a short order cook for the group. An employer may take a tip credit for any amount of time that an employee performs related, non-tipped duties contemporaneously with his or her tipped duties, or for a reasonable time immediately before or after performing the tipped duties. (3) ‘‘Related’’ duties defined. In addition to the examples described in (e)(2), a non-tipped duty is related to a tip-producing occupation if the duty is listed as a task in the description of the tip-producing occupation in the Occupational Information Network (O*NET) at www.onetonline. Occupations not listed in O*NET may qualify as tipped occupations. For those occupations, duties usually and customarily performed by employees are related duties as long as they are included in the list of duties performed in similar O*NET occupations. ■ 12. Revise § 531.59 to read as follows: jbell on DSK3GLQ082PROD with PROPOSALS4 § 531.59 The tip wage credit. (a) In determining compliance with the wage payment requirements of the Act, under the provisions of section 3(m)(2)(A) the amount paid to a tipped employee by an employer is increased on account of tips by an amount equal to the formula set forth in the statute (minimum wage required by section 6(a)(1) of the Act minus cash wage paid (at least $2.13)), provided that the employer satisfies all the requirements of section 3(m)(2)(A). This tip credit is in addition to any credit for board, lodging, or other facilities which may be allowable under section 3(m). (b) As indicated in § 531.51, the tip credit may be taken only for hours worked by the employee in an VerDate Sep<11>2014 21:16 Oct 07, 2019 Jkt 250001 occupation in which the employee qualifies as a ‘‘tipped employee.’’ Pursuant to section 3(m)(2)(A), an employer is not eligible to take the tip credit unless it has informed its tipped employees in advance of the employer’s use of the tip credit of the provisions of section 3(m)(2)(A) of the Act, i.e.: The amount of the cash wage that is to be paid to the tipped employee by the employer; the additional amount by which the wages of the tipped employee are increased on account of the tip credit claimed by the employer, which amount may not exceed the value of the tips actually received by the employee; that all tips received by the tipped employee must be retained by the employee except for a tip pooling arrangement limited to employees who customarily and regularly receive tips; and that the tip credit shall not apply to any employee who has not been informed of these requirements in this section. The credit allowed on account of tips may be less than that permitted by statute (minimum wage required by section 6(a)(1) minus the cash wage paid (at least $2.13)); it cannot be more. In order for the employer to claim the maximum tip credit, the employer must demonstrate that the employee received at least that amount in actual tips. If the employee received less than the maximum tip credit amount in tips, the employer is required to pay the balance so that the employee receives at least the minimum wage with the defined combination of wages and tips. With the exception of tips contributed to a tip pool limited to employees who customarily and regularly receive tips as described in § 531.54, section 3(m)(2)(A) also requires employers that take a tip credit to permit employees to retain all tips received by the employee. ■ 13. Revise § 531.60 to read as follows: § 531.60 Overtime payments. When overtime is worked by a tipped employee who is subject to the overtime pay provisions of the Act, the employee’s regular rate of pay is determined by dividing the employee’s total remuneration for employment (except statutory exclusions) in any workweek by the total number of hours actually worked by the employee in that workweek for which such compensation was paid. (See part 778 of this chapter for a detailed discussion of overtime compensation under the Act.) In accordance with section 3(m)(2)(A), a tipped employee’s regular rate of pay includes the amount of tip credit taken by the employer per hour (not in excess of the minimum wage required by section 6(a)(1) minus the cash wage paid (at least $2.13)), the reasonable cost or PO 00000 Frm 00023 Fmt 4701 Sfmt 4702 53977 fair value of any facilities furnished to the employee by the employer, as authorized under section 3(m) and this part 531, and the cash wages including commissions and certain bonuses paid by the employer. Any tips received by the employee in excess of the tip credit need not be included in the regular rate. Such tips are not payments made by the employer to the employee as remuneration for employment within the meaning of the Act. PART 578—[AMENDED] 14. The heading of Part 578 is revised to read as follows: ■ PART 578—TIP RETENTION, MINIMUM WAGE, AND OVERTIME VIOLATIONS—CIVIL MONEY PENALTIES 15. The authority citation for Part 578 is revised to read as follows: ■ Authority: 29 U.S.C. 216(e), as amended by sec. 9, Pub. L. 101–157, 103 Stat. 938, sec. 3103, Pub. L. 101–508, 104 Stat. 1388–29, sec. 302(a), Pub. L. 110–233, 122 Stat. 920, and sec. 1201, Div. S., Tit. XII, Pub. L. 115– 141, 132 Stat. 348; Pub. L. 101–410, 104 Stat. 890 (28 U.S.C. 2461 note), as amended by sec. 31001(s), Pub. L. 104–134, 110 Stat. 1321–358, 1321–373, and sec. 701, Pub. L. 114–74, 129 Stat 584. ■ 16. Revise § 578.1 to read as follows: § 578.1 What does this part cover? Section 9 of the Fair Labor Standards Amendments of 1989 amended section 16(e) of the Act to provide that any person who repeatedly or willfully violates the minimum wage (section 6) or overtime provisions (section 7) of the Act shall be subject to a civil money penalty not to exceed $1,000 for each such violation. In 2001, WHD adjusted this penalty for inflation pursuant to the Federal Civil Penalties Inflation Adjustment Act of 1990 (Pub. L. 101– 410), as amended by the Debt Collection Improvement Act of 1996 (Pub. L. 104– 134, section 31001(s)). See 66 FR 63503 (Dec. 7, 2001). The Genetic Information Nondiscrimination Act of 2008 amended section 16(e) of the Act to reflect this increase. See Pub. L. 110– 233, sec. 302(a), 122 Stat. 920. Section 1201(b)(3) of the Consolidated Appropriations Act, 2018, amended section 16(e) to add that any person who violates section 3(m)(2)(B) of the Act shall be subject to a civil money penalty not to exceed $1,100. The Federal Civil Penalties Inflation Adjustment Act of 1990 (Pub. L. 101–410), as amended by the Debt Collection Improvement Act of 1996 (Pub. L. 104–134, section 31001(s)) and the Federal Civil Penalties Inflation Adjustment Act Improvement Act of E:\FR\FM\08OCP4.SGM 08OCP4 53978 Federal Register / Vol. 84, No. 195 / Tuesday, October 8, 2019 / Proposed Rules 2015 (Pub. L. 114–74, section 701), requires that inflationary adjustments be annually made in these civil money penalties according to a specified costof-living formula. This part defines terms necessary for administration of the civil money penalty provisions, describes the violations for which a penalty may be imposed, and describes criteria for determining the amount of penalty to be assessed. The procedural requirements for assessing and contesting such penalties are contained in part 580 of this chapter. ■ 17. Revise § 578.3 to read as follows: jbell on DSK3GLQ082PROD with PROPOSALS4 § 578.3 What types of violations may result in a penalty being assessed? (a)(1) A penalty of up to $1,100 may be assessed against any person who repeatedly or willfully violates section 3(m)(2)(B) of the Act. (2) A penalty of up to $1,964 per violation may be assessed against any person who repeatedly or willfully violates section 6 (minimum wage) or section 7 (overtime) of the Act. The amount of the penalties stated in paragraphs (a)(1) and (2) of this section will be determined by applying the criteria in § 578.4. (b) Repeated violations. An employer’s violation of section 3(m)(2)(B), section 6, or section 7 of the Act shall be deemed to be ‘‘repeated’’ for purposes of this section: (1) Where the employer has previously violated section 3(m)(2)(B), section 6, or section 7 of the Act, provided the employer has previously received notice, through a responsible official of the Wage and Hour Division or otherwise authoritatively, that the employer allegedly was in violation of the provisions of the Act; or (2) Where a court or other tribunal has made a finding that an employer has previously violated section 3(m)(2)(B), section 6, or section 7 of the Act, unless an appeal therefrom which has been timely filed is pending before a court or other tribunal with jurisdiction to hear the appeal, or unless the finding has been set aside or reversed by such appellate tribunal. (c) Willful violations. (1) An employer’s violation of section 3(m)(2)(B), section 6, or section 7 of the Act shall be deemed to be ‘‘willful’’ for purposes of this section where the employer knew that its conduct was prohibited by the Act or showed reckless disregard for the requirements of the Act. All of the facts and circumstances surrounding the violation shall be taken into account in determining whether a violation was willful. VerDate Sep<11>2014 21:16 Oct 07, 2019 Jkt 250001 (2) For purposes of this section, the employer’s receipt of advice from a responsible official of the Wage and Hour Division to the effect that the conduct in question is not lawful is a relevant fact and circumstance when determining if the employer’s conduct is knowing. (3) For purposes of this section, whether the employer should have inquired further into whether its conduct was in compliance with the Act and failed to make adequate further inquiry is a relevant fact and circumstance when determining if the employer’s conduct is in reckless disregard of the requirements of the Act. 18. Revise § 578.4(a) to read as follows: § 578.4 Determination of penalty. (a) In determining the amount of penalty to be assessed for any repeated or willful violation of section 3(m)(2)(B), section 6, or section 7 of the Act, the Administrator shall consider the seriousness of the violations and the size of the employer’s business. * * * * * PART 579—CHILD LABOR VIOLATIONS—CIVIL MONEY PENALTIES 19. The authority citation for Part 579 is revised to read as follows: ■ Authority: 29 U.S.C. 203(m), (l), 211, 212, 213(c), 216; Reorg. Plan No. 6 of 1950, 64 Stat. 1263, 5 U.S.C. App; secs. 25, 29, 88 Stat. 72, 76; Secretary of Labor’s Order No. 01– 2014 (Dec. 19, 2014), 79 FR 77527 (Dec. 24, 2014); 28 U.S.C. 2461 Note (Federal Civil Penalties Inflation Adjustment Act of 1990); and Pub. L. 114–7, 129 Stat 584. 20. Amend § 579.1 by: a. Revising paragraph (a) introductory text; ■ b. Redesignating paragraph (a)(2) as paragraph (a)(2)(i); and ■ c. Adding paragraph (a)(2)(ii). The revisions and additions read as follows: ■ ■ § 579.1 Purpose and scope. (a) Section 16(e), added to the Fair Labor Standards Act of 1938, as amended, by the Fair Labor Standards Amendments of 1974, and as further amended by the Fair Labor Standards Amendments of 1989, the Omnibus Budget Reconciliation Act of 1990, the Compactor and Balers Safety Standards Modernization Act of 1996, the Genetic Information Nondiscrimination Act of 2008, and the Consolidated Appropriations Act of 2018, provides for the imposition of civil money penalties in the following manner: * * * * * PO 00000 Frm 00024 Fmt 4701 Sfmt 4702 (2) * * * (ii) Any person who repeatedly or willfully violates section 203(m)(2)(B) of the FLSA, relating to the retention of tips, shall be subject to a civil penalty not to exceed $1,100 for each such violation. * * * * * ■ 21. Amend § 579.2 by revising the definition of ‘‘Willful violations’’ to read as follows: § 579.2 Definitions. * * * * * Willful violations under this section has several components. An employer’s violation of section 12 or section 13(c) of the Act relating to child labor or any regulation issued pursuant to such sections, shall be deemed to be willful for purposes of this section where the employer knew that its conduct was prohibited by the Act or showed reckless disregard for the requirements of the Act. All of the facts and circumstances surrounding the violation shall be taken into account in determining whether a violation was willful. In addition, for purposes of this section, the employer’s receipt of advice from a responsible official of the Wage and Hour Division to the effect that the conduct in question is not lawful is a relevant fact and circumstance when determining if the employer’s conduct is knowing. For purposes of this section, whether the employer should have inquired further into whether its conduct was in compliance with the Act and failed to make adequate further inquiry is a relevant fact and circumstance when determining if the employer’s conduct is in reckless disregard of the requirements of the Act. PART 580—CIVIL MONEY PENALTIES—PROCEDURES FOR ASSESSING AND CONTESTING PENALTIES 22. The authority citation for part 580 continues to read as follows: ■ Authority: 29 U.S.C. 9a, 203, 209, 211, 212, 213(c), 216; Reorg. Plan No. 6 of 1950, 64 Stat. 1263, 5 U.S.C. App; secs. 25, 29, 88 Stat. 72, 76; Secretary’s Order 01–2014 (Dec. 19, 2014), 79 FR 77527 (Dec. 24, 2014); 5 U.S.C. 500, 503, 551, 559; 103 Stat. 938. 23. Revise the first sentence of § 580.2 to read as follows: ■ § 580.2 rules. Applicability of procedures and The procedures and rules contained in this part prescribe the administrative process for assessment of civil money penalties for any violation of the child labor provisions at section 12 of the Act and any regulation thereunder as set E:\FR\FM\08OCP4.SGM 08OCP4 Federal Register / Vol. 84, No. 195 / Tuesday, October 8, 2019 / Proposed Rules forth in part 579, and for assessment of civil money penalties for any repeated or willful violation of the tip retention provisions of section 3(m)(2)(B), the minimum wage provisions of section 6, or the overtime provisions of section 7 of the Act or the regulations thereunder set forth in 29 CFR subtitle B, chapter V. * * * ■ 24. Revise the first sentence of § 580.3 to read as follows: § 580.12 Decision and Order of Administrative Law Judge. * § 580.3 Written notice of determination required. Whenever the Administrator determines that there has been a violation by any person of section 12 of the Act relating to child labor or any regulation issued under that section, or determines that there has been a repeated or willful violation by any person of section 3(m)(2)(B), section 6, or section 7 of the Act, and determines jbell on DSK3GLQ082PROD with PROPOSALS4 that imposition of a civil money penalty for such violation is appropriate, the Administrator shall issue and serve a notice of such penalty on such person in person or by certified mail. * * * ■ 25. Amend § 580.12 by revising the first sentence of paragraph (b) of to read as follows: * * * * (b) The decision of the Administrative Law Judge shall be limited to a determination of whether the respondent has committed a violation of section 12, or a repeated or willful violation of section 3(m)(2)(B), section 6, or section 7 of the Act, and the appropriateness of the penalty assessed by the Administrator. * * * * * * * * 26. Amend § 580.18 by revising the third sentence in paragraph (b)(3) to read as follows: ■ § 580.18 penalty. Collection and recovery of * * * * * (b) * * * (3) * * * A willful violation of sections 3(m)(2)(B), 6, 7, or 12 of the Act may subject the offender to the penalties provided in section 16(a) of the Act, enforced by the Department of Justice in criminal proceedings in the United States courts. * * * The following appendix will not appear in the Code of Federal Regulations. Appendix Table 1—List of Occupations Included in the Outside-Option Regression Sample Amusement and Recreation Attendants Bus Drivers, School or Special Client Bus Drivers, Transit and Intercity Cashiers Childcare Workers Concierges Door-To-Door Sales Workers, News and Street Vendors, and Related Workers Driver/Sales Workers Flight Attendants Funeral Attendants Hairdressers, Hairstylists, and Cosmetologists Home Health Aides Hotel, Motel, and Resort Desk Clerks Insurance Sales Agents Library Assistants, Clerical Maids and Housekeeping Cleaners Manicurists and Pedicurists Massage Therapists Nursing Assistants Occupational Therapy Aides Office Clerks, General Orderlies Parking Lot Attendants Parts Salespersons Personal Care Aides Pharmacy Aides Pharmacy Technicians Postal Service Clerks Real Estate Sales Agents Receptionists and Information Clerks Recreation Workers Residential Advisors Retail Salespersons Sales Agents, Financial Services Sales Representatives, Wholesale and Manufacturing, Except Technical and Scientific Products Secretaries and Administrative Assistants, Except Legal, Medical, and Executive Social and Human Service Assistants Statement Clerks Stock Clerks, Sales Floor Subway and Streetcar Operators Taxi Drivers and Chauffeurs Telemarketers Telephone Operators Tellers Tour Guides and Escorts Travel Agents Travel Guides VerDate Sep<11>2014 21:16 Oct 07, 2019 Jkt 250001 PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 53979 E:\FR\FM\08OCP4.SGM 08OCP4 53980 Federal Register / Vol. 84, No. 195 / Tuesday, October 8, 2019 / Proposed Rules Signed in Washington, DC this 19th day of September, 2019. Cheryl M. Stanton, Administrator, Wage and Hour Division. [FR Doc. 2019–20868 Filed 10–7–19; 8:45 am] jbell on DSK3GLQ082PROD with PROPOSALS4 BILLING CODE 4510–27–P VerDate Sep<11>2014 21:16 Oct 07, 2019 Jkt 250001 PO 00000 Frm 00026 Fmt 4701 Sfmt 9990 E:\FR\FM\08OCP4.SGM 08OCP4

Agencies

[Federal Register Volume 84, Number 195 (Tuesday, October 8, 2019)]
[Proposed Rules]
[Pages 53956-53980]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20868]



[[Page 53955]]

Vol. 84

Tuesday,

No. 195

October 8, 2019

Part IV





Department of Labor





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Wage and Hour Division





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29 CFR Parts 10, 516, 531, et al.





Tip Regulations Under the Fair Labor Standards Act (FLSA); Proposed 
Rule

Federal Register / Vol. 84 , No. 195 / Tuesday, October 8, 2019 / 
Proposed Rules

[[Page 53956]]


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DEPARTMENT OF LABOR

Wage and Hour Division

29 CFR Parts 10, 516, 531, 578, 579, and 580

RIN 1235-AA21


Tip Regulations Under the Fair Labor Standards Act (FLSA)

AGENCY: Wage and Hour Division, Department of Labor.

ACTION: Notice of proposed rulemaking; withdrawal of proposed 
rulemaking; request for comments.

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SUMMARY: In the Consolidated Appropriations Act, 2018 (CAA), Congress 
amended section 3(m) of the Fair Labor Standards Act (FLSA) to prohibit 
employers from keeping tips received by their employees, regardless of 
whether the employers take a tip credit under section 3(m). In this 
Notice of Proposed Rulemaking (NPRM), the Department proposes to amend 
its tip regulations to address this Congressional action. The 
Department also proposes to codify policy regarding the tip credit's 
application to employees who performed tipped and non-tipped duties. 
This NPRM also withdraws the Department's December 5, 2017 NPRM 
proposing changes to the Department's tip regulations, as the CAA has 
superseded it.

DATES: Comments must be received on or before December 9, 2019.
    The proposed rule Tip Regulations under the Fair Labor Standards 
Act, published December 5, 2017 at 82 FR 57395, is withdrawn as of 
October 8, 2019.

ADDRESSES: To facilitate the receipt and processing of written comments 
on this NPRM, the Department encourages interested persons to submit 
their comments electronically. You may submit comments, identified by 
Regulatory Information Number (RIN) 1235-AA21, by either of the 
following methods:
    Electronic Comments: Follow the instructions for submitting 
comments on the Federal eRulemaking Portal https://www.regulations.gov.
    Mail: Address written submissions to Amy DeBisschop, Acting 
Director of the Division of Regulations, Legislation, and 
Interpretation, Wage and Hour Division, U.S. Department of Labor, Room 
S-3502, 200 Constitution Avenue NW, Washington, DC 20210.
    Instructions: This NPRM is available through the Federal Register 
and the https://www.regulations.gov website. You may also access this 
document via the Wage and Hour Division's (WHD) website at https://www.dol.gov/whd/. All comment submissions must include the agency name 
and Regulatory Information Number (RIN 1235-AA21) for this NPRM. 
Response to this NPRM is voluntary. The Department requests that no 
business proprietary information, copyrighted information, or 
personally identifiable information be submitted in response to this 
NPRM. Submit only one copy of your comment by only one method (e.g., 
persons submitting comments electronically are encouraged not to submit 
paper copies). Anyone who submits a comment (including duplicate 
comments) should understand and expect that the comment will become a 
matter of public record and will be posted without change to https://www.regulations.gov, including any personal information provided. All 
comments must be received by 11:59 p.m. on the date indicated for 
consideration in this NPRM; comments received after the comment period 
closes will not be considered. Commenters should transmit comments 
early to ensure timely receipt prior to the close of the comment 
period. Electronic submission via https://www.regulations.gov enables 
prompt receipt of comments submitted as the Department continues to 
experience delays in the receipt of mail in our area. For access to the 
docket to read background documents or comments, go to the Federal 
eRulemaking Portal at https://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Amy DeBisschop, Director of the 
Division of Regulations, Legislation, and Interpretation, Wage and Hour 
Division, U.S. Department of Labor, Room S-3502, 200 Constitution 
Avenue NW, Washington, DC 20210, telephone: (202) 693-0406 (this is not 
a toll-free number). Copies of this NPRM may be obtained in alternative 
formats (Large Print, Braille, Audio Tape or Disc), upon request, by 
calling (202) 693-0675 (this is not a toll-free number). TTY/TDD 
callers may dial toll-free (877) 889-5627 to obtain information or 
request materials in alternative formats.
    Questions of interpretation and/or enforcement of the agency's 
existing regulations may be directed to the nearest WHD district 
office. Locate the nearest office by calling the WHD's toll-free help 
line at (866) 4US-WAGE ((866) 487-9243) between 8 a.m. and 5 p.m. in 
your local time zone, or log onto WHD's website at https://www.dol.gov/whd/america2.htm for a nationwide listing of WHD district and area 
offices.

SUPPLEMENTARY INFORMATION: 

I. Executive Summary

    The FLSA generally requires covered employers to pay employees at 
least a Federal minimum wage, which is currently $7.25 per hour. See 29 
U.S.C. 206(a)(1). Section 3(m) of the FLSA allows an employer that 
meets certain requirements to count a limited amount of the tips its 
``tipped employees'' receive as a credit toward its Federal minimum 
wage obligation (known as a ``tip credit''). See 29 U.S.C. 
203(m)(2)(A). An employer may take a tip credit only for ``tipped 
employees'', and only if, among other things, its tipped employees 
retain all their tips. Id. This requirement, however, does not preclude 
an employer that takes a tip credit from implementing a tip pool in 
which tips are shared only among those employees who ``customarily and 
regularly receive tips.'' Id.
    In 2011, the Department revised its tip regulations to reflect its 
view at the time that the FLSA required that tipped employees retain 
all tips received by them, except for tips distributed through a tip 
pool limited to employees who customarily and regularly receive tips, 
regardless of whether their employer takes a tip credit. See, e.g., 29 
CFR 531.52. On December 5, 2017, the Department published an NPRM, 82 
FR 57,395, which proposed to rescind the parts of its tip regulations 
that applied to employers that pay a direct cash wage of at least the 
full Federal minimum wage and do not take a tip credit.
    On March 23, 2018, Congress amended section 3(m) of the FLSA in the 
CAA, Public Law 115-141, Div. S., Tit. XII, Sec.  1201, 132 Stat. 348, 
1148-49 (2018). Among other things, the CAA revised section 3(m) by 
renumbering the existing tip credit provision as section 3(m)(2)(A). 
Significantly, the CAA added a new section 3(m)(2)(B), which prohibits 
employers, whether or not they take a tip credit, from keeping their 
employees' tips ``for any purposes, including allowing managers or 
supervisors to keep any portion of employees' tips.'' The CAA amended 
sections 16(b) and 16(c) of the FLSA to permit private parties and the 
Department to recover any tips unlawfully kept by an employer in 
violation of section 3(m)(2)(B), in addition to an equal amount of 
liquidated damages. The CAA also amended section 16(e) of the FLSA to 
provide the Department discretion to impose civil money penalties 
(CMPs) up to $1,100 when employers unlawfully keep employee's tips.
    Congress specified in the CAA that the portions of the 2011 final 
rule that ``are not addressed by section 3(m) . . .

[[Page 53957]]

(as such section was in effect on April 5, 2011), shall have no further 
force or effect until any future action taken by [the Department of 
Labor].'' As the Department explained in a Field Assistance Bulletin 
(FAB) published shortly thereafter, that statement applies to those 
portions of the Department's regulations at Sec. Sec.  531.52, 531.54, 
and 531.59 that restricted tip pooling when employers pay tipped 
employees a direct cash wage of at least the full FLSA minimum wage and 
do not claim a tip credit. FAB No. 2018-3 (Apr. 6, 2018), available at 
https://www.dol.gov/whd/FieldBulletins/fab2018_3.pdf.
    Because the Congressional amendments to the FLSA directly impacted 
the subject of the Department's 2017 NPRM, this document withdraws that 
proposal. This document also explains the impact of the 2018 CAA 
amendments on the Department's current tip pooling regulations. The CAA 
did not change the existing rules that apply to employers that take a 
tip credit, now in section 3(m)(2)(A) of the FLSA, which provide that 
such employers may institute a mandatory, ``traditional'' tip pool that 
is limited to employees who ``customarily and regularly'' receive tips. 
But the CAA did eliminate the regulatory restrictions on an employer's 
ability to require tip pooling when it does not take a tip credit: Such 
employers may now implement mandatory, ``nontraditional'' tip pools in 
which employees who do not customarily and regularly receive tips, such 
as cooks and dishwashers, may participate.
    The CAA also created a new statutory provision, 3(m)(2)(B), which 
applies to all employers regardless of whether they take a tip credit, 
and provides that employers may not keep employees' tips and may not 
allow managers or supervisors to keep employees' tips. Among other 
things, this new statutory provision prohibits employers, managers, and 
supervisors from receiving employees' tips from any tip pooling 
arrangement. As explained further herein, section 3(m)(2)(B) also 
prohibits employers from operating tip pools in a manner such that they 
``keep'' tips.
    The Department is proposing to update its tip regulations to 
incorporate the CAA's amendments to the FLSA. Although the CAA 
renumbered the FLSA's existing tip credit provision as section 
3(m)(2)(A), it did not substantively change that provision. Therefore, 
this rulemaking does not address the Department's existing regulations 
and guidance implementing 3(m)(2)(A) that apply to employers that take 
a tip credit unless it is necessary to clarify how those provisions 
relate to the statutory amendment. The Department is proposing to 
incorporate the new statutory provision, section 3(m)(2)(B)--which 
applies regardless of whether the employer takes a tip credit--into its 
existing regulations and is proposing to incorporate a new 
recordkeeping provision to assist the Department with its 
administration of that provision. The Department is additionally 
proposing, consistent with Congressional action, to remove the portions 
of its regulations that prohibited employers that pay their tipped 
employees a direct cash wage of at least the full Federal minimum wage 
and do not take a tip credit against their minimum wage obligations 
from including employees who do not customarily and regularly receive 
tips, such as cooks and dishwashers, in mandatory tip pooling 
arrangements. The Department is also proposing to amend its tip 
regulations to reflect recent guidance explaining that an employer may 
take a tip credit for any amount of time that an employee in a tipped 
occupation performs related, non-tipped duties contemporaneously with 
his or her tipped duties, or for a reasonable time immediately before 
or after performing the tipped duties. The proposed regulation would 
also address which non-tipped duties are related to a tip-producing 
occupation.
    The Department is also proposing to incorporate the FLSA's new CMP 
provision into its existing regulations. Since the Department is 
proposing to revise its CMP regulations to reflect the statutory 
amendments, the Department also proposes to revise portions of its CMP 
regulations to address courts of appeals' decisions that have raised 
concerns that some of the regulations' statements regarding willful 
violations are inconsistent with Supreme Court authority and how the 
Department actually litigates willfulness.
    Finally, the Department is proposing to amend the provisions of its 
regulations that address the payment of tipped employees under 
Executive Order 13658 (Establishing a Minimum Wage for Contractors) to 
reflect the rescissions proposed in the FLSA regulations for tipped 
employees, to incorporate the Department's guidance on when an employee 
performing non-tipped work is a tipped employee, and to otherwise align 
those regulations with the authority provided in the Executive Order.
    The Department estimates the rule updating WHD's regulations to 
reflect the CAA amendments, if finalized as proposed, could result in a 
potential transfer of $107 million, as tip pools are expanded to share 
tips among both front-of-the-house and back-of-the-house employees. The 
directly-observable transfer would only occur among employees because 
section 3(m)(2)(B) prohibits employers from participating in these tip 
pools or otherwise keeping employee's tips. However, because back-of-
the-house workers may now be receiving tips, employers may offset this 
increase in total compensation by reducing the direct wage that they 
pay back-of-the-house workers (as long as they do not reduce their wage 
below the applicable minimum wage). This could allow employers to 
capture some of the transfer. The Department estimates that regulatory 
familiarization costs associated with this proposed rule would be $3.86 
million in the first year. For purposes of Executive Order 13771, it is 
expected that this proposed rule would, if finalized as proposed, 
qualify as a deregulatory action.

II. Background

A. Section 3(m)

    As explained above, the FLSA generally requires covered employers 
to pay employees at least the Federal minimum wage, which is currently 
$7.25 per hour. Section 3(m) (now 3(m)(2)(A)) of the FLSA, however, 
permits an employer to count a limited amount of an employee's tips (up 
to $5.12 per hour) as a partial credit, called a ``tip credit,'' to 
satisfy the difference between the direct cash wage paid and the 
Federal minimum wage. This partial credit is known as a tip credit. An 
employer may take a tip credit only for a ``tipped employee,'' which 
section 3(t) of the FLSA defines as ``any employee engaged in an 
occupation in which he customarily and regularly receives more than $30 
a month in tips.'' In addition, an employer may take a tip credit under 
section 3(m)(2)(A) only if, among other things, the tipped employees 
retain all the tips they receive. An employer taking a tip credit is 
allowed, however, to implement a mandatory tip pool in which tips are 
shared only among employees who ``customarily and regularly receive 
tips.''
    Section 3(m)(2)(B) of the FLSA, added through the CAA, provides 
that ``an employer may not keep tips received by its employees for any 
purposes, including allowing managers or supervisors to keep any 
portion of employees' tips.'' See Div. S., Tit. XII, Sec.  1201. 
Importantly, section 3(m)(2)(B) applies regardless of whether an 
employer takes a tip credit.

[[Page 53958]]

B. Statutory and Regulatory History

i. 1966 and 1974 Amendments to the FLSA \1\
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    \1\ Congress amended section 3(m)'s tip credit provision three 
times between 1974 and 2018, in 1977, 1989, and 1996. These 
amendments changed only the applicable amount of tips received by 
employees that could be used as a credit against an employer's 
minimum wage obligations. See Public Law 95-151, 3(b), 91 Stat. 1245 
(1977); Public Law 101-157, 5, 103 Stat. 938 (1989); Public Law 104-
188, 2105(b), 110 Stat. 1755 (1996).
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    Congress created the FLSA's tip credit provision within the 
definition of ``wages'' in section 3(m) in 1966. See Public Law 89-601, 
101(a), 80 Stat. 830 (1966). In 1974, Congress amended section 3(m) to 
provide that an employer could not credit tips received by its 
employees toward its Federal minimum wage obligation unless, among 
other things:

all tips received by such employee have been retained by the 
employee, except that this subsection shall not be construed to 
prohibit the pooling of tips among employees who customarily and 
regularly receive tips.

    Public Law 93-259, 13(e), 88 Stat. 55 (1974). As a result of the 
amendment, an employer that takes a tip credit can require a tipped 
employee to share tips with other employees in occupations in which 
they customarily and regularly receive tips, but it cannot use 
employees' tips for any other purpose or require tipped employees to 
share them with employees who do not customarily and regularly receive 
tips. As the text of the statute makes plain, Congress only intended to 
regulate employers who take a tip credit, stating that those employers 
cannot take employees' tips except to pool them among employees who 
customarily and regularly receive them. The text contains no indication 
that Congress intended to regulate employers who do not take a tip 
credit and who use tip pools for other purposes, such as by sharing 
tips with ``back of the house'' employees like cooks and dishwashers.
    The Department promulgated its initial tip regulations in 1967, one 
year after Congress created the tip credit. See 32 FR 13,575 (Sept. 28, 
1967). Consistent with the Department's understanding of the 1966 
amendments, the 1967 tip regulations permitted agreements under which 
tips received by employees would be transferred to the employer. 
Immediately after the 1974 amendments, the Department's WHD stated in a 
number of opinion letters that its 1967 regulations were superseded to 
the extent they conflicted with those amendments. See, e.g., WHD 
Opinion Letter WH-310, 1975 WL 40934 (Feb. 18, 1974), at *1.
    In 2010, the Ninth Circuit analyzed section 3(m) and observed that 
``nothing in the text of the FLSA purports to restrict employee tip-
pooling arrangements when no tip credit is taken.'' Cumbie v. Woody 
Woo, Inc., 596 F.3d 577, 583 (9th Cir. 2010). The Ninth Circuit 
reasoned that section 3(m)'s ``plain text'' merely ``imposes conditions 
on taking a tip credit and does not state freestanding requirements 
pertaining to all tipped employees.'' Id. at 580-81. The contrary 
position, the court concluded, would render Section 203(m)'s 
``reference to the tip credit, as well as its conditional language and 
structure, superfluous.'' Id. at 581. The court thus held that the 
employer, which did not take a tip credit, did not violate section 
203(m) by requiring its tipped employees to contribute to a tip pool 
that included employees who were not customarily and regularly tipped. 
See id.
ii. 2011 Regulations
    In 2011, however, the Department revised its 1967 tip regulations 
to reflect its view of the 1974 amendments to the FLSA. See 76 FR 
18,832, 18,854-56 (Apr. 5, 2011). Notwithstanding the Cumbie decision, 
the 2011 regulations prohibited employers from, among other things, 
establishing mandatory tip pools that include employees who are not 
customarily and regularly tipped--regardless of whether employers took 
a tip credit. See 29 CFR 531.52 (2011) (``The employer is prohibited 
from using an employee's tips, whether or not it has taken a tip 
credit, for any reason other than that which is statutorily permitted 
in section 3(m): As a credit against its minimum wage obligations to 
the employee, or in furtherance of a valid tip pool.''); see also Sec.  
531.54 (providing that ``an employer . . . may not retain any of the 
employees' tips''); Sec.  531.59 (``With the exception of tips 
contributed to a valid tip pool as described in Sec.  531.54, the tip 
credit provisions of section 3(m) also require employers to permit 
employees to retain all tips received by the employee.''). The 
Department acknowledged that section 3(m) did not expressly address the 
use of an employee's tips when an employer does not take a tip credit 
and pays a direct cash wage equal to or greater than the Federal 
minimum wage, but stated that the regulation would fill a ``gap'' that 
the Department then believed to exist in the statutory scheme. 76 FR at 
18,841-42.
    Multiple lawsuits have involved challenges to the Department's 
authority under section 3(m) to regulate employers that pay a direct 
cash wage of at least the Federal minimum wage. The parties challenging 
the validity of the 2011 regulations argued, and courts ruling in favor 
of such parties have held, that the text of section 3(m) reflected 
Congress' intent to impose conditions only on employers that take a tip 
credit. See, e.g., Trinidad v. Pret A Manger (USA) Ltd., 962 F. Supp. 
2d 545, 562 (S.D.N.Y. 2013) (``Although the Court need not resolve this 
issue definitively . . . [it] finds Pret's argument more persuasive: 
The DOL regulations are contrary to the plain language of Sec.  
203(m).'').
    On February 23, 2016, a divided Ninth Circuit panel upheld the 
validity of the 2011 regulations. See Oregon Rest. & Lodging Ass'n 
(ORLA) v. Perez, 816 F.3d 1080, 1090 (9th Cir. 2016). Although the 
Ninth Circuit declined en banc review of the decision, ten judges 
dissented on the ground that the FLSA authorized the Department to 
address tip pooling and tip retention only when an employer takes a tip 
credit. See ORLA, 843 F.3d 355, 356 (9th Cir. 2016) (O'Scannlain, J., 
dissenting from denial of reh'g en banc). The dissent noted the Ninth 
Circuit's decision in Cumbie that the FLSA ``clearly and unambiguously 
permits employers who forgo a tip credit to arrange their tip-pooling 
affairs however they see fit.'' Id. at 358 (citing Cumbie, 596 F.3d at 
579 n.6, 581, 581 n.11, 582, 583). The dissent therefore concluded that 
``because the Department has not been delegated authority to ban tip 
pooling by employers who forgo the tip credit, the Department's 
assertion of regulatory jurisdiction is manifestly contrary to the 
statute and exceeds its statutory authority.'' Id. at 363 (internal 
quotation marks omitted). On January 19, 2017, the National Restaurant 
Association, on behalf of itself and other ORLA plaintiffs, sought 
Supreme Court review. See Pet'n for Writ of Cert., ORLA sub nom. Nat'l 
Rest. Ass'n v. U.S. DOL, (Jan. 19, 2017) (No. 16-920).
    On June 30, 2017, the Tenth Circuit ruled that the Department's 
2011 tip regulations were invalid to the extent they barred an employer 
from using or sharing tips with employees who do not customarily and 
regularly receive tips when the employer pays a direct cash wage of at 
least the Federal minimum wage and does not take a section 3(m) tip 
credit. See Marlow v. New Food Guy, Inc., 861 F.3d 1157, 1159 (10th 
Cir. 2017). The Tenth Circuit held that the text of the FLSA limits an 
employer's use of tips only when the employer takes a tip credit, 
``leaving [the Department] without authority to regulate to the 
contrary.'' See Marlow, 861 F.3d at 1163-64.

[[Page 53959]]

    On July 20, 2017, the Department adopted a nationwide 
``nonenforcement policy'' under which the Department would ``not 
enforce'' the 2011 regulations in any context in which an employer pays 
its employees a direct cash wage of at least the Federal minimum wage. 
See 82 FR 57395, 57399 (Dec. 5, 2017).
    On May 22, 2018, the government responded to the petition for 
certiorari in ORLA, then captioned as Nat'l Rest. Ass'n (NRA) et al. v. 
Dept. of Labor et al, explaining that the Department had reconsidered 
its defense of the 2011 regulations in light of the ten-judge dissent 
from denial of rehearing in ORLA and the Tenth Circuit's decision in 
Marlow, and that it believed that it had exceeded its statutory 
authority in promulgating the 2011 regulations as they apply to 
employers that do not take a tip credit against their Federal minimum 
wage obligations. The government explained that ``until the 2018 
[congressional] amendments, Section 203(m) placed limits only on 
employers that took a tip credit,'' and that ``[n]either Section 203(m) 
nor any other provision of the FLSA prevents an employer that pays at 
least the minimum wage from instituting a nontraditional tip pool [that 
includes back-of-the-house employees like cooks and janitors] for 
employees' tips.'' Br. for the Respondents at 26-27, NRA (No. 16-920). 
On June 25, 2018, the Supreme Court denied the petition for certiorari.
iii. 2017 Notice of Proposed Rulemaking
    On December 5, 2017, the Department published an NPRM proposing to 
rescind the portions of its 2011 tip regulations that imposed 
restrictions on employers that pay a direct cash wage of at least the 
full Federal minimum wage and do not take a tip credit against their 
minimum wage obligations. See 82 FR 57395 (Dec. 5, 2017). The 
Department issued the 2017 NPRM in part because of its concerns, in 
light of the ORLA rehearing dissent and the Tenth Circuit's decision in 
Marlow, that it had misconstrued the statute when it promulgated the 
2011 regulations. 82 FR 57399. The Department stated that where ``an 
employer has paid a direct cash wage of at least the full Federal 
minimum wage and does not take the employee tips directly, a strong 
argument exists that the statutory protections of section 3(m) do not 
apply.'' 82 FR 57402. The Department also proposed allowing these 
employers to establish tip pools that include employees who contribute 
to the customers' experience but do not customarily and regularly 
receive tips--such as dishwashers or cooks. See, e.g., 82 FR 57399.
    A number of commenters on the NPRM supported allowing employers to 
establish these tip pools. Several commenters pointed out that these 
workers contribute to each customer's overall service, which directly 
affects the size of the customer's tip. Many commenters, however, 
expressed concern that without regulatory protections in place, an 
employer would take tips received by employees for its own purposes.
    During a hearing on March 6, 2018, before the Subcommittee on 
Labor, Health and Human Services, and Education of the U.S. House of 
Representatives Committee on Appropriations, Secretary of Labor R. 
Alexander Acosta was asked about the proposed rulemaking. The Secretary 
explained that the Tenth Circuit had made clear in Marlow, in reasoning 
the Secretary found persuasive, that the Department lacked statutory 
authority for its 2011 regulations at issue, and that the Secretary had 
concluded that Congress has not authorized the Department to fully 
regulate in this space. The Secretary, however, explained that Congress 
had the authority to implement a solution, and he suggested that 
Congress enact legislation providing that establishments, whether or 
not they take a tip credit, may not keep any portion of employees' 
tips.\2\
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    \2\ A recording of the testimony is available at: https://www.congress.gov/committees/video/house-appropriations/hsap00/6Weo1vfNM1k.
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C. The CAA's Amendments to the FLSA
    On March 23, 2018, Congress amended the FLSA through the CAA to 
further address employers' practices with respect to their employees' 
tips. Public Law 115-141, Div. S., Tit. XII, sec. 1201. The Department 
issued a FAB that provided guidance concerning WHD enforcement of the 
CAA amendments on April 6, 2018. See FAB No. 2018-3 (Apr. 6, 2018).
i. Amendments to Section 3(m) of the FLSA
    The CAA left unchanged the existing text of section 3(m), but 
recodified it as section 3(m)(2)(A). Thus, the CAA did not alter the 
FLSA's longstanding requirements that apply to employers that take a 
tip credit.
    The CAA did, however, add new requirements for all employers. The 
CAA added a new section to the FLSA, 3(m)(2)(B). This provision 
expressly prohibits employers--regardless of whether they take a tip 
credit under section 3(m)--from keeping tips received by their 
employees, including by distributing them to managers or supervisors: 
``An employer may not keep tips received by its employees for any 
purposes, including allowing managers or supervisors to keep any 
portion of employees' tips, regardless of whether or not the employer 
takes a tip credit.'' CAA, Div. S, Tit. XII, Sec.  1201(a) (codified as 
amended at 29 U.S.C. 203(m)(2)(B)); see FAB No. 2018-3.
ii. Effect on Regulations
    The CAA amendments also expressly addressed the portions of the 
Department's 2011 regulations that restricted tip pooling when 
employers pay tipped employees a direct cash wage of at least the full 
FLSA minimum wage and do not take a tip credit. CAA, Div. S, Tit. XII, 
Sec.  1201(c). Section 1201(c) of the CAA provides that the portions of 
WHD's regulations at 29 CFR 531.52, 531.54, and 531.59 that were ``not 
addressed by section 3(m) . . . (as such section was in effect on April 
5, 2011), shall have no further force or effect until any future action 
taken by [the Department of Labor].'' The Department explained in a FAB 
that this statutory language had the effect of depriving of any further 
force or effect the Department's existing regulations prohibiting 
employers that pay tipped employees the full Federal minimum wage from 
including back-of-the-house workers, such as cooks and dishwashers, in 
a tip pool. See FAB No. 2018-3.
iii. Amendments to Section 16 of the FLSA
    The CAA also amended section 16(b) of the FLSA, which provides in 
part that an employee may sue for unpaid minimum wages or overtime 
compensation. The amendment to this provision states that ``[a]ny 
employer who violates section 3(m)(2)(B) shall be liable to the 
employee or employees affected in the amount of the sum of any tip 
credit taken by the employer and all such tips unlawfully kept by the 
employer, and in an additional equal amount as liquidated damages.'' 
CAA, Div. S, Tit. XII, sec. 1201(b)(1). The amendment thus permits 
employees to sue for double the sum of any tips illegally kept by their 
employer and the amount of any tip credit taken by such employer.
    Section 16(c) of the FLSA authorizes the Department to enforce the 
proper payment of unpaid minimum wages and/or unpaid overtime 
compensation. The CAA amended section 16(c) by adding to the 
Department's enforcement authority: ``The authority and

[[Page 53960]]

requirements described in this subsection shall apply with respect to a 
violation of section 3(m)(2)(B), as appropriate, and the employer shall 
be liable for the amount of the sum of any tip credit taken by the 
employer and all such tips unlawfully kept by the employer, and an 
additional equal amount as liquidated damages.'' CAA, Div. S, Tit. XII, 
sec. 1201(b)(2). Accordingly, when an employer unlawfully keeps an 
employee's tips in violation of section 3(m)(2)(B), the Department may 
recover on behalf of the employee the same doubled sum of any tips kept 
and tip credit taken by the employer.
    Section 16(e)(2) provides that any person who repeatedly or 
willfully violates the minimum wage or overtime provisions of the FLSA 
shall be subject to a civil money penalty not to exceed $1,100 for each 
such violation.\3\ The CAA amended this section to add: ``Any person 
who violates section 3(m)(2)(B) shall be subject to a civil penalty not 
to exceed $1,100 for each such violation, as the Secretary determines 
appropriate, in addition to being liable to the employee or employees 
affected for all tips unlawfully kept, and an additional equal amount 
as liquidated damages[.]'' CAA, Div. S, Tit. XII, sec. 1201(b)(3). The 
amendment thus added a new civil money penalty for violations of 
section 3(m)(2)(B).
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    \3\ The Federal Civil Penalties Inflation Adjustment Act of 1990 
(Pub. L. 101-410), as amended by the Debt Collection Improvement Act 
of 1996 (Pub. L. 104-134, sec. 31001(s)) and the Federal Civil 
Penalties Inflation Adjustment Act Improvement Act of 2015 (Publ. L. 
No. 114-74, sec. 701), requires that inflationary adjustments be 
made annually in these civil money penalties according to a 
specified cost-of-living formula.
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III. Withdrawal of the 2017 NPRM

    As noted above, on December 5, 2017, the Department published an 
NPRM which proposed to rescind the parts of its tip regulations that 
applied to employers that pay a direct cash wage of at least the full 
Federal minimum wage and do not take a tip credit.
    The CAA amendments to the statutory text of the FLSA, which were 
signed into law on March 23, 2018, directly impacted the subject of the 
2017 proposed rulemaking--employers that pay at least the full Federal 
minimum wage and do not take a tip credit under section 3(m). For that 
reason, the Department is withdrawing the 2017 NPRM and is addressing 
the 2018 CAA amendments through this rulemaking.

IV. Section-by-Section Analysis of Proposed Regulatory Revisions

    This section describes in detail the Department's proposed changes 
to its tip regulations to implement the CAA amendments and address 
other issues. As discussed above, the CAA amendments deprived of any 
further force or effect the portions of the Department's 2011 
regulations that restricted tip pooling when employers pay tipped 
employees a direct cash wage of at least the full FLSA minimum wage and 
do not take a tip credit, until future action by the WHD Administrator. 
At the same time, the CAA amendments expressly prohibit employers from 
keeping tips received by their employees for any purposes, regardless 
of whether the employer takes a tip credit. Pursuant to section 1201(c) 
of the CAA amendments and consistent with its position articulated in 
the 2017 NPRM, the Department proposes to strike the portions of its 
current regulations that prohibit employers that pay their tipped 
employees a direct cash wage at least equal to the Federal minimum wage 
and do not take a tip credit from establishing mandatory tip pools with 
employees who do not customarily and regularly receive tips, such as 
dishwashers and cooks.
    The Department also proposes to amend Sec.  531.52 to implement 
newly added section 3(m)(2)(B), which prohibits employers--regardless 
of whether they take a tip credit--from keeping employees' tips for any 
purposes, including allowing managers and supervisors to keep the tips. 
The proposed regulation defines an individual who is a manager or 
supervisor, and therefore may not keep employees' tips under section 
3(m)(2)(B), as an individual who meets the duties test at Sec.  
541.100(a)(2)-(4) or Sec.  541.101.
    The Department also proposes to amend Sec.  531.54 to reflect the 
new statutory provision, section 3(m)(2)(B). Proposed Sec.  531.54(b) 
clarifies that section 3(m)(2)(B)'s prohibition on keeping tips applies 
regardless of whether the employer takes a tip credit and precludes 
employers from including themselves, managers, and/or supervisors in 
employer-mandated tip pools. Proposed Sec.  531.54(b) also explains 
that although section 3(m)(2)(B) prohibits employers from sharing 
employees' tips with supervisors, managers, and employers, an employer 
may institute a mandatory tip pool that requires employees to share or 
pool tips with other eligible employees. Proposed Sec.  531.54(b) 
further provides that any employer that collects tips to facilitate a 
mandatory tip pool must fully redistribute the tips, no less often than 
when it pays wages, to avoid ``keep[ing]'' the tips in violation of 
section 3(m)(2)(B).
    Proposed Sec. Sec.  531.54(c) and (d) would also set forth the 
different tip pooling requirements for employers that take a tip credit 
and for those that do not. Because the CAA did not substantively amend 
the statutory requirements under 3(m)(2)(A) that apply to employers 
that take a tip credit, the Department does not propose to change its 
existing tip pooling requirements in Sec.  531.54 that apply to those 
employers. Those existing requirements, in relevant part, state that 
employers can only require tipped employees to contribute tips to a 
``traditional'' tip pool, comprised of employees who customarily and 
regularly receive tips. In contrast, under the CAA amendments, an 
employer that chooses not to take a tip credit may require tipped 
employees to contribute tips to a ``nontraditional'' pool that includes 
employees, such as dishwashers and cooks, who are not employed in an 
occupation in which employees customarily and regularly receive tips. 
The proposed regulation clarifies that an employer that requires such a 
tip pool must pay a direct cash wage of at least the full Federal 
minimum wage to any tipped employee who contributes tips to the pool.
    The Department is also proposing to amend Sec.  531.56(e) to 
reflect recent guidance that an employer may take a tip credit for time 
that an employee in a tipped occupation performs related, non-tipped 
duties contemporaneously with or a reasonable time immediately before 
or after performing the tipped duties. The proposed regulation would 
also address which non-tipped duties are related to a tip-producing 
occupation.
    The Department additionally proposes incorporating into its 
regulations the CAA amendments that provide for civil money penalties 
for violations of section 3(m)(2)(B). Since the Department is proposing 
to revise its regulations to reflect this new CMP provision, which, as 
proposed, would apply only to repeated and willful violations, the 
Department also proposes to revise its existing CMP regulations to 
address courts of appeals' decisions that have raised concerns that 
some of the regulations' statements regarding willful violations are 
inconsistent with Supreme Court authority and how the Department 
actually litigates willfulness.
    Finally, the Department proposes to amend the provisions of Sec.  
10.28, which addresses the payment of tipped employees under Executive 
Order 13658 (Establishing a Minimum Wage for Contractors), to make them 
consistent

[[Page 53961]]

with its proposed rescissions to the FLSA regulations, to remove 
similar restrictions on an employer's use of nontraditional tip pools, 
to otherwise align those regulations with the authority provided in the 
Executive Order, and to incorporate the Department's recent guidance on 
when an employee performing non-tipped work is a tipped employee.
    The Department seeks public comment on these proposed regulatory 
changes. The Department asks commenters to define in their comments any 
terms they use to describe practices regarding tips. This NPRM uses the 
term ``tip pooling'' to describe any scenario in which a tip provided 
by a customer is shared, in whole or in part, among employees. The 
Department recognizes, however, that in some workplaces or under state 
laws, the term ``tip pooling'' may refer to a narrower set of 
practices, and that employers and workers may use other terms--for 
example ``tip out,'' ``tip sharing,'' or ``tip jar''--to describe 
certain practices regarding tips.

A. Rescission of Portions of Sections 531.52, 531.54, and 531.59

    As noted above, section 1201(c) of the CAA provides that the 
portions of the Department's regulations at 29 CFR 531.52, 531.54, and 
531.59 that were ``not addressed by section 3(m)'' ``shall have no 
further force or effect[.]'' CAA, Div. S, Tit. XII, sec. 1201(c). This 
statutory language deprives of any further force or effect the portions 
of Sec. Sec.  531.52, 531.54, and 531.59 that impose restrictions on an 
employer's use of employees' tips when the employer does not take a tip 
credit. As the Department explained in its FAB, under the CAA 
amendments, employers that do not take a tip credit may now establish 
mandatory tip pools that include employees who do not customarily and 
regularly receive tips, such as back-of-the-house workers like cooks 
and dishwashers. See FAB No. 2018-3. Section 1201(c) of the CAA did not 
impact the portions of Sec. Sec.  531.52, 531.54, and 531.59 that apply 
to employers that do take a tip credit.
    Consistent with the statutory language, as well as the Department's 
statements in the 2017 NPRM,\4\ the Department proposes to rescind the 
language in Sec.  531.52 that bars employers from establishing 
mandatory tip pools that include employees who are not customarily and 
regularly tipped, ``whether or not it takes a tip credit,'' and to make 
additional minor clarifying edits; to revise Sec. Sec.  531.54 to 
clarify that the restrictions and notice requirements for tip pools 
apply only to employers that take a tip credit; and to revise Sec.  
531.59 to provide that the bar on including employees who are not 
customarily and regularly tipped in a mandatory tip pool applies only 
to employers that take a tip credit.
---------------------------------------------------------------------------

    \4\ As explained above, the government's brief in response to 
the petition for certiorari in the NRA litigation explained that the 
Department had reconsidered its defense of the 2011 regulations, and 
that it believed that it had exceeded its statutory authority in 
promulgating the 2011 regulations as they apply to employers that do 
not take a tip credit against their Federal minimum wage 
obligations.
---------------------------------------------------------------------------

B. Proposed Section 531.52--General Restrictions on an Employer's Use 
of Its Employees' Tips

i. An Employer May Not Keep Tips, Regardless of Whether It Takes a Tip 
Credit
    Section 3(m)(2)(B) prohibits an employer, regardless of whether it 
takes a tip credit, from ``keeping'' tips received by its employees 
``for any purposes, including allowing managers and supervisors to keep 
any portion of employees' tips.'' Under the amended statute, an 
employer does not ``keep'' employees' tips in violation of section 
3(m)(2)(B) merely by requiring an employee who receives a tip to share 
it with other eligible employees who also contributed to the service 
provided to the customer. In those circumstances, the employees, not 
the employer, keep the tips. Section 3(m)(2)(B), however, prohibits an 
employer from using its employees' tips for any other purpose. An 
employer would ``keep'' tips, for example, by using tips to cover its 
own general operating expenses, using tips to pay for capital 
improvements, or directing the tips to an individual who is not an 
employee, such as a vendor. This is true for tips provided through a 
credit card transaction, as well as for cash tips. The Department 
proposes to amend Sec.  531.52 to include the new statutory language 
prohibiting an employer from keeping employees' tips, and to clarify 
that an employer may exert control over employees' tips only to 
distribute tips to the employee who received them, require employees to 
share tips with other eligible employees, or, where the employer 
facilitates tip pooling by collecting and redistributing employees' 
tips, distribute tips to employees in a tip pool.
    The statutory language prohibits an ``employer'' from ``keep[ing] 
tips received by its employees.'' The term ``employer'' is defined in 
section 3(d) of the FLSA to mean ``any person [or entity] acting 
directly or indirectly in the interest of an employer in relation to an 
employee . . . .'' Therefore, a person or entity that meets the 
definition of a section 3(d) employer may not keep or receive tips from 
a tip pool.
ii. Managers and Supervisors May Not Keep Tips
    As explained above, section 3(m)(2)(B) prohibits employers, 
regardless of whether they take a tip credit, from keeping tips, 
``including allowing managers or supervisors to keep any portion of 
employees' tips.'' 29 U.S.C. 203(m)(2)(B). This prohibition applies to 
managers or supervisors obtaining employees' tips directly or 
indirectly, such as via a tip pool. The Department's current 
enforcement policy under FAB No. 2018-3 is to use the duties test under 
the executive employee exemption of FLSA section 13(a)(1), as defined 
at 29 CFR 541.100(a)(2)-(4), to determine whether an employee is a 
manager or supervisor for purposes of section 3(m)(2)(B).
    Proposed Sec.  531.52 would reflect this policy. Because an 
employee who satisfies the executive duties test manages and supervises 
other employees, the test effectively identifies those employees whom 
Congress sought to preclude from keeping tips. The Department does not 
propose to use the salary requirements at Sec.  541.100(a)(1) to help 
determine whether an employee is a manager or supervisor for purposes 
of section 3(m)(2)(B). Accordingly, this proposal would interpret the 
terms ``manager'' and ``supervisor'' under section 3(m)(2)(b) more 
broadly--and to encompass more employees--than the term ``executive'' 
as used in Section 13(a)(1).
    Sections 541.100(a)(2)-(4) provide that a manager or supervisor 
satisfies the duties test of the executive employee exemption if (1) 
the employee's primary duty is managing the enterprise, or managing a 
customarily recognized department or subdivision of the enterprise (see 
Sec.  541.100(a)(2)); (2) the employee customarily and regularly 
directs the work of at least two or more other full-time employees or 
their equivalent (see Sec.  541.100(a)(3)); and (3) the employee has 
the authority to hire or fire other employees, or the employee's 
suggestions and recommendations as to the hiring, firing, advancement, 
promotion, or any other change of status of other employees are given 
particular weight (see Sec.  541.100(a)(4)). In addition, an employee 
who owns at least a bona fide 20-percent equity interest in the 
enterprise in which she is employed, regardless of the type of business 
organization (e.g., corporation, partnership, or other), and who is

[[Page 53962]]

actively engaged in its management, as defined under 29 CFR 541.101, 
would be considered a manager or supervisor for purposes of section 
3(m)(2)(B). The Department believes that these well-established 
criteria would effectively identify employees who manage or supervise 
other employees and therefore those whom Congress sought to prevent 
from keeping other employees' tips. The Department additionally 
believes that employers can readily use these criteria to determine 
whether an employee is a manager or supervisor for purposes of section 
3(m)(2)(B) because employers are generally familiar with these 
longstanding regulations. Moreover, the Department's staff is highly 
trained, and has extensive experience, in applying and enforcing these 
longstanding regulations.
    The Department requests comments regarding whether other criteria 
may also be appropriate to determine whether an employee is a manager 
or supervisor for purposes of section 3(m)(2)(B), particularly in the 
varied situations where tipping is common.

C. Proposed Section 531.54--Tip Pooling

    The Department also proposes to amend Sec.  531.54, which generally 
addresses tip pooling, to reflect the CAA amendments. Proposed Sec.  
531.54 incorporates section 3(m)(2)(B)'s prohibition on employers 
keeping tips, including allowing managers or supervisors to keep 
employees' tips. This prohibition applies regardless of whether the 
employer takes a tip credit, and therefore governs any employer that 
facilitates or operates a mandatory tip pool. Proposed Sec.  531.54 
also contains other specific requirements for employers that establish 
mandatory tip pools, depending on whether they include employees who do 
not customarily and regularly receive tips.
i. Requirements When an Employer Collects and Redistributes Tips
    The Department recognizes that employers operate a variety of tip 
pooling and tip sharing arrangements and that some employers may wish 
to pool tips received by one set of employees and redistribute them to 
another. Section 3(m)(2)(B) does not prohibit an employer from doing 
so, as long as the employer fully redistributes the tips no less often 
than when it pays wages. In those circumstances, the employees' tips 
are only temporarily within the employer's possession, and the employer 
does not ``keep'' the tips. When an employer collects employees' tips 
but fails to distribute them within this time period, however, and 
instead holds the tips, the employer ``keeps'' them in violation of 
section 3(m)(2)(B). For example, an employer may not maintain a reserve 
of collected tips from one pay period to pay out in a subsequent pay 
period.
    Proposed Sec.  531.54(b)(1) provides that an employer that collects 
tips to administer a tip pool must fully distribute any tips the 
employer collects at the regular payday for the workweek, or when the 
pay period covers more than a single workweek, at the regular payday 
for the period in which the particular workweek ends. To the extent 
that it is not possible for an employer to ascertain the amount of tips 
received or how tips should be distributed prior to processing payroll, 
the proposed rule requires the distribution of those tips to employees 
as soon as practicable after the regular payday. Thus, for a two-week 
pay period, an employer must fully distribute any tips the employer 
collects during those two weeks on the regular payday for that period, 
or to the extent that it is not possible to ascertain the amount or 
distribution of the tips, as soon as possible following that payday. 
This proposed requirement aligns with the Department's current guidance 
on how soon an employer must provide tips charged on credit cards to 
tipped employees. See WHD Field Operations Handbook (FOH) 30d05.
    Because the proposal defines ``keep'' within the meaning of section 
3(m)(2)(B), the proposed requirement that an employer fully and 
promptly distribute any tips it collects would apply regardless of 
whether the employer takes a tip credit, and regardless of whether the 
employer requires employees to participate in a ``traditional'' tip 
pool or in a ``nontraditional'' tip pool.
    The Department requests comments on this proposed requirement, and 
requests information about how this requirement might affect employers' 
current practices for administering tip pools and tip distribution.
ii. Additional Requirements for Mandatory Tip Pools When an Employer 
Takes a Tip Credit
    Current Sec.  531.54 provides that an employer, regardless of 
whether it takes a tip credit, may only require its tipped employees to 
share tips with other employees who customarily and regularly receive 
tips. The employer also must notify its employees of any required tip 
pool contribution amount, may only take a tip credit for the amount of 
tips each employee ultimately receives, and may not retain any of the 
employees' tips for any other purpose. Although, as discussed above, 
the CAA amendments deprived of any further force or effect these 
regulatory tip pooling requirements as they apply to employers that do 
not take a tip credit, the CAA did not affect these requirements as 
they apply to employers that do take a tip credit. Therefore, proposed 
Sec.  531.54(c) retains these requirements but clarifies that they 
apply only to employers that take a tip credit.
iii. Conditions Under Which an Employer May Mandate Participation in a 
Nontraditional Tip Pool
    As explained above, as a result of the CAA amendments to the FLSA, 
employers that do not take a tip credit may now require tipped 
employees to participate in nontraditional tip pools that include 
employees who do not customarily and regularly receive tips, such as 
cooks and dishwashers, so long as the pools do not include employers, 
managers, or supervisors. Proposed Sec.  531.54(d) implements these 
conditions.
    As explained above, the CAA did not substantively amend the FLSA's 
existing tip credit provision, which states that employers may only 
take a tip credit against their minimum wage obligations to employees 
who are employed in an occupation in which they customarily and 
regularly receive tips, such as bussers and servers, and that employers 
that take a tip credit may only require tip pooling among such 
employees. See 29 U.S.C. 203(m)(2)(A). Over the years, the Department 
has developed guidance for itself on how to identify customarily and 
regularly tipped employees. See, e.g., WHD Opinion Letter FLSA 2009-12, 
2009 WL 649014 (Jan. 15, 2009); WHD Opinion Letter FLSA 2008-18, 2008 
WL 5483058 (Dec. 19, 2008); WHD FOH 30d04(b), (f) (listing occupations 
that do, and do not, meet these criteria). This guidance is based in 
large part on the legislative history of the FLSA's tip credit 
provision. See S. Rep. No. 93-690, at 43 (1974).\5\ According to this 
guidance, employers may not take a tip credit for back-of-the-house 
employees who receive tips through a tip pool because those employees 
are not employed in an occupation in which they customarily and 
regularly receive tips. Similarly, employers may not include those non-
customarily and regularly tipped employees in a traditional section 
3(m)(2)(A) tip pool.
---------------------------------------------------------------------------

    \5\ Since the CAA did not change the FLSA's existing tip credit 
provision, that guidance is still applicable to an employer that 
takes a tip credit.

---------------------------------------------------------------------------

[[Page 53963]]

D. Proposed Section 516.28--Recordkeeping Requirements for Employers 
That Have Employees Who Receive Tips

    The Department is proposing revisions to the recordkeeping 
requirements in Sec.  516.28 to provide consistent and effective 
administration of section 3(m)(2)(B) of the FLSA. Section 516.28 
imposes certain recordkeeping requirements on only those employers that 
take a tip credit. Among other things, Sec.  516.28(a) requires that 
the employer identify each employee for whom the employer takes a tip 
credit (see Sec.  516.28(a)(1)) and maintain records regarding the 
weekly or monthly amount of tips received, as reported by the employee 
to the employer (see Sec.  516.28(a)(2)). The employer may use 
information on IRS Form 4070 (Employee's Report of Tips to Employer) to 
satisfy the requirements under Sec.  516.28(a)(2).\6\
---------------------------------------------------------------------------

    \6\ For information regarding IRS Form 4070, see https://www.irs.gov/pub/irs-access/f4070_accessible.pdf.
---------------------------------------------------------------------------

    The Department proposes to apply similar recordkeeping requirements 
for employers that do not take a tip credit but still collect 
employees' tips to operate a mandatory tip pool. Proposed Sec.  
516.28(b)(1) would require these employers to identify on their payroll 
records each employee who receives tips. Proposed Sec.  516.28(b)(2) 
would require employers that do not take a tip credit but that collect 
tips to operate a mandatory tip pool to keep records of the weekly or 
monthly amount of tips received by each employee as reported by the 
employee to the employer (this may consist of reports from the 
employees to the employer on IRS Form 4070). The proposed recordkeeping 
requirements would help the Department determine whether employers are 
complying with their tip pooling obligations. The Department requests 
comments on these proposed requirements.

E. Proposed Section 531.56(e)--Dual Jobs

    The Department proposes to amend Sec.  531.56(e) to reflect recent 
guidance, which addresses whether an employer can take a tip credit for 
the time that a tipped employee spends performing duties in a tipped 
occupation that do not produce tips. Section 3(t) of the FLSA defines a 
``tipped employee'' for whom an employer may take a tip credit under 
section 3(m) as ``any employee engaged in an occupation in which he 
customarily and regularly receives more than $30 a month in tips.'' 29 
U.S.C. 203(t). Current Sec.  531.56(e) recognizes that an employee may 
be employed both in a tipped occupation and in a non-tipped occupation, 
providing that in such a ``dual jobs'' situation, the employee is a 
``tipped employee'' for purposes of section 3(t) only while he or she 
is employed in the tipped occupation, and that an employer may only 
take a tip credit against its minimum wage obligations for the time the 
employee spends in that tipped occupation. In addition to addressing 
dual jobs, the current regulation also recognizes that an employee in a 
tipped occupation may perform related duties that are ``themselves not 
directed toward producing tips,'' such as, for example, a server ``who 
spends part of her time'' performing non-tipped duties, such as 
``cleaning and setting tables, toasting bread, making coffee, and 
occasionally washing dishes or glasses.'' The regulation distinguishes 
this situation, in which the employee is still engaged in the tipped 
occupation of serving, from a dual jobs situation, in which the 
employee is engaged part of the time in a non-tipped occupation. 29 CFR 
531.56(e).
    The Department has in the past provided enforcement guidance on 
whether and to what extent an employer can take a tip credit for a 
tipped employee who is performing non-tipped duties related to the 
tipped occupation. Previously, the Department advised that an employer 
may not take a tip credit for the time an employee spent performing 
related duties that do not produce tips if that time exceeded 20 
percent of the employee's workweek. However, this policy was difficult 
for employers to administer and led to confusion, in part because 
employers lacked guidance to determine whether a particular non-tipped 
duty is ``related'' to the tip-producing occupation. One court 
described it as ``infeasible,'' observing that the policy would 
``present a discovery nightmare'' and require employers to ``keep the 
employee under perpetual surveillance or require them to maintain 
precise time logs accounting for every minute of their shifts.'' Pellon 
v. Bus. Representation Int'l, Inc., 528 F. Supp. 2d 1306, 1314 (S.D. 
Fla. 2007), aff'd, 291 F. App'x 310 (11th Cir. 2008). The Department 
believes that such a situation would help neither employer nor 
employee. See WHD Opinion Letter FLSA 2018-27, 2018 WL 5921455, at *3 
(Nov. 8, 2018).
    In November 2018, the Department issued an opinion letter 
addressing these issues.\7\ The Department subsequently issued a FAB 
and revised its Field Operations Handbook (FOH) to reflect the 
interpretation of related duties in the opinion letter. See FAB 2019-2 
(Feb. 15, 2019); WHD FOH 30d00(f). In these guidance documents, the 
Department explained that it would no longer prohibit an employer from 
taking a tip credit for the time an employee performs related, non-
tipped duties--as long as those duties are performed contemporaneously 
with, or for a reasonable time immediately before or after, tipped 
duties. See FAB 2019-2, at *2 (Feb. 15, 2019) (``[Section] 531.56(e) 
includes non-tipped duties in the tip credit unless they are unrelated 
to the tipped occupation or part of a separate, non-tipped occupation 
in a `dual job' scenario. Accordingly, an employer may take a tip 
credit for any duties that an employee performs in a tipped occupation 
that are related to that occupation and either performed 
contemporaneous with the tip-producing activities or for a reasonable 
time immediately before or after the tipped activities.''); see also 
WHD FOH 30d00(f) WHD Opinion Letter FLSA2018-27, 2018 WL 5921455, at 
*3-4 (Nov. 8, 2018). The Department believes this policy is consistent 
with the plain statutory text, which permits employers to take a tip 
credit based on whether an employee is engaged in a tipped 
``occupation,'' not on whether the employee is performing certain kinds 
of duties within the tipped occupation.
---------------------------------------------------------------------------

    \7\ The Department had provided the same guidance initially in 
WHD Opinion Letter FLSA2009-23, which was issued on January 16, 2009 
and was withdrawn on March 2, 2009 ``for further consideration.''
---------------------------------------------------------------------------

    In its recent guidance, the Department also explained that, in 
addition to the examples listed in 531.56(e), it would use the 
Occupational Information Network (O*NET) to determine whether a tipped 
employee's non-tipped duties are related to their tipped occupation. 
O*NET is a comprehensive database of worker attributes and job 
characteristics, and is available to the public online at 
www.onetonline.com. O*NET includes information on work activities for 
over 900 occupations based on the Standard Occupational Classification 
system, a statistical standard used by federal agencies to classify 
workers into occupational categories for the purpose of collecting, 
calculating, or disseminating data.
    The Department is proposing to revise Sec.  531.56(e) to reflect 
the guidance on related duties in the recent opinion letter, FAB, and 
FOH revisions. Proposed Sec.  531.56(e) would retain current language 
on dual jobs providing that when an individual is employed in

[[Page 53964]]

a tipped occupation and a non-tipped occupation, the tip credit is 
available only for the hours the employee spends working in the tipped 
occupation. It would also continue to distinguish such a dual jobs 
scenario from one in which an employee performs duties that are related 
to her tipped occupation but not themselves directed toward producing 
tips. The proposed regulation would clarify that an employer may take a 
tip credit for any amount of time that an employee performs related, 
non-tipped duties contemporaneously with his or her tipped duties, or 
for a reasonable time immediately before or after performing the tipped 
duties. Proposed Sec.  531.56(e) would also provide that, in addition 
to the examples listed in the regulation, a non-tipped duty is related 
to a tip-producing occupation if the duty is listed as a task of the 
tip-producing occupation in the Occupational Information Network 
(O*NET).
    The Department requests comments on these proposed changes to Sec.  
531.56(e). The Department is particularly interested in comments on how 
to identify related duties for occupations that may qualify as tipped 
occupations, but which lack a description in the O*NET database, 
perhaps because they are newly emerging. In its enforcement guidance, 
the Department has stated that when an O*NET description does not exist 
for an occupation, the Department will consider any duties usually and 
customarily performed by employees in that occupation to be related 
duties so long as the duties are consistent with the related duties for 
similar occupations listed in O*NET.

F. Proposed Parts 578, 579, and 580--Civil Money Penalties

    Section 1201(b)(3) of the CAA amended FLSA section 16(e)(2) by 
adding a new penalty provision: ``Any person who violates section 
3(m)(2)(B) shall be subject to a civil penalty not to exceed $1,100 for 
each such violation, as the Secretary determines appropriate, in 
addition to being liable to the employee or employees affected for all 
tips unlawfully kept, and an additional equal amount as liquidated 
damages, as described in subsection (b).''
    The CAA thus provides the Department with discretion to impose CMPs 
up to $1,100 \8\ when employers unlawfully keep employee tips, 
including when they allow managers or supervisors to keep any portion 
of employees' tips. See 29 U.S.C. 203(m)(2)(B). In assessing CMPs for 
violations of section 3(m)(2)(B) under amended section 16(e)(2), the 
Department proposes to follow the same guidelines and procedures that 
it follows for assessing CMPs for violation of the minimum wage 
(section 6) and overtime (section 7) provisions of the FLSA, and to 
issue CMPs only when it determines there has been a willful or repeated 
violation of section 3(m)(2)(B). The Department has been assessing CMPs 
for repeated or willful violations of the minimum wage and overtime 
provisions of the FLSA using the guidelines in part 578 and procedures 
in part 580 for nearly three decades. As such, employers are generally 
familiar with these regulations, and the Department's staff and 
Administrative Law Judges have experience applying them.
---------------------------------------------------------------------------

    \8\ This number is adjusted by inflation annually as required by 
the authorities in footnote 5 of this NPRM.
---------------------------------------------------------------------------

    Part 578 of the Department's regulations (Sec. Sec.  578.1-578.4) 
sets out the criteria the Department uses when determining whether a 
minimum wage or overtime violation is repeated or willful and thus 
subject to a CMP, as well as the amount of any CMP it assesses, and 
part 580 (Sec. Sec.  580.1-580.18) sets out the procedures for 
assessing and contesting CMPs. Additionally, Sec.  579.1(a) lists the 
maximum allowable CMPs for violations of the FLSA's child labor, 
minimum wage, and overtime provisions. See 29 CFR 579.1. The Department 
proposes to revise Sec.  578.1 to provide that section 1201 of the CAA 
authorizes the Department to issue CMPs for violations of section 
3(m)(2)(B); to revise Sec.  578.3(a)(1) to provide that any person who 
willfully or repeatedly violates section 3(m)(2)(B) shall be subject to 
a CMP not to exceed $1,100 (as adjusted for inflation under the IAA); 
to revise Sec. Sec.  578.3(b)-(c) to provide that the Department will 
use the criteria therein to determine whether an employer's violation 
of section 3(m)(2)(B) is repeated or willful and thus subject to a 
civil penalty; and to revise Sec.  578.4 to provide that the Department 
will determine the amount of the penalty for repeated or willful 
violations of section 3(m)(2)(B) according to the guidelines set forth 
in that section. The Department proposes to revise Sec. Sec.  579.1(a) 
and 579.1(a)(2) to provide that, consistent with the CAA amendments, 
any person who willfully or repeatedly violates section 3(m)(2)(B) 
shall be subject to a CMP not to exceed $1,100. Additionally, the 
Department proposes to revise Sec. Sec.  580.2, 580.3, 580.12, and 
580.18 to provide that the assessment of civil penalties for violations 
of section 3(m)(2)(B) shall be governed by the rules and procedures set 
forth therein. Finally, the Department proposes additional, 
nonsubstantive changes to Sec.  578.1 to better reflect the history of 
amendments to the civil money penalty for violations of section 6 
(minimum wage) and section 7 (overtime) of the Act.
    Since the Department is proposing to revise parts 578 and 579 to 
reflect the new CMP provision that the CAA added to the FLSA, the 
Department also proposes to revise Sec. Sec.  578.3(c)(2) and (3), and 
identical language in Sec.  579.2, to address courts of appeals' 
concerns that some of the regulations' statements regarding willful 
violations are inconsistent with Supreme Court authority and how the 
Department actually litigates willfulness.
    When it initially promulgated Sec.  578.3(c) to provide guidance 
for assessing CMPs for violations of the FLSA's minimum wage or 
overtime pay requirements, the Department based its definition of a 
``willful'' violation on the Supreme Court's decision in McLaughlin v. 
Richland Shoe Co., 486 U.S. 128 (1988). See 57 FR 49,129 (Oct. 29, 
1992). In Richland Shoe, the Supreme Court held that a violation is 
willful if the employer ``knew or showed reckless disregard'' for 
whether its conduct was prohibited by the FLSA. 486 U.S. at 133. 
Section 578.3(c)(1) incorporates this holding and provides that ``[a]ll 
of the facts and circumstances surrounding the violation shall be taken 
into account in determining whether a violation was willful.'' Section 
578.3(c)(2) provides that ``an employer's conduct shall be deemed 
knowing'' if the employer received advice from the WHD that its conduct 
is unlawful. Section 578.3(c)(3) provides that ``an employer's conduct 
shall be deemed to be in reckless disregard'' of the FLSA's 
requirements if the employer should have inquired further into whether 
its conduct complied with the FLSA and failed to make adequate further 
inquiry.
    An appellate court has identified an ``incongruity'' between 
Sec. Sec.  578.3(c)(2) and (3) and ``the Richland Shoe standard on 
which the regulation is based.'' Baystate Alt. Staffing, Inc. v. 
Herman, 163 F.3d 668, 680 (1st Cir. 1998). The court expressed 
``significant reservations about [Sec.  578.3(c)(2)'s] blanket 
assertion that a party's decision not to comply with [WHD's] advice 
constitutes a `knowing' violation'' under Richland Shoe. Id. The court 
further stated that Sec.  578.3(c)(3) ``by its terms--specifically, 
that a party `should have inquired further' about the legality of its 
conduct--embraces a negligence standard of liability,'' which Richland 
Shoe ``expressly rejected.'' Id. at 680-81

[[Page 53965]]

(citing 486 U.S. at 133-35). Describing Sec. Sec.  578.3(c)(2) and (3) 
as ``incomplete'' and ``unhelpful,'' the court urged the Department 
``to reconsider [them] to ensure that they comport with the Court's 
reading of . . . `willful' in Richland Shoe.'' Id. at 681 n.16.
    In several cases addressing this issue, the Department has argued 
that advice from WHD to an employer that its conduct was unlawful 
``would not necessarily be dispositive of willfulness'' in a future 
enforcement action, and that the employer would have the opportunity 
``to contest the assertion that the violation was willful 
notwithstanding its receipt of such advice.'' See, e.g., Br. for 
Appellee at 22-23, Rhea Lana, Inc. v. DOL, 824 F.3d 1023 (DC Cir. 2016) 
(No. 15-5014), 2015 WL 4052846, at *22-23. The Department stated that 
Sec.  578.3(c)(2) ``simply reflects the commonsense principle that, in 
the absence of persuasive and relevant evidence presented by an 
employer, notice from the agency of a FLSA violation may be used to 
establish willfulness,'' and that such notice is ``but one piece of 
evidence.'' Id. at 26. In Rhea Lana, the court did not reject outright 
the Department's reading of Sec.  578.3(c), but pointed out that it was 
possible to read the regulation as ``a stand-alone trigger for 
willfulness penalties'' in a future enforcement action against the 
employer. 824 F.3d at 1031-32.
    In light of Baystate, Rhea Lana, and Sec.  578.3(c)(1)'s command 
that ``[a]ll of the facts and circumstances surrounding the violation 
shall be taken into account in determining whether a violation was 
willful,'' the Department proposes to revise Sec. Sec.  578.3(c)(2) and 
(3) to clarify that no single fact or circumstance is automatically 
dispositive as to willfulness to the exclusion of consideration of all 
other facts and circumstances. Revising Sec. Sec.  578.3(c)(2) and (3) 
as proposed would ensure consistency between the regulation and how the 
Department litigates and briefs the issue of willfulness under the 
FLSA; resolve concerns that the regulation is inconsistent with 
Richland Shoe; and provide greater clarity to the regulated community 
regarding the standard for willfulness under the FLSA, including by 
specifying that no one fact or circumstance will preclude an employer 
from arguing that its conduct was not willful. To ensure consistent 
guidance regarding willful violations, the Department proposes to 
similarly revise identical language in Sec.  579.2 addressing the 
proper assessment of CMPs for willful violations of the FLSA's child 
labor provisions.
G. Additional Proposed Regulatory Revisions
    Section 531.50 currently sets forth the provisions of the FLSA that 
apply to tips and tipped employees. The Department proposes to revise 
Sec.  531.50 to reflect the language that the CAA added to the FLSA. 
The Department also proposes to update Sec. Sec.  531.50, 531.51, 
531.52, 531.55, 531.56, 531.59, and 531.60 to reflect the new statutory 
citation to the FLSA's existing tip credit provision, previously cited 
as section 3(m), as section 3(m)(2)(A). The Department also proposes to 
clarify references in Sec. Sec.  531.56(d), 531.59(a) and (b), and 
531.60 to the amount an employer can take as a tip credit under section 
3(m) (now 3(m)(2)(A)). The Department's regulations currently state 
that the an employer can take a tip credit for each employee equal to 
the difference between the minimum wage required by section 6(a)(1) of 
the FLSA (currently $7.25 an hour) and $2.13 an hour. To ensure that 
the Department's regulations clearly state employers' obligations under 
the FLSA, the Department proposes to revise Sec. Sec.  531.56(d), 
531.59(a) and (b), and 531.60 to provide, consistent with the text of 
the statute, that the tip credit permitted by section 3(m)(2)(A) is 
equal to the difference between the Federal minimum wage and the cash 
wage paid by the employer. That cash wage must be at least $2.13 per 
hour, but the statute does not preclude an employer from paying more.
    Finally, the Department proposes to amend the tip provisions of its 
Executive Order 13658 regulations. Executive Order 13658 raised the 
hourly minimum wage paid by contractors to workers performing work on 
or in connection with covered Federal contracts. The Executive Order 
also established a tip credit for workers covered by the Order who are 
tipped employees pursuant to section 3(t) of the FLSA. Section 4(c) of 
the Executive Order encourages the Department, when promulgating 
regulations under that Order, to incorporate existing ``definitions, 
procedures, remedies, and enforcement processes'' from a number of laws 
that the agency enforces, including the FLSA. The Department's current 
Executive Order 13658 regulations are modeled after the Department's 
current FLSA tip regulations, and prohibit covered employers from 
implementing tip pools that include employees who are not customarily 
and regularly tipped. The Department proposes to amend Sec.  10.28, 
consistent with its proposed rescissions to portions of the 
Department's FLSA regulations, to remove similar restrictions on an 
employer's use of such tip pools and to otherwise align those 
regulations with the authority provided in the Executive Order. Federal 
contractors covered by the FLSA would, of course, also be subject to 
the FLSA regulations proposed herein. The Department also proposes to 
amend Sec.  10.28, consistent with its proposed revisions to Sec.  
531.56(e), to reflect its current guidance on when an employee 
performing non-tipped work constitutes a tipped employee for the 
purposes of 3(t).

V. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq., 
and its attendant regulations, 5 CFR part 1320, require the Department 
to consider the agency's need for its information collections, their 
practical utility, as well as the impact of paperwork and other 
information collection burdens imposed on the public, and how to 
minimize those burdens. The PRA typically requires an agency to provide 
notice and seek public comments on any proposed collection of 
information contained in a proposed rule.\9\ Persons are not required 
to respond to the information collection requirements until the Office 
of Management and Budget (OMB) approves them under the PRA. This NPRM 
would revise the existing information collection burden estimates 
previously approved under OMB control number 1235-0018 (Records to be 
Kept by Employers--Fair Labor Standards Act) because employers may 
choose to pay the full Federal minimum wage and not take a tip credit, 
and collect tips to operate an employer-required, mandatory tip pooling 
arrangement, thereby triggering the recordkeeping requirement in 
proposed Sec.  516.28(b). The Department has opened OMB control number 
1235-0NEW for this action. As the PRA requires, the Department has 
submitted the information collection revisions to OMB for review to 
reflect changes that would result from this proposed rule. The 
Department proposes a slight burden increase for employers keeping 
records concerning employees who receive tips, as well as a regulatory 
familiarization burden.
---------------------------------------------------------------------------

    \9\ See 44 U.S.C. 3506(c)(2)(B); 5 CFR 1320.8.
---------------------------------------------------------------------------

    Summary: FLSA section 11(c) requires covered employers to make, 
keep, and preserve records of employees and their wages, hours, and 
other conditions of employment, as prescribed by regulation. The 
Department's regulations at 29 CFR part 516 establish the basic FLSA

[[Page 53966]]

recordkeeping requirements. Section 516.28(a) currently requires 
employers to keep certain records concerning tipped employees for whom 
the employer takes a tip credit under the FLSA. Among other things, 
Sec.  516.28(a) requires that the employer identify each employee for 
whom the employer takes a tip credit, identify the hourly tip credit 
for each such employee, and maintain records regarding the weekly or 
monthly amount of tips received (which may consist of IRS Form 4070) as 
reported by the employee to the employer. The adoption of proposed 
Sec.  516.28(b)(1) and (b)(2) would require an employer that does not 
take a tip credit, but that collects employees' tips to operate a 
mandatory tip pooling arrangement, to indicate on its pay records each 
employee who receives tips and to maintain records of the weekly or 
monthly amount of tips that each such employee receives (this may 
consist of reports that the employees make to the employer on IRS Form 
4070). The increase in the number of respondents and, accordingly, the 
burden hours associated with records to be kept under the proposed 
Sec.  516.28(b)(1)-(2), is attributable to an expanding economy 
increasing the number of establishments employing individuals who 
receive tips since the last PRA revision of this recordkeeping 
requirement.
    Purpose and Use: WHD and employees use employer records to 
determine whether covered employers have complied with various FLSA 
requirements. Employers use the records to document compliance with the 
FLSA, and in the case of this NPRM, the Department would use the 
records regarding employees who receive tips to determine compliance 
with sections 3(m)(2)(A) and 3(m)(2)(B).
    Technology: The regulations prescribe no particular order or form 
of records, and employers may preserve records in forms of their 
choosing, provided that facilities are available for inspection and 
transcription of the records.
    Minimizing Small Entity Burden: Although the FLSA recordkeeping 
requirements do involve small businesses, including small state and 
local government agencies, the Department minimizes respondent burden 
by requiring no specific order or form of records in responding to this 
information collection.
    Public Comments: As part of its continuing effort to reduce 
paperwork and respondent burden, the Department conducts a preclearance 
consultation program to provide the general public and Federal agencies 
with an opportunity to comment on proposed and continuing collections 
of information in accordance with the PRA. This program helps to ensure 
that requested data can be provided in the desired format, reporting 
burden (time and money) is minimized, collection instruments are 
clearly understood, and the impact of collection requirements on 
respondents can be properly assessed. The Department seeks public 
comments regarding the burdens imposed by the information collections 
associated with this NPRM. Commenters may send their views about this 
information collection to the Department in the same manner as all 
other comments (e.g., through the regulations.gov website). All 
comments received will be made a matter of public record and posted 
without change to https://www.regulations.gov and https://www.reginfo.gov, including any personal information provided.
    As previously noted, an agency may not conduct an information 
collection unless it has a currently valid OMB approval, and the 
Department has submitted information-collection requests under OMB 
control number 1235-0NEW to update them to reflect this rulemaking and 
provide interested parties a specific opportunity to comment under the 
PRA. See 44 U.S.C. 3507(d); 5 CFR 1320.11. Interested parties may 
receive a copy of the full supporting statement by sending a written 
request to the mail address shown in the ADDRESSES section at the 
beginning of this preamble. In addition to having an opportunity to 
file comments with the Department, comments about the paperwork 
implications may be addressed to OMB. Comments to OMB should be 
directed to: Office of Information and Regulatory Affairs, Attention 
OMB Desk Officer for the Wage and Hour Division, Office of Management 
and Budget, Room 10235, 725 17th Street NW, Washington, DC 20503; by 
Fax: 202-395-5806 (this is not a toll-free number); or by email: 
[email protected]. OMB will consider all written comments 
that the agency receives within 30 days of publication of this proposed 
rule. Commenters are encouraged, but not required, to send the 
Department a courtesy copy of any comments sent to OMB. The courtesy 
copy may be sent via the same channels as comments on the rule.
    The Department is particularly interested in comments that:
     Evaluate whether the proposed collections of information 
are necessary for the proper performance of the functions of the 
agency, including whether the information will have practical utility;
     Evaluate the accuracy of the agency's estimate of the 
burden of the proposed collection of information, including the 
validity of the methodology and assumptions used;
     Enhance the quality, utility, and clarity of the 
information to be collected; and
     Minimize the burden of the collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology, e.g., permitting 
electronic submission of responses.
    Total annual burden estimates, which reflect both the existing and 
new responses for the recordkeeping information collection, are 
summarized as follows:
    Type of Review: Revision of a currently approved collection.
    Agency: Wage and Hour Division, Department of Labor.
    Title: Records to be Kept by Employers--Fair Labor Standards Act.
    OMB Control Number: 1235-0NEW.
    Affected Public: Private Sector: businesses or other for-profits, 
farms, and not-for-profit institutions: State, Local and Tribal 
governments; and individuals or households.
    Estimated Number of Respondents: 3,860,288 (102,994 from this 
rulemaking).
    Estimated Number of Responses: 43,799,221 (248,032 from this 
rulemaking).
    Estimated Burden Hours: 1,007,512 hours (24,593 from this 
rulemaking).
    Estimated Time per Response: Various (unaffected by this 
rulemaking).
    Frequency: Various (unaffected by this rulemaking).
    Other Burden Cost: $0.

VI. Analysis Conducted in Accordance With Executive Order 12866, 
Regulatory Planning and Review, Executive Order 13563, Improved 
Regulation and Regulatory Review, and Executive Order 13771, Reducing 
Regulation and Controlling Regulatory Costs

A. Introduction

    Under Executive Order 12866, OMB's Office of Information and 
Regulatory Affairs determines whether a regulatory action is 
significant and, therefore, subject to the requirements of the 
Executive Order and OMB review.\10\ Section 3(f) of Executive Order 
12866 defines a ``significant regulatory action'' as an action that is 
likely to result in a

[[Page 53967]]

rule that: (1) Has an annual effect on the economy of $100 million or 
more, or adversely affects in a material way a sector of the economy, 
productivity, competition, jobs, the environment, public health or 
safety, or State, local or tribal governments or communities (also 
referred to as economically significant); (2) creates serious 
inconsistency or otherwise interferes with an action taken or planned 
by another agency; (3) materially alters the budgetary impacts of 
entitlement grants, user fees, or loan programs, or the rights and 
obligations of recipients thereof; or (4) raises novel legal or policy 
issues arising out of legal mandates, the President's priorities, or 
the principles set forth in the Executive Order. Because the annual 
effect of this proposed rule would be greater than $100 million, this 
proposed rule would be economically significant under section 3(f) of 
Executive Order 12866.
---------------------------------------------------------------------------

    \10\ 58 FR 51735 (Sept. 30, 1993).
---------------------------------------------------------------------------

    Executive Order 13563 directs agencies to propose or adopt a 
regulation only upon a reasoned determination that its benefits justify 
its costs; that it is tailored to impose the least burden on society, 
consistent with achieving the regulatory objectives; and that, in 
choosing among alternative regulatory approaches, the agency has 
selected the approaches that maximize net benefits. Executive Order 
13563 recognizes that some benefits are difficult to quantify and 
provides that, when appropriate and permitted by law, agencies may 
consider and discuss qualitatively values that are difficult or 
impossible to quantify, including equity, human dignity, fairness, and 
distributive impacts.
    This proposed rule is expected to be an Executive Order 13771 
deregulatory action, because it provides more flexibility to employers 
in structuring their employee tip pools. Details on the estimated costs 
and transfers, as well as qualitative discussions of cost savings of 
this proposed rule, can be found in the economic analysis below. The 
unquantified cost savings are expected to outweigh the quantified 
costs. Cost savings include reduced turnover of back-of-the-house 
employees, greater flexibility for tip pooling, and reduced effort 
spent ensuring that the tip pool is limited to only customarily and 
regularly tipped employees.

B. Economic Analysis

i. Introduction
    In March 2018, Congress amended section 3(m) and sections 16(b), 
(c), and (e) of the FLSA to prohibit employers from keeping their 
employees' tips, to permit recovery of tips that an employer unlawfully 
keeps, and suspend the operations of the portions of the 2011 final 
rule that restricted tip pooling when employers do not take a tip 
credit. This analysis examines the economic impact associated with the 
Department's proposed implementation of those amendments, specifically 
the transfers resulting from employers that do not claim a tip credit 
and previously did not have a mandatory tip pool, or that only had a 
traditional tip pool limited to ``front-of-the-house'' employees (i.e., 
servers and bartenders) implementing a nontraditional tip pool that 
includes ``back-of-the-house'' employees (i.e., janitors, chefs, 
dishwashers, and food-preparation workers). Thus, a transfer of tip 
income will occur from ``front-of-the-house'' employees. The Department 
also quantified rule familiarization costs and qualitatively discusses 
additional costs, cost savings, and benefits. To perform this analysis, 
the Department compares the impact relative to a pre-statutory baseline 
(i.e., before Congress amended the FLSA in March 2018). If the 
Department were to look at economic impacts relative to a post-
statutory baseline, there would likely be no impact aside from rule 
familiarization costs, as the transfers arise from the changes put 
forth in the statute.
    The Department is also proposing to amend its regulations to 
reflect guidance which provides that an employer may take a tip credit 
for any amount of time that an employee in a tipped occupation performs 
related, non-tipped duties contemporaneously with his or her tipped 
duties, or for a reasonable time immediately before or after performing 
the tipped duties. This interpretation was promulgated in a November 
2018 opinion letter and subsequent FAB, and reflects WHD's enforcement 
position. As explained below, the Department lacks data to quantify any 
potential costs, benefits, or transfers which may be associated with 
the implementation of this policy; therefore, the Department discusses 
potential costs, benefits, and transfers qualitatively. The Department 
welcomes comments on the impact of this proposal, including data on 
employers' responses to the codification of this policy.
    The economic analysis covers employees in two industries and in two 
occupations within those industries. The two industries are classified 
under the North American Industry Classification System (NAICS) as 
722410 (Drinking Places (Alcoholic Beverages)) and 722511 (Full-service 
Restaurants); referred to in this analysis as ``restaurants and 
drinking places.'' The two occupations are classified under Bureau of 
Labor Statistics (BLS) Standard Occupational Classification (SOC) codes 
SOC 35-3031 (Waiters and Waitresses) and SOC 35-3011 (Bartenders).\11\ 
The Department considered these two occupations because they constitute 
a large percentage of total tipped workers and a large percentage of 
the workers in these occupations receive tips (see Table 1 for shares 
of workers in these employees who may receive tips). The Department 
understands that there are other occupations beyond servers and 
bartenders with tipped workers, such as SOC 35-9011 (Dining room and 
Cafeteria Attendants and Bartender Helpers), SOC 35-9031 (Hosts and 
Hostesses, Restaurant, Lounge, and Coffee Shop), and others, as well as 
other industries that employ workers who receive tips, such as NAICS 
722515 (snack and nonalcoholic beverage bars), NAICS 722513 (limited 
service restaurants), NAICS 721110 (hotels and motels), and NAICS 
713210 (casinos); thus, the Department welcomes comments and 
suggestions on whether this analysis should extend to such occupations 
and industries.
---------------------------------------------------------------------------

    \11\ In the Current Population Survey, these occupations 
correspond to Bartenders (Census Code 4040) and Waiters and 
Waitresses (Census Code 4110). The industries correspond to 
Restaurants and Other Food Services (Census Code 8680) and Drinking 
Places, Alcoholic Beverages (Census Code 8690).
---------------------------------------------------------------------------

    The analysis covers ten years to ensure that it captures major 
costs and transfers. When summarizing the costs and transfers of the 
proposed rule, the Department presents the first year's impact, as well 
as the 10-year annualized costs and transfers with 3 percent and 7 
percent discounting.\12\
---------------------------------------------------------------------------

    \12\ Discount rates are directed by OMB. See Circular A-4, OMB 
(Sept. 17, 2003).
---------------------------------------------------------------------------

ii. Estimated Transfers
    Under the regulations proposed in this NPRM, transfers would arise 
when employers that already pay the full Federal minimum wage and 
previously did not have a mandatory tip pool or only had a traditional 
tip pool institute nontraditional tip pools in which tipped employees 
such as servers and bartenders are required to share tips with 
employees who do not customarily and regularly receive tips, such as 
cooks and dishwashers. The Department believes that including back-of-
the-house workers in tip pools could help equalize income among the 
employees within the establishment, and could also help promote 
cooperation and collaboration among employees. Because the statute 
prohibits employers from keeping employee tips, directly-observable 
transfers will only occur

[[Page 53968]]

among employees. However, because back-of-the-house workers could now 
be receiving tips, employers may offset this increase in total 
compensation by reducing the direct wage that they pay back-of-the-
house workers (as long as they do not reduce these employees' wages 
below the applicable minimum wage); offsets of this type are implied in 
the model underlying the quantitative estimates below. To the extent 
that wages are sticky in the short run, back-of-the-house employees are 
recipients of transfers, but across a longer time horizon, market 
adjustments increasingly allow employers to capture the transfer.
    The analysis assumes that employers will institute nontraditional 
tip pools with employees who do not customarily and regularly receive 
tips only in situations that are beneficial to them. Accordingly, it 
assumes that employers will include back-of-the-house employees in 
their tip pools only if they believe that they can do so without losing 
their front-of-the-house staff. To attract and retain the tipped 
workers that they need, employers must pay these workers as much as 
their ``outside option,'' or the hourly earnings that they could 
receive in a non-tipped job with a similar skill level requirement to 
their current position. For each tipped worker, the Department assumes 
a transfer will occur only if their total earnings, including tips, is 
greater than the predicted outside-option wage from a non-tipped job. 
This methodology was informed by comments submitted as part of the 
Department's 2017 NPRM that discussed using outside options to 
determine potential transfer of tips.
    The transfer calculation excludes any workers who are paid a direct 
cash wage below the full FLSA minimum wage of $7.25, because under the 
amended statute and the Department's proposed rule, employers who do 
take a tip credit are still subject to section 3(m)(2)(A)'s 
restrictions on tip pools. Some employers may begin paying their tipped 
workers a direct cash wage of at least the full FLSA minimum wage in 
order to institute a tip pool with back-of-the-house workers. This 
potential transfer is not quantified due to uncertainty regarding how 
many employers would choose to no longer use the tip credit. Choosing 
to no longer take a tip credit would require a change to employers' 
payroll systems and methods of compensation to which employers and 
employers are accustomed, which could discourage employers from making 
this change. The Department requests comments on the prevalence of this 
adjustment.
    The transfer calculation also excludes any workers who are paid a 
direct cash wage by their employers, exclusive of any tips received, 
that exceeds the applicable minimum wage (either the Federal or 
applicable State minimum wage). The Department assumes that because 
these employers are already paying more than required under applicable 
law for these workers, any reduction in compensation would result in 
these workers leaving that employment. These employees will therefore 
not have their tips redistributed through a nontraditional tip pool. 
The Department requests comments and data on this assumption.
    The Department does not attempt to definitively interpret 
individual state law; it is assumed, however, that some wait staff and 
bartenders work in a state that either prohibits mandatory tip pooling 
or imposes stricter limits on who can participate in a mandatory tip 
pool than are proposed in this NPRM,\13\ or in a state that is in the 
Tenth Circuit \14\ where, as a result of Marlow v. New Food Guy, Inc., 
861 F.3d at 1159, employers that do not take a tip credit were already 
permitted to institute nontraditional tip pools at the time Congress 
amended the FLSA. The transfer estimate excludes tipped employees in 
these states whom the changes proposed in this NPRM may not affect--
amounting to about 43 percent of a $0.5 billion intermediate estimate 
of the potential transfer amount.\15\ Thus, the Department first 
determined total transfers for all wait staff and bartenders using the 
methodology described above. The Department then excluded workers whom 
the proposed changes will not affect due to their respective state 
laws. The Department welcomes comments with more information regarding 
the effects of this proposed rule in specific states. Finally, the 
Department further reduced the total transfer amount to account for the 
fact that an uncertain number of employers will decline to change their 
tip pooling practices even when it is seemingly economically beneficial 
for them to do so because it will require changes to practices to which 
employees are accustomed, as well as payroll and recordkeeping changes.
---------------------------------------------------------------------------

    \13\ See, e.g., Minn. Stat. Sec.  177.24, subd. 3 (``No employer 
may require an employee to contribute or share a gratuity received 
by the employee with the employer or other employees or to 
contribute any or all of the gratuity to a fund or pool operated for 
the benefit of the employer or employees.''); Mass. Gen. Laws ch. 
149, Sec.  152A(c) (``No employer or person shall cause, require or 
permit any wait staff employee, service employee, or service 
bartender to participate in a tip pool through which such employee 
remits any wage, tip or service charge, or any portion thereof, for 
distribution to any person who is not a wait staff employee, service 
employee, or service bartender.'')
    \14\ The jurisdiction of the Tenth Circuit includes the six 
states of Oklahoma, Kansas, New Mexico, Colorado, Wyoming, and Utah. 
See About Us, The United States Court of Appeals for the Tenth 
Circuit, https://www.ca10.uscourts.gov/clerk (last visited May 9, 
2019).
    \15\ Arkansas, California, Colorado, Delaware, Hawaii, Kansas, 
Kentucky, Massachusetts, Minnesota, New Hampshire, New Mexico, New 
York, North Carolina, North Dakota, Oklahoma, Utah, and Wyoming.
---------------------------------------------------------------------------

    To compute potential tip transfers, the Department used individual-
level microdata from the 2017 Current Population Survey (CPS), a 
monthly survey of about 60,000 households that is jointly sponsored by 
the U.S. Census Bureau and BLS. Households are surveyed for four 
months, excluded from the survey for eight months, surveyed for an 
additional four months, and then permanently dropped from the sample. 
During the last month of each rotation in the sample (month 4 and month 
16), employed respondents complete a supplementary questionnaire in 
addition to the regular survey. These households and questions form the 
CPS Merged Outgoing Rotation Group (CPS-MORG) and provide more detailed 
information about those surveyed.\16\ The Department used 2017 CPS data 
to calculate the transfer because the CAA went into effect in March 
2018. Although 2018 CPS data is available, 2017 is the most recent full 
year of data that is prior to the statutory change. In this analysis, 
2017 wage data are inflated to $2018 using the GDP deflator. For 
purposes of rule familiarization costs, the Department used the most 
recent year of data (2018) to reflect employers reading the rule after 
it is published.
---------------------------------------------------------------------------

    \16\ See Current Population Survey, U.S. Census Bureau, https://www.census.gov/programs-surveys/cps.html (last visited August 13, 
2019); CPS Merged Outgoing Rotation Groups, NBER, https://www.nber.org/data/morg.html (last visited August 13, 2019).
---------------------------------------------------------------------------

    The CPS asks respondents whether they usually receive overtime pay, 
tips, and commissions (OTTC), which allows the Department to estimate 
the number of bartenders and wait staff in restaurants and drinking 
places who receive tips.\17\ CPS data are not available

[[Page 53969]]

separately for overtime pay, tips, and commissions, but the Department 
assumes very few bartenders and wait staff at restaurants and drinking 
places receive commissions, and the number who receive overtime pay but 
not tips is also assumed to be minimal.\18\ Therefore, when bartenders 
and wait staff responded affirmatively to this question, the Department 
assumed that they receive tips.
---------------------------------------------------------------------------

    \17\ This question is only asked of hourly employees and 
consequently nonhourly workers are excluded from the transfer 
estimate. The Department did not quantify transfers from nonhourly 
workers because without knowing the prevalence of tipped income 
among nonhourly workers, the Department cannot accurately estimate 
potential transfers from these workers. However, the Department 
believes the transfer from nonhourly workers will be small because 
only 13 percent of wait staff and bartenders in restaurants and 
drinking places are nonhourly and the Department believes nonhourly 
workers may have a lower probability of receiving tips.
    \18\ According to BLS Current Population Survey data, in 2017, 
workers in service occupations worked an average of 35 hours per 
week. See https://www.bls.gov/cps/aa2017/cpsaat23.htm.
---------------------------------------------------------------------------

    All data tables in this analysis include estimates for the year 
2017 as the baseline. Table 1 presents the estimates of the share of 
bartenders and wait staff in restaurants and drinking places who 
reported that they usually earned OTTC in 2017. Approximately 64 
percent of bartenders and 55 percent of wait staff reported usually 
earning OTTC in 2017. These numbers include workers in all states, 
including states whom the changes proposed in this NPRM may not affect. 
These numbers also include workers who are paid a direct cash wage 
below the full FLSA minimum wage of $7.25 (i.e., employers whose 
employers are using a tip credit). Both these populations are excluded 
from the transfer calculation.

 Table 1--Share of Bartenders and Waiters/Waitresses in Restaurants and Drinking Places Who Earned Overtime Pay,
                                              Tips, or Commissions
----------------------------------------------------------------------------------------------------------------
                                                                      Workers           Report Earning OTTC
                                                                  responding  to -------------------------------
                   Occupation                      Total workers   question  on
                                                    (millions)         OTTC           Workers         Percent
                                                                    (millions)      (millions)
----------------------------------------------------------------------------------------------------------------
Total...........................................            2.21            1.92            1.08            56.5
    Bartenders..................................            0.34            0.27            0.17            63.5
    Waiters/Waitresses..........................            1.88            1.65            0.91            55.4
----------------------------------------------------------------------------------------------------------------
Source: CEPR, 2017 CPS-MORG.
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).

    Of the 1.08 million bartenders and wait staff who receive OTTC, 
only 688,000 reported the amount received in OTTC. Therefore, the 
Department imputed OTTC for those workers who did not report the amount 
received in OTTC. As shown in Table 2, 54 percent of bartenders' 
earnings (an average of $276 per week) and 49 percent of waiters' and 
waitresses' earnings (an average of $234 per week) were from overtime 
pay, tips, and commissions in 2017. For workers who reported receiving 
tips but did not report the amount, the ratio of OTTC to total earnings 
for the sample who reported their OTTC amounts (54 or 49 percent) was 
applied to their weekly total income to estimate weekly tips. Nonhourly 
workers, who are not asked the question on receipt of OTTC, are assumed 
to not be tipped employees.

  Table 2--Portion of Income From Overtime Pay, Tips, and Commissions for Bartenders and Waiters/Waitresses in
                                         Restaurants and Drinking Places
----------------------------------------------------------------------------------------------------------------
                                                            Those who report the amount earned in OTTC
                                                 ---------------------------------------------------------------
                                                                                                    Percent of
                   Occupation                                         Average         Average        earnings
                                                      Workers         weekly       weekly  OTTC    attributable
                                                                     earnings                         to OTTC
----------------------------------------------------------------------------------------------------------------
Total...........................................         688,171         $478.34         $240.15             50%
    Bartenders..................................         105,787          512.29          275.65              54
    Waiters and waitresses......................         582,384          472.17          233.71              49
----------------------------------------------------------------------------------------------------------------
Source: CEPR, 2017 CPS-MORG, inflated to $2018 using the GDP deflator.
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).

1. Outside-Option Wage Calculation
    As discussed above, to determine potential transfers of tips, the 
Department assumes that employers will only redistribute tips from 
tipped employees to employees who are not customarily and regularly 
tipped in a nontraditional tip pool if the tipped employee's total 
earnings, including the tips the employee retains, are greater than the 
``outside-option wage'' that the tipped employee could earn in a non-
tipped job. To model a worker's outside-option wage, the Department 
used robust quartile regression analysis to predict the wage that these 
workers would earn in a non-tipped job. Hourly wage was regressed on 
age, age squared, age cubed, education, gender, race, ethnicity, 
citizenship, marital status, veteran status, metro area status and 
state for a sample of non-tipped workers.\19\ The Department restricted 
the regression sample to workers earning at least the Federal minimum 
wage of $7.25 per hour (inclusive of OTTC), and those who are employed. 
This analysis excludes states where the law prohibits non-tipped back-
of-the-house employees from being included in the tip pool, and states 
governed by the Marlow decision were also excluded from the regression 
analysis.
---------------------------------------------------------------------------

    \19\ For workers who had missing values for one or more of these 
explanatory variables we imputed the missing value as the average 
value for tipped/non-tipped workers.

---------------------------------------------------------------------------

[[Page 53970]]

    In calculating the outside-option wage for tipped workers, the 
Department defined the comparator sample for tipped workers in two 
different ways: (1) All non-tipped workers (i.e., workers who are 
either not waiters/waitresses or bartenders, or do not work in 
restaurants or drinking places), and (2) Non-tipped workers in a set of 
occupations that are likely to represent outside options. The 
Department determined the list of relevant occupations by exploring the 
similarity between the knowledge, activities, skills, and abilities 
required by the occupation to that of servers and bartenders. The 
Department searched the Occupational Information Network (O*NET) system 
for occupations that share important similarities with waiters and 
waitresses and bartenders--the occupations had to require ``customer 
and personal service'' knowledge and ``service orientation'' 
skills.\20\ The list was further reduced by eliminating occupations 
that are not comparable to the waitress and bartender occupations in 
terms of education and training, as waiter and waitress and bartender 
occupations do not require formal education or training. See Appendix 
Table 1 for a list of these occupations. The transfer estimates 
presented in this analysis use this sample of limited occupations to 
predict each tipped worker's outside-option wage, that is, the wage 
that the tipped worker could earn in a non-tipped job. The Department 
also ran the regression to predict the outside-option wage using all 
non-tipped workers as the outside-option sample, and found that 
transfers are approximately 30 percent lower in that specification.
---------------------------------------------------------------------------

    \20\ For a full list of all occupations on O*NET, see https://www.onetcenter.org/taxonomy/2010/updated.html.
---------------------------------------------------------------------------

    The regression calculates a distribution of outside-option wages 
for each worker. The Department considered two methods: (1) Using the 
50th percentile and (2) using the same percentile for each worker as 
they currently earn in the distribution of wages for wait staff and 
bartenders in restaurants and drinking places in the state where they 
live.\21\ The second method accounts for the fact that two workers may 
have the exact same characteristics (age, race, education, etc.), but 
one worker may have a higher or lower outside-option wage because he or 
she is a more or less effective employee. This method assumes that a 
worker's position in the wage distribution for wait staff and 
bartenders in restaurants and drinking places reflects their position 
in the wage distribution for the outside-option occupations. The 
Department believes this method is more appropriate than the 50th 
percentile method.\22\
---------------------------------------------------------------------------

    \21\ Because of the uncertainty in the estimate of the 
percentile ranking of the worker's current wage, the Department used 
the midpoint percentile for workers in each decile. For example, 
workers whose current wage was estimated to be in the zero to tenth 
percentile range were assigned the predicted fifth percentile 
outside-option wage, those with wages estimated to be in the 
eleventh to twentieth percentile were assigned the predicted 
fifteenth percentile outside-option wage, etc.
    \22\ The 50th percentile method results in a higher transfer 
estimate ($173 million compared with $107 million).
---------------------------------------------------------------------------

2. Transfer Calculation
    After determining each tipped worker's outside-option wage, the 
Department calculated the potential transferrable tips as the lesser of 
the following four numbers:
    1. The positive differential between a worker's current earnings 
(wage plus tips) and their predicted outside-option wage,
    2. The positive differential between a worker's current earnings 
and the state minimum wage,
    3. The total tips earned by the worker, or
    4. Zero if the worker currently earns a direct cash wage above the 
full applicable minimum wage.
    The second number is included for cases where the outside-option 
wage predicted by the analysis is below the state minimum wage, because 
the worker will not earn less than their applicable state minimum wage. 
The third number is included because the maximum potential tips that 
can be transferred from an employee cannot be greater than their total 
tips. Total tips for each worker were calculated from the OTTC variable 
in the CPS data. For hourly-paid workers, the Department subtracted 
predicted overtime pay to better estimate total tips.\23\ For workers 
who reported receiving overtime, tips, and commissions, but did not 
report the amount they earned, the Department applied the ratio of 
tipped earnings to total earnings for all waiters and waitresses and 
bartenders in their state (see Table 2).
---------------------------------------------------------------------------

    \23\ Predicted overtime pay is calculated as (1.5 x base wage) x 
weekly hours worked over 40.
---------------------------------------------------------------------------

    The Department set the transfer to zero if the worker currently 
earns a direct cash wage above the full applicable minimum wage. If the 
employer is paying a tipped employee a direct cash wage above the 
required full minimum wage, this indicates the wage is set at the 
market clearing wage and any reduction in the wage (e.g., by requiring 
tips to be transferred to back-of-the-house workers) would cause the 
employee to quit and look for other work. Therefore, where an employer 
is paying a tipped employee above the full applicable minimum wage, the 
employer would generally not require the employee to contribute tips to 
a nontraditional tip pool.
    To determine the annual total tip transfer, the Department first 
multiplied a weighted sum of weekly tip transfers for all wait staff 
and bartenders who work at full-service restaurants and bars in the 
United States by 45.2 weeks--the average weeks worked in a year for 
waiters and waitresses and bartenders in the 2017 CPS Annual Social and 
Economic Supplement. The Department then reduced this total by 43 
percent to account for wait staff and bartenders who work in a state 
that prohibits mandatory tip pooling or imposes stricter limits on who 
can participate in a mandatory tip pool than the limits proposed in 
this NPRM or a state that is in the Tenth Circuit. Using this 
methodology, the total potential transfer from front-of-the-house 
employees associated with this proposed rule is $213.4 million. This 
represents the transfers that the Department expects would occur if 
every employer that does not take a tip credit, and for whom it was 
economically beneficial, instituted tip pools that include back-of-the-
house workers. In reality, even when it is seemingly economically 
beneficial, many employers may not change their tip pooling practices, 
because it would require changes to the current practice to which their 
employees are accustomed, as well as their payroll and recordkeeping 
systems.
    The Department was unable to determine what proportion of the total 
tips estimated to be potentially transferred from these workers will 
realistically be transferred. The Department assumes that the likely 
potential transfers are somewhere between a minimum of zero and a 
maximum of $213.4 million, and therefore used the midpoint as a better 
estimate of likely transfers. The Department accordingly estimates that 
transfers of tips from front-of-the-house workers will be around $107 
million in the first year that this rule is effective. Assuming these 
transfers occur annually, and there is no real wage growth, this 
results in 10-year annualized transfers of $107 million at both the 3 
percent and 7 percent discount rates. The Department requests comments 
on whether the midpoint is the appropriate adjustment.
    The Department acknowledges that some employers could respond to 
the proposed rule by decreasing back-of-the-house workers' wages, as 
the rule will

[[Page 53971]]

allow employers to supplement these employees' wages with tips. Some 
employers may consider exchanging back-of-the-house workers' hourly 
wages for tips, but tips fluctuate at any given time. Thus, employers' 
ability to do so would be limited by market forces, such as, 
potentially, workers' aversion to risk and the endowment effect 
(workers potentially valuing their set wages more than tips of the same 
average amount). Because of a lack of data to quantify the extent to 
which this will occur, the Department has not included this possibility 
in the present analysis.
    The Department welcomes comments and information regarding whether 
and to what extent employers will choose to expand existing tip pools 
to include back-of-the-house employees or otherwise change their 
current compensation structures.
iii. Estimated Costs, Cost Savings, and Benefits
    In this subsection, the Department addresses costs attributable to 
the proposed rule, by quantifying regulatory familiarization costs and 
qualitatively discussing additional recordkeeping costs. The Department 
qualitatively discusses benefits and cost savings associated with this 
proposed rule. Lastly, the Department qualitatively discusses the 
potential costs, transfers, and benefits associated with its proposed 
revision to its regulations to reflect its guidance that an employer 
may take a tip credit for any amount of time that an employee in a 
tipped occupation performs related, non-tipped duties performed 
contemporaneously with his or her tipped duties, or for a reasonable 
time immediately before or after performing the tipped duties.
1. Regulatory Familiarization Costs
    Regulatory familiarization costs represent direct costs to 
businesses associated with reviewing the new regulation. It is not 
clear whether regulatory familiarization costs are a function of the 
number of establishments or the number of firms.\24\ Presumably, the 
headquarters of a firm will conduct the regulatory review for 
businesses with multiple restaurants, and may also require chain 
restaurants to familiarize themselves with the regulation at the 
establishment level. To be conservative, the Department used the number 
of establishments in its cost estimate--which is larger than the number 
of firms--and assumes that regulatory familiarization occurs at both 
the headquarters and establishment levels.
---------------------------------------------------------------------------

    \24\ An establishment is commonly understood as a single 
economic unit, such as a farm, a mine, a factory, or a store, that 
produces goods or services. Establishments are typically at one 
physical location and engaged in one, or predominantly one, type of 
economic activity for which a single industrial classification may 
be applied. An establishment is in contrast to a firm, or a company, 
which is a business and may consist of one or more establishments, 
where each establishment may participate in a different predominant 
economic activity. See BLS, ``Quarterly Census of Employment and 
Wages: Concepts,'' https://www.bls.gov/opub/hom/cew/concepts.htm.
---------------------------------------------------------------------------

    The Department assumes that all establishments will incur some 
regulatory familiarization costs regardless of whether the employer 
decides to change its tip pooling practices as a result of the proposed 
rule.\25\ There may be differences in familiarization cost by the size 
of establishments; however, our analysis does not compute different 
costs for establishments of different sizes. To estimate the total 
regulatory familiarization costs, the Department used (1) the number of 
establishments in the two industries, Drinking Places (Alcoholic 
Beverages) and Full-Service Restaurants; (2) the wage rate for the 
employees reviewing the rule; and (3) the number of hours that it 
estimates employers will spend reviewing the rule. Table 3 shows the 
number of establishments in the two industries. To estimate the number 
of potentially affected establishments, the Department used data from 
BLS's Quarterly Census of Employment and Wages (QCEW) for 2018.
---------------------------------------------------------------------------

    \25\ This includes establishments in states excluded from the 
transfer calculation.

          Table 3--Number of Establishments With Tipped Workers
------------------------------------------------------------------------
                       Industry                          Establishments
------------------------------------------------------------------------
NAICS 722410 (Drinking Places (Alcoholic Beverages)).             42,826
NAICS 722511 (Full-service Restaurants)..............            247,237
                                                      ------------------
    Total............................................            290,063
------------------------------------------------------------------------
Source: QCEW, 2018

    The Department assumes that a Compensation, Benefits, and Job 
Analysis Specialist (SOC 13-1141) (or a staff member in a similar 
position) with a mean wage of $32.65 per hour in 2018 will review the 
rule.\26\ Given the change proposed, the Department assumes that it 
will take on average about 15 minutes to review the final rule. The 
Department has selected a small time estimate because it is an average 
for both establishments making changes to their compensation structure 
and those who are not (and consequently will have negligible or no 
regulatory familiarization costs). Further, the change effected by this 
regulation is unlikely to cause major burdens or costs. Assuming 
benefits are paid at a rate of 46 percent of the base wage, and 
overhead costs are 17 percent of the base wage, the reviewer's 
effective hourly rate is $53.22; thus, the average cost per 
establishment is $13.30 for 15 minutes of review time. The number of 
establishments in the selected industries was 290,063 in 2018. 
Therefore, regulatory familiarization costs in Year 1 are estimated to 
be $3.86 million ($13.30 x 290,063 establishments), which amounts to a 
10-year annualized cost of $452,422 at a discount rate of 3 percent or 
$549,471 at a discount rate of 7 percent. Regulatory familiarization 
costs in future years are assumed to be de minimis.
---------------------------------------------------------------------------

    \26\ A Compensation/Benefits Specialist ensures company 
compliance with federal and state laws, including reporting 
requirements; evaluates job positions, determining classification, 
exempt or non-exempt status, and salary; plans, develops, evaluates, 
improves, and communicates methods and techniques for selecting, 
promoting, compensating, evaluating, and training workers. See BLS, 
``13-1141 Compensation, Benefits, and Job Analysis Specialists,'' 
https://www.bls.gov/oes/current/oes131141.htm (last visited August 
14, 2019).
---------------------------------------------------------------------------

2. Other Costs
    The Department also assumes that there will be a minimal increase 
in recordkeeping costs associated with this proposed rule. Under the 
Department's current regulations, employers are only required to keep 
records of which employees receive tips and how much each employee 
receives if the employer takes a tip credit. If this rule is finalized 
as proposed, employers that do not take

[[Page 53972]]

a tip credit but collect tips to institute a mandatory tip pool must 
keep records showing which employees are included in the tip pool, and 
the amount of tips they receive, as reported by employees to the 
employer. As such records are already required under IRS Form 4070, 
there will be minimal recordkeeping costs for employers that pay the 
full Federal minimum wage in direct cash wages and choose to institute 
a nontraditional tip pool.
    Employers may incur some training costs associated with 
familiarizing first line managers and staff with the proposed rule; 
however, the Department believes these costs will be de minimis. The 
Department welcomes data on these costs.
3. Benefits
    Section 3(m)'s tip credit provision allows an employer to meet a 
portion of its Federal minimum wage obligation from the tips customers 
give employees. If an employer takes a tip credit, section 3(m)(2)(A) 
applies, along with its requirement that only employees who customarily 
and regularly receive tips be included in any mandatory tip pool. When 
an employer does not take a tip credit, however, the proposed rule 
would allow the employer to act in a manner currently prohibited by 
regulation--that is, by distributing tips to employees who are employed 
in occupations in which they do not customarily and regularly receive 
tips (e.g., cooks or dishwashers) through a tip pool. The proposed 
rule, therefore, provides employers greater flexibility in determining 
their pay policies for tipped and non-tipped workers.
    Full-service restaurants commonly have a tip pool. One study 
suggests that tip pooling contributes to increased service quality, 
along with enhanced interaction and cooperation between coworkers, 
especially when team members rely on input or task completion from each 
other.\27\ Another study indicates that tip pooling may foster 
customer-focused service, promote employee camaraderie, and increase 
productivity.\28\ Additionally, under the proposed changes, the 
employer will be able to distribute customer tips to back-of-the-house 
employees like cooks and dishwashers, possibly resulting in increased 
earnings for those employees. The Department believes that allowing 
employers to expand tip pools beyond customarily and regularly tipped 
workers like servers and bartenders could help incentivize back-of-the-
house workers, which may improve the customer's experience.
---------------------------------------------------------------------------

    \27\ Samuel Estreicher & Jonathan Nash, The Law and Economics of 
Tipping: The Laborer's Perspective, Am. Law & Econ. Ass'n Annual 
Meetings. (2004), https://law.bepress.com/cgi/viewcontent.cgi?referer=&httpsredir=1&article=1068&context=alea.
    \28\ Ofer H. Azar, The Implications of Tipping for Economics and 
Management, 30 (10) Int'l J. Soc. Econ., 1084-94 (2003), https://individual.utoronto.ca/diep/c/azar2003.pdf.
---------------------------------------------------------------------------

4. Cost Savings
    The cost savings associated with this rule would result from the 
increased earnings for back-of-the-house employees. Higher earnings for 
these employees could result in reduced turnover, which reduces hiring 
and training costs for employers. This proposed rule would also give 
employers greater flexibility for tip pooling, and could reduce effort 
spent ensuring that the tip pool is limited to only customarily and 
regularly tipped employees. The Department believes that the cost 
savings would outweigh any increased rule-familiarization and 
recordkeeping costs.
    This rule may also reduce deadweight loss. Deadweight loss is the 
loss of economic efficiency that occurs when the perfectly competitive 
equilibrium in a market for a good or service is not achieved. Minimum 
wages may prevent the market from reaching equilibrium and thus result 
in fewer hours worked than would otherwise be efficient. Allowing 
nontraditional tip pools may cause a shift in the labor demand and/or 
supply curves for wait staff and bartenders. This could result in the 
market moving closer to the competitive market equilibrium. The 
Department did not quantify the potential reduction in deadweight loss 
because of uncertainty (e.g., what are the appropriate demand and 
supply elasticities).
5. Costs, Benefits, and Potential Transfers Associated With Revision to 
Dual Jobs Regulation
    The Department proposes to amend its regulations to reflect its 
recent guidance removing the limit on the amount of time that an 
employee for whom an employer takes a tip credit can perform related, 
non-tipped duties has potential benefits. Under the previous guidance, 
in order to ensure they were in compliance, employers may have tracked 
how tipped employees were spending their time, which could be difficult 
and costly. Removing the time requirement will eliminate this 
monitoring cost. Additionally, the revisions add clarity by providing a 
reference list of applicable related duties through O*NET. Although 
employers will reference this list of duties to ensure that their 
employees' non-tipped duties are related to their tipped occupations, 
this would likely be less of a burden than constantly monitoring their 
employee's time.
    The removal of the twenty percent time limit may result in tipped 
workers such as wait staff and bartenders performing more of these non-
tipped duties such as ``cleaning and setting tables, toasting bread, 
making coffee, and occasionally washing dishes or glasses.'' 
Consequently, employment of workers currently performing these duties, 
such as dishwashers and cooks, may fall, possibly resulting in a 
transfer of employment-related producer surplus from those non-tipped 
workers to tipped workers who work longer hours. However, tipped 
workers might lose tipped income by spending more of their time 
performing duties where they are not earning tips, while still 
receiving cash wages of less than minimum wage. For example, assume 
that prior to this change, a restaurant server spends 12 minutes each 
hour of their shift (i.e., 20 percent) performing related, non-tipped 
duties (e.g., clearing tables, washing dishes, etc.), and 48 minutes 
providing direct customer service. Assume the server earns $12 per hour 
in tips (i.e., $0.25 per minute of customer service work). With no 20 
percent limit on the performance of related, non-tipped duties, an 
employee might spend more than 12 minutes per hour performing related, 
non-tipped duties, as long as they still receive enough tips to earn at 
least $7.25 per hour for the shift. Thus, if an employee now spends 20 
minutes performing non-tipped work (i.e., 33 percent of their shift) 
and 40 minutes interacting with customers, they would be expected to 
lose $2 per hour in tips, a decrease accounting for eight fewer minutes 
per hour spent performing tip-generating work (i.e., 8 minutes x $0.25 
per minute). Similarly, employers that had been paying the full minimum 
wage to tipped employees performing related, non-tipped duties could 
potentially pay the lower direct cash wage for this time and could pass 
these reduced labor cost savings on to consumers. As mentioned above, 
the Department lacks data to quantify this potential reduction in tips. 
For instance, data does not exist on the amount of time that tipped 
employees currently spend on tipped duties or related, nontipped 
duties. Absent such a baseline, the Department cannot quantify how time 
spent by tipped employees on related, nontipped duties would change as 
a result of this proposed rule. The Department welcomes feedback on how 
employers would adjust employees' schedules as a result of this recent 
guidance.

[[Page 53973]]

iv. Summary of Transfers and Costs
    Below the Department provides a summary table of the quantified 
transfers and costs for the RIA. Transfer costs in years two through 
ten are assumed to be the same as in Year 1.

                              Table 4--Summary of Transfers and Costs Calculations
                                                 [2018 dollars]
----------------------------------------------------------------------------------------------------------------
                                                                              Potential tip        Regulatory
                                                                                transfers       familiarization
                                                                                (Millions)      costs (Millions)
----------------------------------------------------------------------------------------------------------------
Year 1:
    Preferred Estimate....................................................             $106.7               $3.9
    Lower-Bound...........................................................                0.0                N/A
    Upper-Bound...........................................................              213.4                N/A
10-year Annualized Transfers (Preferred Est.):
3% Discount Rate..........................................................              106.7                0.5
7% Discount Rate..........................................................              106.7                0.5
----------------------------------------------------------------------------------------------------------------

v. Additional Potential Impacts of This Rulemaking
    The Department believes that by implementing section 3(m)(2)(B) and 
providing clarification on tip pooling, this proposal could affect the 
number of employers who choose to implement tip pools or otherwise 
affect their practices. Because of the lack of data to determine how 
employers would behave, the Department welcomes comments that provide 
insight into employers' decisions to implement tip pools, and how these 
decisions affect both employers and employees.

C. Analysis of Regulatory Alternatives

    In developing this NPRM, the Department considered a regulatory 
alternative that would be less restrictive than what is currently 
proposed and one that would be more restrictive. For the less-
restrictive option, the Department considered excluding employers that 
do not take a tip credit from the requirement to keep records of the 
weekly or monthly amount of tips received by each employee as reported 
by the employee to the employer.\29\ The Department concluded, however, 
that requiring all employers with tip pools to keep records of the 
weekly or monthly amount of tips received by employees would ensure 
uniformity among these employers and help the Department administer 
section 3(m)(2)(B).
---------------------------------------------------------------------------

    \29\ Current Sec.  516.28(a) requires employers that take a tip 
credit under the FLSA to keep records of the weekly or monthly 
amount of tips received by employees.
---------------------------------------------------------------------------

    For a more restrictive alternative, the Department considered 
requiring employers that collect cash tips for a mandatory tip pool to 
fully distribute the tips on a daily basis. The Department concluded, 
however, that this requirement would be unnecessarily onerous for 
employers. The Department's proposal for full distribution of cash and 
credit-card tips on the regular payday or, in certain cases, as soon as 
practicable afterward, would be simpler for employers to follow. It 
would align the policy for cash tips with the current policy for 
credit-card tips and allow employers to pay tips the same day they 
otherwise pay their employees. The Department believes that the current 
proposal will ensure that employers do not operate tip pools in such a 
manner that they ``keep'' tips.

VII. Regulatory Flexibility Analysis

    The Regulatory Flexibility Act of 1980 (RFA), 5 U.S.C. 601 et seq., 
as amended by the Small Business Regulatory Enforcement Fairness Act of 
1996, Public Law 104-121 (1996), requires federal agencies engaged in 
rulemaking to consider the impact of their proposals on small entities, 
consider alternatives to minimize that impact, and solicit public 
comment on their analyses. The RFA requires the assessment of the 
impact of a regulation on a wide range of small entities, including 
small businesses, not-for-profit organizations, and small governmental 
jurisdictions. Accordingly, the Department examined the regulatory 
requirements of the proposed rule to determine whether they would have 
a significant economic impact on a substantial number of small 
entities.
    In its analysis, the Department used the Small Business 
Administration size standards, which determine whether a business 
qualifies for small-business status.\30\ According to the 2017 
standards, Full-service Restaurants (NAICS 722511) and Drinking Places 
(Alcoholic Beverages) (NAICS 722410) have a size standard of $7.5 
million in annual revenue.\31\ The Department used this number to 
estimate the number of small entities. Any establishments with annual 
sales revenue less than this amount were considered small entities.
---------------------------------------------------------------------------

    \30\ SBA, Summary of Size Standards by Industry Sector, 2017, 
www.sba.gov/document/support-table-size-standards.
    \31\ Id., Subsector 722.
---------------------------------------------------------------------------

    The Department used the U.S. Census Bureau's 2012 Economic Census 
to obtain the number of establishments (operating the entire year) and 
annual sales/receipts for the two industries in the analysis: Full-
service Restaurants and Drinking Places (Alcoholic Beverages).\32\ From 
annual receipts/sales, the Department can estimate how many 
establishments fall under the size standard. Table 5 shows the number 
of private, year-round establishments in the two industries by 
revenue.\33\
---------------------------------------------------------------------------

    \32\ U.S. Census Bureau, 2012 Economic Census, Accommodation and 
Food Services: Subject Series--Estab & Firm Size: Summary Statistics 
by Sales Size of Establishments for the U.S.: 2012. https://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?src=bkmk.
    \33\ The small-business size standard for the two industries is 
$7.5 million in annual revenue. However, the final size category 
reported in the table is $5 million-$9 million. This is a data 
limitation because the 2012 Economic Census reported this category 
of $5 million-$9 million and not $5 million-$7.5 million. Thus, the 
total number of firms shown may be slightly higher than the actual 
number of small entities.
---------------------------------------------------------------------------

    The annual cost per establishment is the regulatory familiarization 
cost of $13.30 per establishment calculated in section V.B.iii.1. The 
Department applied this cost to all sizes of establishments since each 
establishment would incur this cost regardless of the number of 
affected workers. Finally, the impact of this provision was calculated 
as the ratio of annual cost per establishment to average sales receipts 
per establishment. As shown, the annual cost per establishment is less 
than 0.03 percent of average annual sales for establishments in all 
small

[[Page 53974]]

entity size classes. The impact of this proposed rule on small 
establishments will be de minimis. The Department certifies that the 
proposed rule will not have a significant economic impact on a 
substantial number of small entities.

                                        Table 5--Costs to Small Entities
----------------------------------------------------------------------------------------------------------------
                                                                                                Annual cost per
                                          Number of        Average annual    Annual cost per   establishment  as
    Annual revenue/sales/receipts       establishments       sales per      establishment ($)  percent of  sales/
                                                         establishment ($)                          receipts
                                                    [a]                [b]                [c]
----------------------------------------------------------------------------------------------------------------
                                         722511 Full-service Restaurants
----------------------------------------------------------------------------------------------------------------
< $100,000..........................             10,211            $68,356             $13.30               0.02
100,000 to 499,999..................             28,651            193,823              13.30               0.01
250,000 to 499,999..................             39,554            405,727              13.30               0.00
500,000 to 999,999..................             46,793            792,561              13.30               0.00
1,000,000 to 2,499,999..............             45,173          1,729,025              13.30               0.00
2,500,000 to 4,999,999..............             17,039          3,750,831              13.30               0.00
5,000,000 to 9,999,999..............              3,531          7,128,700              13.30               0.00
----------------------------------------------------------------------------------------------------------------
                                  722410 Drinking Places (Alcoholic Beverages)
----------------------------------------------------------------------------------------------------------------
< 100,000...........................              4,622             69,775              13.30               0.02
100,000 to 249,999..................             11,610            188,975              13.30               0.01
250,000 to 499,999..................              9,059            387,358              13.30               0.00
500,000 to 999,999..................              5,138            762,365              13.30               0.00
1,000,000 to 2,499,999..............              3,386          1,665,727              13.30               0.00
2,500,000 to 4,999,999..............                755          3,708,103              13.30               0.00
5,000,000 to 9,999,999..............                164          7,318,368              13.30               0.00
----------------------------------------------------------------------------------------------------------------
[a] Limited to establishments operated for the entire year.
[b] Inflated to $2018 using the GDP deflator.
[c] The annual cost per establishment is the regulatory familiarization cost per establishment calculated in
  section V.B.iii.1.

VIII. Unfunded Mandates Reform Act Analysis

    The Unfunded Mandates Reform Act of 1995, 2 U.S.C. 1532, requires 
agencies to prepare a written statement, which includes an assessment 
of anticipated costs and benefits, before proposing any Federal mandate 
that may result in excess of $100 million (adjusted annually for 
inflation) in expenditures in any one year by state, local, and tribal 
governments in the aggregate, or by the private sector. This rulemaking 
is not expected to affect state, local, or tribal governments. While 
this rulemaking would affect employers in the private sector, it is not 
expected to result in expenditures greater than $100 million in any one 
year. See section V.B for an assessment of anticipated costs and 
benefits to the private sector.

IX. Executive Order 13132, Federalism

    The Department has (1) reviewed this proposed rule in accordance 
with Executive Order 13132 regarding federalism and (2) determined that 
it does not have federalism implications. The proposed rule would not 
have substantial direct effects on the States, on the relationship 
between the national government and the States, or on the distribution 
of power and responsibilities among the various levels of government.

X. Executive Order 13175, Indian Tribal Governments

    This proposed rule would not have substantial direct effects on one 
or more Indian tribes, on the relationship between the Federal 
Government and Indian tribes, or on the distribution of power and 
responsibilities between the Federal Government and Indian tribes.

List of Subjects

29 CFR Part 10

    Administrative practice and procedure, Construction industry, 
Government procurement, Law enforcement, Reporting and recordkeeping 
requirements, Wages

29 CFR Part 516

    Minimum wages, Reporting and recordkeeping requirements, Wages

 29 CFR Part 531

    Wages

 29 CFR Part 578

    Penalties, Wages

 29 CFR Part 579

    Child labor, Penalties

 29 CFR Part 580

    Administrative practice and procedure, Child labor, Penalties, 
Wages.

    For the reasons set forth above, the Department proposes to amend 
Title 29, Parts 10, 516, 531, 578, 579, and 580 of the Code of Federal 
Regulations as follows:

PART 10--ESTABLISHING A MINIMUM WAGE FOR CONTRACTORS

0
1. The authority citation for Part 10 is revised to read as follows:

    Authority: 4 U.S.C. 301; section 4, E.O 13658, 79 FR 9851; 
Secretary of Labor's Order No. 01-2014 (Dec. 19, 2014), 79 FR 77527 
(Dec. 24, 2014).

0
2. Amend Sec.  10.28 by revising paragraphs (b)(2), (c), (e), and (f) 
to read as follows:


Sec.  10.28  Tipped employees.

* * * * *
    (b) * * *
    (2)(i) In some situations an employee is employed in a dual job, as 
for example, where a maintenance person in a hotel also works as a 
server. In such a situation the employee, if he or she customarily and 
regularly receives more than $30 a month in tips for his or her work as 
a server, is a tipped employee only with respect to his or her 
employment as a server. The employee is employed in two occupations, 
and no tip credit can be taken for his or her hours of employment in 
the occupation of maintenance person.

[[Page 53975]]

    (ii) Such a situation is distinguishable from that of an employee 
who spends time performing duties that are related to his or her tip-
producing occupation but not themselves directed toward producing tips. 
For example, a server may spend part of his or her time cleaning and 
setting tables, toasting bread, making coffee and occasionally washing 
dishes or glasses. Likewise, a counter attendant may also prepare his 
or her own short orders or may, as part of a group of counter 
attendants, take a turn as a short order cook for the group. An 
employer may take a tip credit for any amount of time that an employee 
performs related, non-tipped duties contemporaneously with his or her 
tipped duties, or for a reasonable time immediately before or after 
performing the tipped duties.
    (iii) ``Related'' duties defined. In addition to the examples 
described in (e)(ii), a non-tipped duty is related to a tip-producing 
occupation if the duty is listed as a task in the description of the 
tip-producing occupation in the Occupational Information Network 
(O*NET) at www.onetonline. Occupations not listed in O*NET may qualify 
as tipped occupations. For those occupations, duties usually and 
customarily performed by employees are related duties as long as they 
are included in the list of duties performed in similar O*NET 
occupations.
    (c) Characteristics of tips. A tip is a sum presented by a customer 
as a gift or gratuity in recognition of some service performed for the 
customer. It is to be distinguished from payment of a fixed charge, if 
any, made for the service. Whether a tip is to be given, and its 
amount, are matters determined solely by the customer. Customers may 
present cash tips directly to the employee or may designate a tip 
amount to be added to their bill when paying with a credit card or by 
other electronic means. Special gifts in forms other than money or its 
equivalent such as theater tickets, passes, or merchandise, are not 
counted as tips received by the employee for purposes of determining 
wages paid under the Executive Order.
* * * * *
    (e) Tip pooling. Where tipped employees share tips through a tip 
pool, only the amounts retained by the tipped employees after any 
redistribution through a tip pool are considered tips in applying the 
provisions of FLSA section 3(t) and the wage payment provisions of 
section 3 of the Executive Order. There is no maximum contribution 
percentage on mandatory tip pools. However, an employer must notify its 
employees of any required tip pool contribution amount, may only take a 
tip credit for the amount of tips each employee ultimately receives, 
and may not retain any of the employees' tips for any other purpose.
    (f) Notice. An employer is not eligible to take the tip credit 
unless it has informed its tipped employees in advance of the 
employer's use of the tip credit. The employer must inform the tipped 
employee of the amount of the cash wage that is to be paid by the 
employer, which cannot be lower than the cash wage required by 
paragraph (a)(1) of this section; the additional amount by which the 
wages of the tipped employee will be considered increased on account of 
the tip credit claimed by the employer, which amount may not exceed the 
value of the tips actually received by the employee; that all tips 
received by the tipped employee must be retained by the employee except 
for a tip pooling arrangement; and that the tip credit shall not apply 
to any worker who has not been informed of these requirements in this 
section.

PART 516--RECORDS TO BE KEPT BY EMPLOYERS

0
3. Revise the authority section for Part 516 to read:

    Authority:  Sec. 11, 52 Stat. 1066, as amended, 29 U.S.C. 211. 
Section 516.28 also issued under 29 U.S.C. 203(m), as amended by 
sec. 2105(b), Pub. L. 104-188, 110 Stat. 1755; sec. 8102(a), Pub. L. 
110-28, 121 Stat. 112; and sec. 1201, Div. S., Tit. XII, Pub. L. 
115-141, 132 Stat. 348. Section 516.33 also issued under 52 Stat. 
1060, as amended; 29 U.S.C. 201 et seq. Section 516.34 also issued 
under Sec. 7, 103 Stat. 944, 29 U.S.C. 207(q).

0
4. Amend Sec.  516.28 by revising the section heading and paragraph (b) 
to read as follows:


Sec.  516.28  Tipped employees and employer-administered tip pools.

* * * * *
    (b) With respect to employees who receive tips but for whom a tip 
credit is not taken under section 3(m)(2)(A), any employer that 
collects tips received by employees to operate a mandatory tip-pooling 
or tip-sharing arrangement shall maintain and preserve payroll or other 
records containing the information and data required in Sec.  516.2(a) 
and, in addition, the following:
    (1) A symbol, letter, or other notation placed on the pay records 
identifying each employee who receive tips.
    (2) Weekly or monthly amount reported by the employee, to the 
employer, of tips received (this may consist of reports made by the 
employees to the employer on IRS Form 4070).

PART 531--WAGE PAYMENTS UNDER THE FAIR LABOR STANDARDS ACT OF 1938

0
5. Revise the authority citation for Part 531 to read as follows:


    Authority: 29 U.S.C. 203(m) and (t), as amended by sec. 3(m), 
Pub. L. 75-718, 52 Stat. 1060; sec. 2, Pub. L. 87-30, 75 Stat. 65; 
sec. 101, sec. 602, Pub. L. 89-601, 80 Stat. 830; sec. 29(B), Pub. 
L. 93-259, 88 Stat. 55 sec. 3, sec. 15(c), Pub. L. 95-151, 91 Stat 
1245; sec. 2105(b), Pub. L. 104-188, 110 Stat 1755; sec. 8102, Pub. 
L. 110-28, 121 Stat. 112; and sec. 1201, Div. S., Tit. XII, Pub. L. 
115-141, 132 Stat. 348.

0
6. Amend Sec.  531.50 by:
0
a. Revising paragraph (a) introductory text and adding paragraph 
(a)(3);
0
b. Redesignating paragraph (b) as paragraph (c); and
0
c. Adding a new paragraph (b).
    The revisions and additions read as follows:


Sec.  531.50  Statutory provisions with respect to tipped employees.

    (a) With respect to tipped employees, section 3(m)(2)(A) provides 
that, in determining the wage an employer is required to pay a tipped 
employee, the amount paid such employee by the employee's employer 
shall be an amount equal to--
    * * *
    (3) Section 3(m)(2)(A) also provides that an employer that takes a 
tip credit against its minimum wage obligations to its tipped employees 
must inform those employees of the provisions of that subsection, and 
that the employees must retain all of their tips, although the employer 
may require those employees to participate in a tip pool with other 
tipped employees that customarily and regularly receive tips.
    (b) Section 3(m)(2)(B) provides that an employer may not keep tips 
received by its employees for any purposes, including allowing managers 
and supervisors to keep any portion of employees' tips, regardless of 
whether the employer takes a tip credit under section 3(m)(2)(A).
* * * * *
0
7. Revise the first sentence of Sec.  531.51 to read as follows:


Sec.  531.51  Conditions for taking tip credits in making wage 
payments.

    The wage credit permitted on account of tips under section 
3(m)(2)(A) may be taken only with respect to wage payments made under 
the Act to those employees whose occupations in the workweeks for which 
such payments are made are those of ``tipped employees'' as defined in 
section 3(t). * * *

[[Page 53976]]

0
8. Revise Sec.  531.52 to read as follows:


Sec.  531.52  General restrictions on an employer's use of its 
employees' tips.

    (a) A tip is a sum presented by a customer as a gift or gratuity in 
recognition of some service performed for the customer. It is to be 
distinguished from payment of a charge, if any, made for the service. 
Whether a tip is to be given, and its amount, are matters determined 
solely by the customer. An employer that takes a tip credit against its 
minimum wage obligations is prohibited from using an employee's tips 
for any reason other than that which is statutorily permitted in 
section 3(m)(2)(A): As a credit against its minimum wage obligations to 
the employee, or in furtherance of a tip pool limited to employees who 
customarily and regularly receive tips. Only tips actually received by 
an employee as money belonging to the employee may be counted in 
determining whether the person is a ``tipped employee'' within the 
meaning of the Act and in applying the provisions of section 3(m)(2)(A) 
which govern wage credits for tips.
    (b) Section 3(m)(2)(B) of the Act provides that an employer may not 
keep tips received by its employees for any purposes, regardless of 
whether the employer takes a tip credit.
    (1) An employer may exert control over an employee's tips only to 
distribute tips to the employee who received them, require employees to 
share tips with other employees in compliance with Sec.  531.54, or, 
where the employer facilitates tip pooling by collecting and 
redistributing employees' tips, distribute tips to employees in a tip 
pool in compliance with Sec.  531.54.
    (2) An employer may not allow managers and supervisors to keep any 
portion of an employee's tips, regardless of whether the employer takes 
a tip credit. For purposes of section 3(m)(2)(B), the term ``manager'' 
or ``supervisor'' shall mean any employee whose duties match those of 
an executive employee as described in Sec.  541.100(a)(2) through (4) 
or Sec.  541.101.
0
9. Revise Sec.  531.54 to read as follows:


Sec.  531.54  Tip pooling.

    (a) Monies counted as tips. Where employees practice tip splitting, 
as where waiters give a portion of their tips to the busser, both the 
amounts retained by the waiters and those given the bussers are 
considered tips of the individuals who retain them, in applying the 
provisions of sections 3(m)(2)(A) and 3(t). Similarly, where an 
accounting is made to an employer for his information only or in 
furtherance of a pooling arrangement whereby the employer redistributes 
the tips to the employees upon some basis to which they have mutually 
agreed among themselves, the amounts received and retained by each 
individual as his own are counted as his tips for purposes of the Act. 
Section 3(m)(2)(A) does not impose a maximum contribution percentage on 
mandatory tip pools.
    (b) Meaning of ``keep.'' Section 3(m)(2)(B)'s prohibition against 
keeping tips applies regardless of whether an employer takes a tip 
credit. Section 3(m)(2)(B) expressly prohibits employers from requiring 
employees to share tips with managers or supervisors, as defined in 
Sec.  531.52(b)(2), or employers, as defined in 29 U.S.C. 203(d). An 
employer does not violate section 3(m)(2)(B)'s prohibition against 
keeping tips if it requires employees to share tips with other 
employees who are eligible to receive tips.
    (1) Full and prompt distribution of tips. An employer that 
facilitates tip pooling by collecting and redistributing employees' 
tips does not violate section 3(m)(2)(B)'s prohibition against keeping 
tips if it fully distributes any tips the employer collects no later 
than the regular payday for the workweek in which the tips were 
collected, or when the pay period covers more than a single workweek, 
the regular payday for the period in which the workweek ends. To the 
extent that it is not possible for an employer to ascertain the amount 
of tips that have been received or how tips should be distributed prior 
to processing payroll, tips must be distributed to employees as soon as 
practicable after the regular payday.
    (c) Employers that take a section 3(m)(2)(A) tip credit. When an 
employer takes a tip credit pursuant to section 3(m)(2)(A):
    (1) The employer may require an employee for whom the employer 
takes a tip credit to contribute tips to a tip pool only if it is 
limited to employees who customarily and regularly receive tips; and
    (2) The employer must notify its employees of any required tip pool 
contribution amount, may only take a tip credit for the amount of tips 
each employee ultimately receives, and may not retain any of the 
employees' tips for any other purpose.
    (d) Employers that do not take a section 3(m)(2)(A) tip credit. An 
employer that pays its tipped employees the full minimum wage and does 
not take a tip credit may impose a tip pooling arrangement that 
includes dishwashers, cooks, or other employees in the establishment 
who are not employed in an occupation in which employees customarily 
and regularly receives tips. An employer may not participate in such a 
tip pool, and may not include supervisors and managers in the pool.
0
10. Revise Sec.  531.55(a) to read as follows:


Sec.  531.55  Examples of amounts not received as tips.

    (a) A compulsory charge for service, such as 15 percent of the 
amount of the bill, imposed on a customer by an employer's 
establishment, is not a tip and, even if distributed by the employer to 
its employees, cannot be counted as a tip received in applying the 
provisions of sections 3(m)(2)(A) and 3(t). Similarly, where 
negotiations between a hotel and a customer for banquet facilities 
include amounts for distribution to employees of the hotel, the amounts 
so distributed are not counted as tips received.
* * * * *
0
11. Amend Sec.  531.56 by revising the second and third sentences in 
paragraph (a), and paragraphs (d) and (e) to read as follows:


Sec.  531.56  ``More than $30 a month in tips.''

    (a) In general. * * * An employee employed in an occupation in 
which the tips he receives meet this minimum standard is a ``tipped 
employee'' for whom the wage credit provided by section 3(m)(2)(A) may 
be taken in computing the compensation due him under the Act for 
employment in such occupation, whether he is employed in it full time 
or part time. An employee employed full time or part time in an 
occupation in which he does not receive more than $30 a month in tips 
customarily and regularly is not a ``tipped employee'' within the 
meaning of the Act and must receive the full compensation required by 
its provisions in cash or allowable facilities without any deduction 
for tips received under the provisions of section 3(m)(2)(A).
* * * * *
    (d) Significance of minimum monthly tip receipts. More than $30 a 
month in tips customarily and regularly received by the employee is a 
minimum standard that must be met before any wage credit for tips is 
determined under section 3(m)(2)(A). It does not govern or limit the 
determination of the appropriate amount of wage credit under section 
3(m)(2)(A) that may be taken for tips under section 6(a)(1) (tip credit 
equals the difference between the minimum wage required by section 
6(a)(1) and the cash wage paid (at least $2.13 per hour)).
    (e) Dual jobs. (1) In some situations an employee is employed in a 
dual job, as for example, where a maintenance

[[Page 53977]]

person in a hotel also works as a server. In such a situation the 
employee, if he or she customarily and regularly receives more than $30 
a month in tips for his or her work as a server, is a tipped employee 
only with respect to his or her employment as a server. The employee is 
employed in two occupations, and no tip credit can be taken for his or 
her hours of employment in the occupation of maintenance person.
    (2) Such a situation is distinguishable from that of an employee 
who spends time performing duties that are related to his or her tip-
producing occupation but not themselves directed toward producing tips. 
For example, a server may spend part of his or her time cleaning and 
setting tables, toasting bread, making coffee and occasionally washing 
dishes or glasses. Likewise, a counter attendant may also prepare his 
or her own short orders or may, as part of a group of counter 
attendants, take a turn as a short order cook for the group. An 
employer may take a tip credit for any amount of time that an employee 
performs related, non-tipped duties contemporaneously with his or her 
tipped duties, or for a reasonable time immediately before or after 
performing the tipped duties.
    (3) ``Related'' duties defined. In addition to the examples 
described in (e)(2), a non-tipped duty is related to a tip-producing 
occupation if the duty is listed as a task in the description of the 
tip-producing occupation in the Occupational Information Network 
(O*NET) at www.onetonline. Occupations not listed in O*NET may qualify 
as tipped occupations. For those occupations, duties usually and 
customarily performed by employees are related duties as long as they 
are included in the list of duties performed in similar O*NET 
occupations.
0
12. Revise Sec.  531.59 to read as follows:


Sec.  531.59  The tip wage credit.

    (a) In determining compliance with the wage payment requirements of 
the Act, under the provisions of section 3(m)(2)(A) the amount paid to 
a tipped employee by an employer is increased on account of tips by an 
amount equal to the formula set forth in the statute (minimum wage 
required by section 6(a)(1) of the Act minus cash wage paid (at least 
$2.13)), provided that the employer satisfies all the requirements of 
section 3(m)(2)(A). This tip credit is in addition to any credit for 
board, lodging, or other facilities which may be allowable under 
section 3(m).
    (b) As indicated in Sec.  531.51, the tip credit may be taken only 
for hours worked by the employee in an occupation in which the employee 
qualifies as a ``tipped employee.'' Pursuant to section 3(m)(2)(A), an 
employer is not eligible to take the tip credit unless it has informed 
its tipped employees in advance of the employer's use of the tip credit 
of the provisions of section 3(m)(2)(A) of the Act, i.e.: The amount of 
the cash wage that is to be paid to the tipped employee by the 
employer; the additional amount by which the wages of the tipped 
employee are increased on account of the tip credit claimed by the 
employer, which amount may not exceed the value of the tips actually 
received by the employee; that all tips received by the tipped employee 
must be retained by the employee except for a tip pooling arrangement 
limited to employees who customarily and regularly receive tips; and 
that the tip credit shall not apply to any employee who has not been 
informed of these requirements in this section. The credit allowed on 
account of tips may be less than that permitted by statute (minimum 
wage required by section 6(a)(1) minus the cash wage paid (at least 
$2.13)); it cannot be more. In order for the employer to claim the 
maximum tip credit, the employer must demonstrate that the employee 
received at least that amount in actual tips. If the employee received 
less than the maximum tip credit amount in tips, the employer is 
required to pay the balance so that the employee receives at least the 
minimum wage with the defined combination of wages and tips. With the 
exception of tips contributed to a tip pool limited to employees who 
customarily and regularly receive tips as described in Sec.  531.54, 
section 3(m)(2)(A) also requires employers that take a tip credit to 
permit employees to retain all tips received by the employee.
0
13. Revise Sec.  531.60 to read as follows:


Sec.  531.60  Overtime payments.

    When overtime is worked by a tipped employee who is subject to the 
overtime pay provisions of the Act, the employee's regular rate of pay 
is determined by dividing the employee's total remuneration for 
employment (except statutory exclusions) in any workweek by the total 
number of hours actually worked by the employee in that workweek for 
which such compensation was paid. (See part 778 of this chapter for a 
detailed discussion of overtime compensation under the Act.) In 
accordance with section 3(m)(2)(A), a tipped employee's regular rate of 
pay includes the amount of tip credit taken by the employer per hour 
(not in excess of the minimum wage required by section 6(a)(1) minus 
the cash wage paid (at least $2.13)), the reasonable cost or fair value 
of any facilities furnished to the employee by the employer, as 
authorized under section 3(m) and this part 531, and the cash wages 
including commissions and certain bonuses paid by the employer. Any 
tips received by the employee in excess of the tip credit need not be 
included in the regular rate. Such tips are not payments made by the 
employer to the employee as remuneration for employment within the 
meaning of the Act.

PART 578--[AMENDED]

0
14. The heading of Part 578 is revised to read as follows:

PART 578--TIP RETENTION, MINIMUM WAGE, AND OVERTIME VIOLATIONS--
CIVIL MONEY PENALTIES

0
15. The authority citation for Part 578 is revised to read as follows:

    Authority: 29 U.S.C. 216(e), as amended by sec. 9, Pub. L. 101-
157, 103 Stat. 938, sec. 3103, Pub. L. 101-508, 104 Stat. 1388-29, 
sec. 302(a), Pub. L. 110-233, 122 Stat. 920, and sec. 1201, Div. S., 
Tit. XII, Pub. L. 115-141, 132 Stat. 348; Pub. L. 101-410, 104 Stat. 
890 (28 U.S.C. 2461 note), as amended by sec. 31001(s), Pub. L. 104-
134, 110 Stat. 1321-358, 1321-373, and sec. 701, Pub. L. 114-74, 129 
Stat 584.

0
16. Revise Sec.  578.1 to read as follows:


Sec.  578.1  What does this part cover?

    Section 9 of the Fair Labor Standards Amendments of 1989 amended 
section 16(e) of the Act to provide that any person who repeatedly or 
willfully violates the minimum wage (section 6) or overtime provisions 
(section 7) of the Act shall be subject to a civil money penalty not to 
exceed $1,000 for each such violation. In 2001, WHD adjusted this 
penalty for inflation pursuant to the Federal Civil Penalties Inflation 
Adjustment Act of 1990 (Pub. L. 101-410), as amended by the Debt 
Collection Improvement Act of 1996 (Pub. L. 104-134, section 31001(s)). 
See 66 FR 63503 (Dec. 7, 2001). The Genetic Information 
Nondiscrimination Act of 2008 amended section 16(e) of the Act to 
reflect this increase. See Pub. L. 110-233, sec. 302(a), 122 Stat. 920. 
Section 1201(b)(3) of the Consolidated Appropriations Act, 2018, 
amended section 16(e) to add that any person who violates section 
3(m)(2)(B) of the Act shall be subject to a civil money penalty not to 
exceed $1,100. The Federal Civil Penalties Inflation Adjustment Act of 
1990 (Pub. L. 101-410), as amended by the Debt Collection Improvement 
Act of 1996 (Pub. L. 104-134, section 31001(s)) and the Federal Civil 
Penalties Inflation Adjustment Act Improvement Act of

[[Page 53978]]

2015 (Pub. L. 114-74, section 701), requires that inflationary 
adjustments be annually made in these civil money penalties according 
to a specified cost-of-living formula. This part defines terms 
necessary for administration of the civil money penalty provisions, 
describes the violations for which a penalty may be imposed, and 
describes criteria for determining the amount of penalty to be 
assessed. The procedural requirements for assessing and contesting such 
penalties are contained in part 580 of this chapter.
0
17. Revise Sec.  578.3 to read as follows:


Sec.  578.3  What types of violations may result in a penalty being 
assessed?

    (a)(1) A penalty of up to $1,100 may be assessed against any person 
who repeatedly or willfully violates section 3(m)(2)(B) of the Act.
    (2) A penalty of up to $1,964 per violation may be assessed against 
any person who repeatedly or willfully violates section 6 (minimum 
wage) or section 7 (overtime) of the Act. The amount of the penalties 
stated in paragraphs (a)(1) and (2) of this section will be determined 
by applying the criteria in Sec.  578.4.
    (b) Repeated violations. An employer's violation of section 
3(m)(2)(B), section 6, or section 7 of the Act shall be deemed to be 
``repeated'' for purposes of this section:
    (1) Where the employer has previously violated section 3(m)(2)(B), 
section 6, or section 7 of the Act, provided the employer has 
previously received notice, through a responsible official of the Wage 
and Hour Division or otherwise authoritatively, that the employer 
allegedly was in violation of the provisions of the Act; or
    (2) Where a court or other tribunal has made a finding that an 
employer has previously violated section 3(m)(2)(B), section 6, or 
section 7 of the Act, unless an appeal therefrom which has been timely 
filed is pending before a court or other tribunal with jurisdiction to 
hear the appeal, or unless the finding has been set aside or reversed 
by such appellate tribunal.
    (c) Willful violations. (1) An employer's violation of section 
3(m)(2)(B), section 6, or section 7 of the Act shall be deemed to be 
``willful'' for purposes of this section where the employer knew that 
its conduct was prohibited by the Act or showed reckless disregard for 
the requirements of the Act. All of the facts and circumstances 
surrounding the violation shall be taken into account in determining 
whether a violation was willful.
    (2) For purposes of this section, the employer's receipt of advice 
from a responsible official of the Wage and Hour Division to the effect 
that the conduct in question is not lawful is a relevant fact and 
circumstance when determining if the employer's conduct is knowing.
    (3) For purposes of this section, whether the employer should have 
inquired further into whether its conduct was in compliance with the 
Act and failed to make adequate further inquiry is a relevant fact and 
circumstance when determining if the employer's conduct is in reckless 
disregard of the requirements of the Act.
    18. Revise Sec.  578.4(a) to read as follows:


Sec.  578.4  Determination of penalty.

    (a) In determining the amount of penalty to be assessed for any 
repeated or willful violation of section 3(m)(2)(B), section 6, or 
section 7 of the Act, the Administrator shall consider the seriousness 
of the violations and the size of the employer's business.
* * * * *

PART 579--CHILD LABOR VIOLATIONS--CIVIL MONEY PENALTIES

0
19. The authority citation for Part 579 is revised to read as follows:

    Authority: 29 U.S.C. 203(m), (l), 211, 212, 213(c), 216; Reorg. 
Plan No. 6 of 1950, 64 Stat. 1263, 5 U.S.C. App; secs. 25, 29, 88 
Stat. 72, 76; Secretary of Labor's Order No. 01-2014 (Dec. 19, 
2014), 79 FR 77527 (Dec. 24, 2014); 28 U.S.C. 2461 Note (Federal 
Civil Penalties Inflation Adjustment Act of 1990); and Pub. L. 114-
7, 129 Stat 584.

0
20. Amend Sec.  579.1 by:
0
a. Revising paragraph (a) introductory text;
0
b. Redesignating paragraph (a)(2) as paragraph (a)(2)(i); and
0
c. Adding paragraph (a)(2)(ii).
    The revisions and additions read as follows:


Sec.  579.1  Purpose and scope.

    (a) Section 16(e), added to the Fair Labor Standards Act of 1938, 
as amended, by the Fair Labor Standards Amendments of 1974, and as 
further amended by the Fair Labor Standards Amendments of 1989, the 
Omnibus Budget Reconciliation Act of 1990, the Compactor and Balers 
Safety Standards Modernization Act of 1996, the Genetic Information 
Nondiscrimination Act of 2008, and the Consolidated Appropriations Act 
of 2018, provides for the imposition of civil money penalties in the 
following manner:
* * * * *
    (2) * * *
    (ii) Any person who repeatedly or willfully violates section 
203(m)(2)(B) of the FLSA, relating to the retention of tips, shall be 
subject to a civil penalty not to exceed $1,100 for each such 
violation.
* * * * *
0
21. Amend Sec.  579.2 by revising the definition of ``Willful 
violations'' to read as follows:


Sec.  579.2   Definitions.

* * * * *
    Willful violations under this section has several components. An 
employer's violation of section 12 or section 13(c) of the Act relating 
to child labor or any regulation issued pursuant to such sections, 
shall be deemed to be willful for purposes of this section where the 
employer knew that its conduct was prohibited by the Act or showed 
reckless disregard for the requirements of the Act. All of the facts 
and circumstances surrounding the violation shall be taken into account 
in determining whether a violation was willful. In addition, for 
purposes of this section, the employer's receipt of advice from a 
responsible official of the Wage and Hour Division to the effect that 
the conduct in question is not lawful is a relevant fact and 
circumstance when determining if the employer's conduct is knowing. For 
purposes of this section, whether the employer should have inquired 
further into whether its conduct was in compliance with the Act and 
failed to make adequate further inquiry is a relevant fact and 
circumstance when determining if the employer's conduct is in reckless 
disregard of the requirements of the Act.

PART 580--CIVIL MONEY PENALTIES--PROCEDURES FOR ASSESSING AND 
CONTESTING PENALTIES

0
22. The authority citation for part 580 continues to read as follows:

    Authority: 29 U.S.C. 9a, 203, 209, 211, 212, 213(c), 216; Reorg. 
Plan No. 6 of 1950, 64 Stat. 1263, 5 U.S.C. App; secs. 25, 29, 88 
Stat. 72, 76; Secretary's Order 01-2014 (Dec. 19, 2014), 79 FR 77527 
(Dec. 24, 2014); 5 U.S.C. 500, 503, 551, 559; 103 Stat. 938.

0
23. Revise the first sentence of Sec.  580.2 to read as follows:


Sec.  580.2  Applicability of procedures and rules.

    The procedures and rules contained in this part prescribe the 
administrative process for assessment of civil money penalties for any 
violation of the child labor provisions at section 12 of the Act and 
any regulation thereunder as set

[[Page 53979]]

forth in part 579, and for assessment of civil money penalties for any 
repeated or willful violation of the tip retention provisions of 
section 3(m)(2)(B), the minimum wage provisions of section 6, or the 
overtime provisions of section 7 of the Act or the regulations 
thereunder set forth in 29 CFR subtitle B, chapter V. * * *
0
24. Revise the first sentence of Sec.  580.3 to read as follows:


Sec.  580.3  Written notice of determination required.

    Whenever the Administrator determines that there has been a 
violation by any person of section 12 of the Act relating to child 
labor or any regulation issued under that section, or determines that 
there has been a repeated or willful violation by any person of section 
3(m)(2)(B), section 6, or section 7 of the Act, and determines that 
imposition of a civil money penalty for such violation is appropriate, 
the Administrator shall issue and serve a notice of such penalty on 
such person in person or by certified mail. * * *
0
25. Amend Sec.  580.12 by revising the first sentence of paragraph (b) 
of to read as follows:


Sec.  580.12  Decision and Order of Administrative Law Judge.

* * * * *
    (b) The decision of the Administrative Law Judge shall be limited 
to a determination of whether the respondent has committed a violation 
of section 12, or a repeated or willful violation of section 
3(m)(2)(B), section 6, or section 7 of the Act, and the appropriateness 
of the penalty assessed by the Administrator. * * *
* * * * *
0
26. Amend Sec.  580.18 by revising the third sentence in paragraph 
(b)(3) to read as follows:


Sec.  580.18  Collection and recovery of penalty.

* * * * *
    (b) * * *
    (3) * * * A willful violation of sections 3(m)(2)(B), 6, 7, or 12 
of the Act may subject the offender to the penalties provided in 
section 16(a) of the Act, enforced by the Department of Justice in 
criminal proceedings in the United States courts. * * *
    The following appendix will not appear in the Code of Federal 
Regulations.

Appendix Table 1--List of Occupations Included in the Outside-Option 
Regression Sample

------------------------------------------------------------------------
 
-------------------------------------------------------------------------
Amusement and Recreation Attendants
Bus Drivers, School or Special Client
Bus Drivers, Transit and Intercity
Cashiers
Childcare Workers
Concierges
Door-To-Door Sales Workers, News and Street Vendors, and Related Workers
Driver/Sales Workers
Flight Attendants
Funeral Attendants
Hairdressers, Hairstylists, and Cosmetologists
Home Health Aides
Hotel, Motel, and Resort Desk Clerks
Insurance Sales Agents
Library Assistants, Clerical
Maids and Housekeeping Cleaners
Manicurists and Pedicurists
Massage Therapists
Nursing Assistants
Occupational Therapy Aides
Office Clerks, General
Orderlies
Parking Lot Attendants
Parts Salespersons
Personal Care Aides
Pharmacy Aides
Pharmacy Technicians
Postal Service Clerks
Real Estate Sales Agents
Receptionists and Information Clerks
Recreation Workers
Residential Advisors
Retail Salespersons
Sales Agents, Financial Services
Sales Representatives, Wholesale and Manufacturing, Except Technical and
 Scientific Products
Secretaries and Administrative Assistants, Except Legal, Medical, and
 Executive
Social and Human Service Assistants
Statement Clerks
Stock Clerks, Sales Floor
Subway and Streetcar Operators
Taxi Drivers and Chauffeurs
Telemarketers
Telephone Operators
Tellers
Tour Guides and Escorts
Travel Agents
Travel Guides
------------------------------------------------------------------------



[[Page 53980]]

    Signed in Washington, DC this 19th day of September, 2019.
Cheryl M. Stanton,
Administrator, Wage and Hour Division.

[FR Doc. 2019-20868 Filed 10-7-19; 8:45 am]
 BILLING CODE 4510-27-P

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