Rule2021-19795
Tip Regulations Under the Fair Labor Standards Act (FLSA); Partial Withdrawal
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
September 24, 2021
Issuing agencies
Labor DepartmentWage and Hour Division
Abstract
In December 2020, the Department promulgated a final rule (2020 Tip final rule) to amend its tip regulations to address the Consolidated Appropriations Act of 2018 (CAA) amendments to section 3(m) of the Fair Labor Standards Act (FLSA), among other things. In this final rule, the Department withdraws two portions of the 2020 Tip final rule that have not yet gone into effect addressing civil money penalties (CMPs) and finalizes proposed changes to those portions of the 2020 Tip final rule. The Department also modifies regulatory provisions adopted by the 2020 Tip final rule addressing managers and supervisors.
Full Text
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<title>Federal Register, Volume 86 Issue 183 (Friday, September 24, 2021)</title>
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[Federal Register Volume 86, Number 183 (Friday, September 24, 2021)]
[Rules and Regulations]
[Pages 52973-52987]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-19795]
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DEPARTMENT OF LABOR
Wage and Hour Division
29 CFR Parts 531, 578, 579 and 580
RIN 1235-AA21
Tip Regulations Under the Fair Labor Standards Act (FLSA);
Partial Withdrawal
AGENCY: Department of Labor, Wage and Hour Division.
ACTION: Final rule.
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SUMMARY: In December 2020, the Department promulgated a final rule
(2020 Tip final rule) to amend its tip regulations to address the
Consolidated Appropriations Act of 2018 (CAA) amendments to section
3(m) of the Fair Labor Standards Act (FLSA), among other things. In
this final rule, the Department withdraws two portions of the 2020 Tip
final rule that have not yet gone into effect addressing civil money
penalties (CMPs) and finalizes proposed changes to those portions of
the 2020 Tip final rule. The Department also modifies regulatory
provisions adopted by the 2020 Tip final rule addressing managers and
supervisors.
DATES: As of November 23, 2021 Wage & Hour is withdrawing the revisions
to Sec. Sec. 578.3, 578.4, 579.1, 579.2, 580.2, 580.3, 580.12, and
580.18, published December 30, 2020, at 85 FR 86756, delayed until
April 30, 2021, on February 26, 2021, at 86 FR 11632, and delayed until
December 31, 2021, on April 29, 2021 at 86 FR 22597.
This final rule is effective November 23, 2021.
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 final rule 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 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 <a href="https://www.dol.gov//whd/contact/local-offices">https://www.dol.gov//whd/contact/local-offices</a> for a nationwide listing of WHD district and area
offices.
SUPPLEMENTARY INFORMATION:
I. Executive Summary
Section 3(m) of the FLSA allows an employer that satisfies certain
requirements to count a limited amount of the tips received by its
``tipped employees'' as a credit toward the employer's Federal minimum
wage obligation (known as a ``tip credit''). See 29 U.S.C.
203(m)(2)(A). In 2018, Congress passed the Consolidated Appropriations
Act (CAA), Public Law 115-141, Div. S., Tit. XII, sec. 1201, 132 Stat.
348, 1148-49 (2018), which amended section 3(m). The CAA added a new
statutory provision at section 3(m)(2)(B) which expressly prohibits
employers from keeping employees' tips
[[Page 52974]]
``for any purposes'' regardless of whether the employer claims a tip
credit. This includes prohibiting ``managers or supervisors'' from
keeping employees' tips. The CAA also amended section 16(e)(2) of the
FLSA to give the Department discretion to impose civil money penalties
(CMPs) of up to $1,100 when employers unlawfully keep employees' tips.
On December 30, 2020, the Department issued a final rule (2020 Tip
final rule) that updated the Department's tip regulations to implement
the CAA amendments. The 2020 Tip final rule also made other changes to
the Department's regulations, including revising the definition of
``willful'' in the Department's CMP regulations.
On March 25, 2021, the Department published a notice of proposed
rulemaking (CMP NPRM) in the Federal Register, 86 FR 15817, proposing
to withdraw and repropose two portions of the 2020 Tip final rule and
seeking comment on whether to revise another portion of the 2020 Tip
final rule. The Department proposed to withdraw and repropose: (1) The
portion of the 2020 Tip final rule incorporating the CAA's new
provisions authorizing the assessment of CMPs for violations of section
3(m)(2)(B) of the Act; and (2) the portion of its CMP regulations
addressing willful violations. The Department subsequently finalized a
delay of the effective date of these portions of the rule until
December 31, 2021 to allow the Department to review these and one other
portion of the 2020 Tips final rule. In the CMP NPRM, the Department
also sought comment on whether to revise certain aspects of the 2020
Tip final rule that apply to ``managers or supervisors'' who perform
tipped work and went into effect on April 30, 2021. Section 578.1, as
revised by the 2020 Tip final rule, at 85 FR 86756, and the effective
date of which the Department also delayed, will go into effect on
December 31, 2021.
After considering the comments, the Department has decided to adopt
the NPRM's proposed changes to the portion of the 2020 Tip final rule
incorporating the CAA's new provisions authorizing the assessment of
CMPs for violations of section 3(m)(2)(B) of the Act, and the portion
of its CMP regulations addressing willful violations. The Department
has also decided to modify portions of the 2020 Tip final rule
addressing managers and supervisors who perform tipped work.
The final rule modifies the CMP provisions for violations of
3(m)(2)(B) included in the 2020 Tip final rule by withdrawing
regulatory language in 29 CFR 578.3, 578.4, 579.1, 580.2, 580.3, and
580.12 that limited assessment of CMPs for section 3(m)(2)(B)
violations to only repeated or willful violations.\1\ This modification
upholds the Department's statutorily-granted discretion with regard to
section 3(m)(2)(B) CMPs and aligns the Department's regulations with
the statutory text. At the same time, the final rule adopts the same
rules, procedures, and amount considerations for CMPs for violation of
3(m)(2)(B) as the Department applies for other FLSA CMPs, and therefore
preserves consistent enforcement procedures that are familiar to the
Department and the public.
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\1\ The Department also finalizes as proposed the revision to
Sec. 580.18(b)(3), which corrected a technical error.
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The final rule also modifies the amendments made by the 2020 Tip
final rule to the portion of the Department's CMP regulations at 29 CFR
578.3(c)(2) and (3) and 29 CFR 579.2 addressing when a violation of
section 6 or 7 of the FLSA is willful. Specifically, the rule modifies
these regulations by clarifying that multiple circumstances, not just
the circumstance identified in Sec. Sec. 578.3(c)(2) and (3), can be
sufficient to show that a violation is willful because it is knowing or
is done with reckless disregard for whether the conduct violates the
FLSA and by reinserting language addressing the meaning of reckless
disregard. These revisions further align the Department's regulations
with applicable precedent and how the Department litigates willfulness
and provide improved guidance on circumstances where employers' conduct
may be willful.
In addition, the Department has decided to modify Sec.
531.54(c)(3) and (d), which currently provide that an employer may not
``include'' managers and supervisors in tip pools or sharing
arrangements. The final rule clarifies that while managers and
supervisors may not receive tips from mandatory tip pools or tip
sharing arrangements, managers or supervisors are not prohibited from
contributing tips to eligible employees in mandatory tip pools or
sharing arrangements. The Department is also modifying language in
Sec. 531.52, as amended by the 2020 Tip final rule, which currently
explains that it is not a violation of section 3(m)(2)(B) when a
manager or supervisor keeps tips that the manager or supervisor
receives directly from customers based on the service that the manager
or supervisor directly provides. The modified language clarifies that a
manager or supervisor may keep tips only when the tip is based on a
service the manager or supervisor directly and ``solely'' provides.
Thus, under the Department's tip regulations as revised by this final
rule, when a manager or supervisor directly receives tips for services
the manager or supervisor directly and solely provides, an employer may
allow the manager or supervisor to keep those tips, and may also
require the manager or supervisor to share some portion of the tips
with other eligible employees. The final regulations reflect the
reality that some managers or supervisors perform work for which they
receive tips, while ensuring that managers and supervisors do not keep
any portion of other employees' tips in violation of section
3(m)(2)(B).
II. Background
A. Tips and Tip Pooling
Section 6(a) of the FLSA generally requires covered employers to
pay employees at least the federal minimum wage, which is currently
$7.25 per hour. 29 U.S.C. 206(a). Section 3(m)(2)(A) allows an employer
to satisfy a portion of its minimum wage obligation to any ``tipped
employee'' by taking a partial credit toward the minimum wage based on
tips the employee receives. 29 U.S.C. 203(m)(2)(A). An employer may
take a tip credit only if, among other requirements, the tipped
employee retains all the tips he or she receives. Id. An employer
taking a tip credit is, however, allowed to require tipped employees to
participate in a mandatory, ``traditional'' tip pool \2\ in which
tipped employees share tips with other employees who ``customarily and
regularly receive tips.'' 29 U.S.C. 203(m)(2)(A). The employee must
retain sufficient tips to make up the difference between the cash wage
paid and the minimum wage. Id.
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\2\ The Department uses the term ``tip pool'' to describe any
scenario in which a tip provided by a customer is shared, in whole
or in part, between 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 transferring tips between employees. See 84 FR 53961.
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In 2011, the Department issued regulations interpreting what is now
section 3(m)(2)(A) to prohibit all covered employers--regardless of
whether the employer takes a tip credit--from using employees' tips
other than as a credit against its minimum wage obligation to the
employee, or in furtherance of valid traditional tip pools. See 76 FR
18832, 29 CFR 531.52 (2011); 29 CFR 531.54
[[Page 52975]]
(2011); 29 CFR 531.59 (2011). These regulations were consistent with
the Department's longstanding position on tipped employees, and the
Department stated that, although the statutory language 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 minimum wage, the regulations filled a gap in the statutory
scheme.\3\ See 76 FR 18841-42.
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\3\ In December 2017, the Department published an NPRM proposing
to rescind the portions of its 2011 tip regulations that imposed
restrictions on employers that do not take a tip credit against
their minimum wage obligations, in part because of litigation
involving these regulatory provisions. See 82 FR 57395. The
Department withdrew this NPRM in October 2019 after the CAA
amendments to the FLSA directly impacted the subject of the
rulemaking. See 84 FR 53960. For a more detailed history of this
rulemaking, see 86 FR 15817.
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On March 23, 2018, Congress enacted the CAA, which amended section
3(m) of the FLSA to expressly prohibit employers from keeping
employees' tips ``for any purposes,'' ``regardless of whether or not
the employer takes a tip credit.'' See Public Law 115-141, Div. S.,
Tit. XII, sec. 1201; 29 U.S.C. 203(m)(2)(B). Section 3(m)(2)(B) also
prohibits employers from ``allowing managers or supervisors to keep any
portion of employees' tips.'' Id. In addition, the CAA suspended the
portions of the Department's 2011 regulations that restricted tip
pooling when employers do not take a tip credit, by providing that
those regulations ``shall have no further force or effect until any
future action taken by [the Department of Labor].'' See Public Law 115-
141, Div. S, Tit. XII, sec. 1201(c).
The CAA also amended the penalty provisions in section 16 of the
FLSA to incorporate the new statutory prohibition on employers keeping
tips. Among other things, the CAA amended section 16(e)(2) to authorize
the assessment of a civil money penalty (CMP) for violations of section
3(m)(2)(B): ``Any person who violates section 3(m)(2)(B) shall be
subject to a civil penalty not to exceed $1,100 \4\ 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[.]''
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\4\ 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 Improvements Act of 2015 (Pub. L.
114-74, sec. 701), requires that inflationary adjustments be made
annually in these civil money penalties according to a specified
formula.
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Shortly after Congress passed the CAA, the Department issued a
Field Assistance Bulletin (FAB) concerning the Wage and Hour Division's
(WHD) enforcement of the amendments to section 3(m). See FAB No. 2018-3
(Apr. 6, 2018). The Department explained that the CAA had effectively
suspended the regulatory restrictions that prohibited an employer that
does not take a tip credit from requiring tip pooling, and that ``given
these developments, employers who pay the full FLSA minimum wage are no
longer prohibited from allowing employees who are not customarily and
regularly tipped--such as cooks and dishwashers--to participate in tip
pools.'' Id. As a result, the Department explained, such employers may
implement mandatory, ``nontraditional'' tip pools in which employees
who do not customarily and regularly receive tips, such as cooks and
dishwashers, may participate. The FAB also explained that the
amendments prohibit employers, including managers or supervisors, from
keeping tips received by their employees, regardless of whether the
employer takes a tip credit under 29 U.S.C. 203(m). In addition, the
FAB provided that, as ``an enforcement policy, WHD will use the duties
test at 29 CFR 541.100(a)(2)-(4) to determine whether an employee is a
manager or supervisor,'' and thus cannot ``keep'' another employee's
tips under section 3(m)(2)(B). Id. Finally, the FAB stated that the
Department will follow its ``normal procedures'' for FLSA CMPs when
enforcing the new tips CMP, and will assess tips CMPs only when it
determines that a violation of section 3(m)(2)(B) is repeated or
willful. Id.
B. ``Willful'' Requirement for CMPs for FLSA Minimum Wage and Overtime
Violations
Section 16(e)(2) of the FLSA provides for the assessment of CMPs
for violations of the minimum wage (section 6), overtime pay (section
7), and, with the enactment of the CAA, tip provisions (section
3(m)(2)(B)) of the FLSA. Section 16(e)(2) authorizes the Department to
assess CMPs for minimum wage and overtime pay violations only when the
violations are ``repeated[ ] or willful[ ].'' See 29 U.S.C. 216(e)(2).
The Department's regulations at 29 CFR 578.3(c) and 579.2 address what
violations are willful under the Act. These regulations are intended to
implement the Supreme Court's decision in McLaughlin v. Richland Shoe
Co., 486 U.S. 128, 133 (1988), that a willful violation occurs when the
employer knew or showed reckless disregard for whether its conduct was
prohibited by the FLSA. For many years, these regulations identified
two specific circumstances in which a violation ``shall be deemed''
willful. 29 CFR 578.3(c)(2) and (3), 579.2. Specifically, the
Department's regulations at sections 578.3(c)(2) and 579.2 provided
that ``an employer's conduct shall be deemed knowing,'' among other
situations, if the employer received prior advice from WHD that its
conduct was unlawful. Additionally, sections 578.3(c)(3) and 579.2
stated that ``an employer's conduct shall be deemed to be in reckless
disregard of the requirements of the Act,'' among other situations, if
the employer failed to inquire further into the lawfulness of its
conduct when it should have. The Department's regulations further
provided that WHD shall take into account ``[a]ll of the facts and
circumstances surrounding the violation'' when determining whether a
violation is willful. 29 CFR 578.3(c)(1), 579.2.
In Baystate Alt. Staffing, Inc. v. Herman, 163 F.3d 668, 680-81
(1st Cir. 1998), the U.S. Court of Appeals for the First Circuit
identified an ``incongruity'' between the regulatory provisions deeming
two specific circumstances to be willful, and ``the Richland Shoe
standard on which the regulation is based'' which takes into account
all of the facts and circumstances. The court urged the Department ``to
reconsider'' Sec. 578.3(c)(2) and (3) ``to ensure that they comport
with'' Richland Shoe. Id. at 681 n.16. In 2016, the U.S. Court of
Appeals for the D.C. Circuit also addressed these regulations and noted
that the Department had not altered them despite being urged to do so
by the court in Baystate. See Rhea Lana, Inc. v. Dep't of Labor, 824
F.3d 1023, 1030-31 (D.C. Cir. 2016).
C. 2020 Tip Final Rule
On October 8, 2019, the Department issued an NPRM proposing to
revise the Department's tip regulations to incorporate the CAA
amendments, among other things. See 84 FR 53956. Because the Department
was revising its CMP regulations to incorporate the new CMP provision
for section 3(m)(2)(B) violations, the Department also proposed to
address the ``willful'' provisions of the Department's existing FLSA
CMP regulations in light of the decisions of the courts of appeals in
Baystate and Rhea Lana. See id. at 53964. The Department published the
Tip final rule on December 30, 2020. See 85 FR 86756. The 2020 Tip
final rule was initially scheduled to go into effect on March 1, 2021;
however, the Department delayed the 2020 Tip final rule's effective
date to April 30, 2021, in order to give the Department additional time
to consider issues of law, policy,
[[Page 52976]]
and fact that warranted additional review. See 86 FR 11632. The
Department subsequently further delayed the effective date, until
December 31, 2021, of three portions of the 2020 Tip final rule,
including the two portions addressing CMPs. See 86 FR 22597.\5\
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\5\ The third portion of the 2020 Tip final rule, delayed until
December 31, 2021, addresses when an employee is performing both
tipped and non-tipped work (dual jobs) under the FLSA. The
Department has issued a separate notice of proposed rulemaking on
this issue. See 86 FR 32818.
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Most of the provisions of the 2020 Tip final rule went into effect
on April 30, 2021. The 2020 Tip final rule amended the Department's tip
pooling regulations at 29 CFR 531.52, 531.54, and 531.59 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, and prohibits managers and supervisors from keeping
employees' tips. The 2020 Tip final rule explained that section
3(m)(2)(B) proscribes all manner of keeping tips, and is so broad as to
prohibit an employer from exerting control over employees' tips other
than to (1) distribute tips to the employee who received them, (2)
require employees to share tips with other eligible employees, or, (3)
where the employer facilitates tip pooling by collecting and
redistributing employees' tips, to distribute tips to employees in a
tip pool. The 2020 Tip final rule further provided 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).
The 2020 Tip final rule also addressed who is a manager or
supervisor, and therefore may not keep employees' tips under section
3(m)(2)(B). The rule defined a ``manager or supervisor,'' as an
individual who meets the duties test at Sec. 541.100(a)(2)-(4) or
Sec. 541.101. As a result, a manager or supervisor for purposes of
section 3(m)(2)(B) is any employee (1) whose primary duty is managing
the enterprise or a customarily recognized department or subdivision of
the enterprise; (2) who customarily and regularly directs the work of
at least two or more other full-time employees or their equivalent; and
(3) who has the authority to hire or fire other employees, or whose
suggestions and recommendations as to the hiring or firing are given
particular weight. The definition also includes as managers or
supervisors any individuals who own at least a bona fide 20 percent
equity interest in the enterprise in which they are employed and who
are actively engaged in its management.
The final rule revised Sec. 531.54 to state that FLSA section
3(m)(2)(B) ``prohibits employers from requiring employees to share tips
with managers and supervisors,'' and to state that employers ``may not
include supervisors and managers'' in a tip pool. The rule at Sec.
531.52(b) specified, however, that such a manager or supervisor may
keep tips that he or she receives directly from customers based on the
service that he or she directly provides.
Consistent with the CAA amendments, the 2020 Tip final rule also
removed the provisions of the Department's 2011 regulations that
imposed restrictions on employers that do not take a tip credit. In
addition, the 2020 Tip final rule amended Sec. 531.54 to explicitly
state that an employer that pays tipped employees the full minimum wage
and does not take a tip credit may require tipped employees to share
tips with dishwashers, cooks, or other employees who are not employed
in an occupation in which employees customarily and regularly receive
tips, as long as that arrangement does not include any employer,
supervisor, or manager. The 2020 Tip final rule also incorporated a new
recordkeeping requirement for employers that administer such
``nontraditional'' tip pools.
These portions of the 2020 Tip final rule--addressing the CAA's
changes to tips and tip pooling in section 3(m) and related
recordkeeping requirements, including the provisions on managers and
supervisors--went into effect on April 30, 2021. 86 FR 22597.
The 2020 Tip final rule also made changes to the Department's CMP
regulations at 29 CFR parts 578, 579, and 580. The Department delayed
the effective date of these changes, and the revised provisions have
not gone into effect. See 86 FR 22597. The 2020 Tip final rule updated
the Department's FLSA CMP regulations to add references to the new CMP
for violations of 3(m)(2)(B). The 2020 Tip final rule also specified
that the Department may assess CMPs only for ``repeated or willful''
violations of section 3(m)(2)(B), although the statute does not include
this limitation. The 2020 Tip final rule also amended the Department's
CMP regulations at Sec. Sec. 578.3(c)(2) and 579.2 regarding when a
violation is knowing, and thus willful, to address the appellate court
decisions that have, for example, ``urge[d]'' the Department to
reconsider those regulations to ensure their consistency with the
Supreme Court's interpretation of the meaning of ``willful'' in the
FLSA. See 85 FR 86757. In addition, the 2020 Tip final rule deleted
Sec. 578.3(c)(3) and the corresponding language in Sec. 579.2
regarding when a violation is in reckless disregard of the FLSA. See
id. at 86774.
D. Legal Challenge to the 2020 Tip Final Rule
On January 19, 2021, before the 2020 Tip final rule went into
effect, Attorneys General from eight states and the District of
Columbia (``AG Coalition'') filed a complaint in the United States
District Court for the Eastern District of Pennsylvania, in which they
argued that the Department violated the Administrative Procedure Act in
promulgating the 2020 Tip final rule.\6\ The complaint argues that the
2020 Tip final rule made several changes to the Department's
regulations that are contrary to the FLSA and the CAA, including the
2020 Tip final rule's imposition of a willfulness requirement for CMPs
for section 3(m)(2)(B) violations, and the rule's revisions to its CMP
regulations on willful violations. It further argues that the 2020 Tip
final rule's revisions to the Department's CMP regulations on willful
violations contradict the longstanding Supreme Court precedent on
willfulness. The complaint also asserts that the 2020 Tip final rule's
provisions on managers and supervisors improperly prevent certain
lower-paid managers and supervisors from receiving tips.
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\6\ See Compl., Commonwealth of Pennsylvania et al. v. Scalia et
al., No. 2:21-cv-00258 (E.D. Pa.).
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E. The Department's Proposal
On March 25, 2021, the Department issued an NPRM proposing to
withdraw and repropose the two portions of the 2020 Tip final rule
addressing CMPs and seeking comment on whether to revise another
portion of the 2020 Tip final rule. See 86 FR 15817. Because of its
concerns that the 2020 Tip final rule inappropriately circumscribed the
Department's discretion to assess CMPs for violations of 3(m)(2)(B),
the Department proposed to withdraw that portion of the rule and adopt
regulatory language so that the Department is not limited in its
assessment of CMPs to only repeated and willful violations of section
3(m)(2)(B). At the same time, the Department reproposed language that
would, similar to the language in the 2020 Tip final rule, adopt the
same rules, procedures, and amount considerations for CMPs for
violation of 3(m)(2)(B), as the Department applies for other FLSA CMPs.
The Department also proposed to withdraw the portion of its CMP
regulations addressing
[[Page 52977]]
willful violations, and reproposed those portions with modifications to
further align the regulations with Supreme Court and appellate court
decisions and provide improved guidance on circumstances where
employers' conduct may be willful. Finally, the Department requested
comment on whether to revise the 2020 Tip final rule's language
regarding managers or supervisors, which went into effect on April 30,
2021, to better address the fact that some managers and supervisors
perform tipped work.\7\
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\7\ The Department also asked questions about how it might
improve the recordkeeping requirements in the 2020 Tip final rule in
a future rulemaking.
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The 60-day comment period for the NPRM ended on May 24, 2021. The
Department received 33 unique comments from various constituencies
including small business owners, worker advocacy groups, employer and
industry associations, non-profit organizations, law firms, attorneys
general, and other interested members of the public. All timely
received comments may be viewed on the <a href="http://regulations.gov">regulations.gov</a> website, docket
ID WHD-2019-0004. The Department has considered the timely submitted
comments addressing the proposed changes and discusses significant
comments below.
The Department also received a small number of comments on issues
that are beyond the scope of this rulemaking. These include, for
example, comments suggesting that the amount of the federal minimum
wage should be increased, and comments requesting that the Department
revise the regulatory definition of ``managers or supervisors'' that
cannot keep employees' tips to include a salary component. The
Department does not address those issues in this final rule.
III. Final Regulatory Revisions
A. Civil Money Penalties for Violations of Section 3(m)(2)(B)
The CAA amended FLSA section 16(e), which establishes CMPs for
certain violations of the Act, to add new penalty language for
employers who violate section 3(m)(2)(B) by ``keep[ing]'' employees'
tips. 29 U.S.C. 216(e)(2). This provision states that: ``Any person who
violates section 3(m)(2)(B) shall be subject to a civil penalty not to
exceed $1,100 \8\ 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 . . . .'' Unlike the statutory
provisions in section 16(e)(2) setting forth CMPs for minimum wage and
overtime violations, the statute does not limit the assessment of CMPs
to repeated or willful violations of section 3(m)(2)(B). Instead, the
penalty language subjects persons who violate 3(m)(2)(B) to civil
penalties ``as the Secretary determines appropriate.''
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\8\ The CMP amount in the 2020 Tip final rule was adjusted to
$1,162 for inflation, as required by 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
Improvements Act of 2015 (Pub. L. 114-74, sec. 701).
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Although the 2020 Tip final rule acknowledged the Department's
discretion to assess CMPs for any violation of section 3(m)(2)(B), the
2020 Tip final rule limited this discretion by restricting CMPs to only
repeated or willful violations of section 3(m)(2)(B). In the CMP NPRM,
the Department proposed to withdraw the 2020 Tip final rule CMP
provisions for violations of 3(m)(2)(B) and adopt regulatory language
in 29 CFR 578.3, 578.4, 579.1, 580.2, 580.3, and 580.12 that retains
the full discretion granted to the Secretary to assess CMPs for any
violation of section 3(m)(2)(B). The Department also proposed to adopt
the same rules, procedures, and amount considerations for CMP
assessments applicable to violation of section 3(m)(2)(B) as the
Department applies to other FLSA CMP assessments.\9\ These procedures
are found in Sec. Sec. 578.3, 578.4, 579.1, 580.2, 580.3, and 580.12.
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\9\ In the 2020 Tip final rule, the Department similarly adopted
the same rules, procedures, and considerations applicable to CMP
assessments for violations of section 3(m)(2)(B) as the Department
applies to other FLSA CMP assessments. As explained above, the
Department proposed to withdraw those provisions, which have not
gone into effect.
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Many commenters, such as the National Partnership for Women &
Families and the Employee Rights Center, supported the proposal,
stating that it ``aligns with the plain language of the FLSA and
Congress's legislative intent.'' Several commenters that supported the
proposal noted that it preserved the full discretion the statute grants
to the Department to assess CMPs for violations of section 3(m)(2)(B).
The AG Coalition noted that by including regulatory language in the
proposal that differentiates between violations of section 3(m)(2)(B)
and repeated or willful minimum wage and overtime violations, the
``Department retains its discretion to levy CMPs against employers that
violate the FLSA, as intended by Congress and limited only by the
statute.'' Texas RioGrande Legal Aid stated that the discretion
permitted by the proposal would mean that ``DOL investigators will have
more tools at their disposal to help workers'' and argued that the
Department should not ``hamper its own investigations'' by restricting
such discretion.
Other commenters opposed the proposal. The National Restaurant
Association (NRA) stated that the Department should instead retain the
2020 Tip final rule requirement that the Department would only assess
CMPs for repeated and willful violations of section 3(m)(2)(B), noting
that the Department had previously explained that this limitation was
``consistent with how the Department enforces other FLSA wage
violations.'' The NRA also argued that making such a differentiation
between violations of sections 6 and 7 and violations of section
3(m)(2)(B) will ``destroy the public trust.'' The Department disagrees.
The statute itself distinguishes between violations of sections 6 and 7
and violations of section 3(m)(2)(B) with regard to the assessment of
CMPs. Thus, removing the 2020 Tip final rule's repeated or willful
requirement for section 3(m)(2)(B) CMPs is consistent with the FLSA
itself. Moreover, the Department's enforcement of different sections of
the FLSA currently varies depending on whether the statutory text
limits CMPs to repeated or willful violations or not. The child labor
provisions of the FLSA--like the statutory text for violations of
section 3(m)(2)(B)--do not limit CMPs to repeated or willful
violations. Compare 29 U.S.C. 216(e)(1)(A)(i) (``Any person who
violates the provisions of sections 212 or 213(c) of this title,
relating to child labor . . . shall be subject to a civil penalty . . .
for each employee who was the subject of such a violation'') with 29
U.S.C. 216(e)(1)(A)(ii) (CMPs for violations that caused the death or
serious injury of a child employee ``may be doubled where the violation
is a repeated or willful violation''). The Department's final rule will
bring the assessment of section 3(m)(2)(B) CMPs into harmony with the
statutory text, as is currently the case with the child labor CMP
provisions. Furthermore, this final rule adopts the same rules,
procedures, and amount considerations for determining section
3(m)(2)(B) CMPs that the Department uses to determine CMPs for other
FLSA wage violations. Therefore, the final rule will preserve
consistent enforcement procedures familiar to the Department and the
public.
The National Federation of Independent Businesses (NFIB) also
opposed the proposal. Recognizing that the statute ``vests wide
discretion in the Secretary of Labor,'' NFIB asked the Department to
keep the ``repeated or
[[Page 52978]]
willful'' requirement from the 2020 Tip final rule for small businesses
that violate section 3(m)(2)(B). The Department declines to adopt this
recommendation, because it would not be consistent with its enforcement
in other areas to impose the requirement that CMPs be assessed against
small businesses only when the violations committed are repeated and
willful. However, NFIB also requested that the Department preserve the
requirement that it consider the seriousness of the violation and the
size of the employer's business when assessing CMPs for section
3(m)(2)(B). The Department's final rule does preserve that requirement,
because, as explained above, it adopts the same longstanding rules and
procedures that the Department applies for other FLSA CMPs for the
assessment of section 3(m)(2)(B) CMPs. This includes the obligation,
required by 29 U.S.C. 216(e)(3), to consider the size of the employer's
business when determining the amount of any civil money penalty.
After review of the comments, the Department agrees that it was
inappropriate to limit the statutorily-granted discretion by regulation
and that instead the regulations should reflect the statutory text.
Therefore, the Department finalizes the revisions to 29 CFR 578.3,
578.4, 579.1, 580.2, 580.3, and 580.12 that eliminate the references
limiting CMP assessments for violations of section 3(m)(2)(B) to
repeated and willful violations as proposed. The Department also
finalizes as proposed the other revisions to Sec. Sec. 578.3, 578.4,
579.1, 580.2, 580.3, and 580.12 which amend those provisions to adopt
the same rules, procedures, and amount considerations for tip CMP
assessments as the Department applies for other FLSA CMP assessments,
which will promote the goals of consistency and familiarity that the
Department emphasized in the 2020 Tip final rule.
The Department also finalizes as proposed the revision to Sec.
580.18(b)(3), which eliminates the reference in that regulation to
willful violations of section 3(m)(2)(B), which was a technical error
in the 2020 Tip final rule, since the CAA Amendments did not provide
for criminal penalties for violations of section 3(m)(2)(B).
B. Civil Money Penalties for Willful Violations of the Fair Labor
Standards Act
1. Summary of Proposed Changes to Portions of CMP Regulations
Addressing When a Violation of Section 6 or Section 7 of the FLSA Is
Willful
In addition to revising its regulations to preserve the
Department's full discretion to assess CMPs for violations of section
3(m)(2)(B), the Department proposed to further modify Sec. Sec.
578.3(c) and 579.2 of its CMP regulations, which address when a
violation of the FLSA is ``willful,'' and thus subject to a CMP under
section 16(e). 86 FR 15822. Specifically, the Department proposed to
withdraw and repropose with a modification the language at Sec. Sec.
578.3(c)(2) and 579.2 addressing when an employer's violation is
knowing, and further proposed to reinsert language at Sec. Sec.
578.3(c)(3) and 579.2 to provide guidance regarding the meaning of
reckless disregard.
As previously explained,\10\ the Department's definition of a
``willful'' violation in Sec. Sec. 578.3(c) and 579.2 is based on
McLaughlin v. Richland Shoe Co., 486 U.S. 128, 133 (1988), which held
that a violation is willful if the employer ``knew or showed reckless
disregard'' for whether its conduct was prohibited by the FLSA. The
Department incorporated this holding into Sec. 578.3(c)(1) of its CMP
regulations when they were first promulgated in 1992, and Sec.
578.3(c)(1) further states that ``[a]ll of the facts and circumstances
surrounding the violation shall be taken into account in determining
whether a violation was willful.'' 29 CFR 578.3(c)(1); 57 FR 49130
(1992). The 2020 Tip final rule made no changes to this language in
Sec. 578.3(c)(1), and the Department did not propose any in the CMP
NPRM. See 86 FR 15822.
---------------------------------------------------------------------------
\10\ See supra Section II.B.
---------------------------------------------------------------------------
The Department's 1992 CMP regulations identified two specific
circumstances in which a violation ``shall be deemed'' knowing and in
reckless disregard, respectively, and thus willful: Prior advice from
WHD to the employer that its conduct was unlawful, and the employer's
failure to adequately inquire further into the lawfulness of its
conduct when it should have. 57 FR 49130; 29 CFR 578.3(c)(2)-(3). As
the Department noted in the NPRM for the 2020 Tip final rule, two
appellate courts identified an inconsistency between the 1992
regulations' language, on the one hand, that conduct ``shall be deemed
knowing'' if the employer was previously advised by WHD that the
conduct was unlawful, and its language, on the other hand, derived from
Richland Shoe, that WHD shall take into account ``[a]ll of the facts
and circumstances surrounding the violation'' when determining
willfulness. See 84 FR 53964-65 (discussing Rhea Lana, Inc. v. Dep't of
Labor, 824 F.3d 1023, 1030-32 (D.C. Cir. 2016), and Baystate Alt.
Staffing, Inc. v. Herman, 163 F.3d 668, 680-81 (1st Cir. 1998)). The
Department also explained in the NPRM for the 2020 Tip final rule that
it does evaluate all of the facts and circumstances surrounding a
violation when litigating willfulness, notwithstanding the regulatory
language that appeared to be to the contrary. See 84 FR 53965.
Accordingly, the NPRM for the 2020 Tip final rule proposed to revise
Sec. Sec. 578.3(c)(2)-(3) and 579.2 to state that an employer's
receipt of advice from WHD that its conduct is unlawful and its failure
to inquire further regarding the legality of its conduct are each ``a
relevant fact and circumstance'' in determining willfulness. See 84 FR
53978.
After considering comments received, the 2020 Tip final rule
revised Sec. 578.3(c)(2) and the corresponding language in Sec. 579.2
to state that, in considering all of the facts and circumstances, an
employer's receipt of advice from WHD that its conduct was unlawful
``can be sufficient'' to show that the violation is knowing but is
``not automatically dispositive.'' See 85 FR 86774. In addition, the
2020 Tip final rule deleted Sec. 578.3(c)(3) and the corresponding
language in Sec. 579.2 addressing the meaning of reckless disregard.
The 2020 Tip final rule explained that, unlike Sec. 578.3(c)(2), Sec.
578.3(c)(3) does not just identify a fact and address how that fact
impacts a willfulness finding; instead, it addresses a scenario--in
which an employer should have inquired further into the lawfulness of
its conduct but did not do so adequately--that is ``tantamount to
reckless disregard.'' See 85 FR 86774 (citing Davila v. Menendez, 717
F.3d 1179, 1185 (11th Cir. 2013)). According to the 2020 Tip final
rule, revising Sec. 578.3(c)(3) in the same manner as Sec.
578.3(c)(2) thus ``did not seem helpful.'' Id.
In the CMP NPRM, the Department stated that it believed a
modification to Sec. 578.3(c)(2) and the corresponding language in
section Sec. 579.2 regarding knowing violations was necessary to
clarify that other circumstances, not just the circumstance identified
in these regulations, can be sufficient to show that a violation is
knowing. Accordingly, the Department proposed to withdraw and repropose
Sec. 578.3(c)(2)
[[Page 52979]]
and the corresponding language in Sec. 579.2 to state that ``the
employer's receipt of advice from a responsible [WHD] official . . . to
the effect that the conduct in question is not lawful, among other
situations, can be sufficient to show that the employer's conduct is
knowing, but is not automatically dispositive.'' 86 FR 15823. The
Department also explained in the CMP NPRM that, although the preamble
to the 2020 Tip final rule stated that an employer's failure to make
adequate further inquiry into the lawfulness of its conduct when it
should have done so is ``tantamount to reckless disregard,'' the rule's
deletion of Sec. 578.3(c)(3) and the corresponding language in Sec.
579.2 could be read as suggesting the opposite. See id. Accordingly,
the Department proposed to reinsert language in Sec. Sec. 578.3(c)(3)
and 579.2 addressing reckless disregard--specifically, that ``reckless
disregard of the requirements of the Act means, among other situations,
that the employer should have inquired further into whether its conduct
was in compliance with the Act and failed to make adequate further
inquiry.'' 86 FR 15823.
2. Comments Regarding Proposed Willfulness Changes
Multiple commenters supported the willfulness changes proposed in
the CMP NPRM. The AG Coalition stated that the proposed revisions to
Sec. Sec. 578.3(c)(2) and (3) and 579.2 would address their concerns
with the 2020 Tip final rule's amendments to these provisions, which
``[left] the regulated community without guidance in determining when
reckless conduct is willful'' (among other concerns). The AG Coalition
supported the Department's proposal to ``clarif[y] that there may be
other situations'' where a violation can be found knowing, in addition
to when an employer has received advice from WHD that its conduct is
unlawful. The AG Coalition also supported the Department's proposal to
reinstate regulatory text regarding the meaning of reckless disregard
in Sec. Sec. 578.3(c)(3) and 579.2, including the Department's
proposal that reckless disregard may be established in situations other
than where ``the employer should have inquired further but did not do
so adequately.'' \11\ The Center for Workplace Compliance (CWC) stated
that it was ``pleased to support'' the Department's proposal to retain
language in Sec. Sec. 578.3(c)(2) and 579.2 stating that an employer's
receipt of advice from WHD that its conduct was unlawful is ``not
automatically dispositive'' of willfulness. According to CWC, this
language ``recognizes that employers should not be automatically
subject to [CMPs] where legitimate questions exist concerning . . .
coverage.''
---------------------------------------------------------------------------
\11\ The AG Coalition also stated that ``section 578.3(c)(2)
could be strengthened by re-inserting the `shall be deemed' language
while maintaining consistency with Richland Shoe, though the
proposed revision is much improved from the 2020 Tip Rule.''
---------------------------------------------------------------------------
Commenters representing employees generally supported the proposed
willfulness changes in part. Commenters such as Restaurant
Opportunities Centers United (ROC United), the North Carolina Justice
Center (NCJC), and the National Employment Lawyers Association (NELA)
supported the Department's affirmation in the CMP NPRM that the two
scenarios identified in its regulations--an employer's receipt of
advice from WHD that its conduct was unlawful and an employer's failure
to adequately inquire into the lawfulness of its conduct when it should
have done so--``can be sufficient'' to establish willfulness. See also
Texas RioGrande Legal Aid (TRLA) (``TRLA appreciate[s] the DOL's
improvement between the prior notice of proposed rulemaking and this
reproposal.''). These commenters noted that they understood the
Department's concern that the 1992 versions of Sec. Sec. 578.3(c)(2)
and (3) and 579.2 ``may be in tension'' with Richland Shoe and with
Sec. 578.3(c)(1)'s requirement that all facts and circumstances be
considered.\12\ However, to give the scenarios identified in the
regulations ``the proper weight,'' commenters representing employees
recommended that the Department ``establish a rebuttable presumption
that a violation is knowing when an employer received notice from WHD
that its conduct was unlawful, and that a violation is in reckless
disregard of the law if the employer failed to make adequate inquiry
into whether its conduct was compliant.'' See, e.g., ROC United; NCJC;
NELA; NELP; TRLA.
---------------------------------------------------------------------------
\12\ In contrast, NELP stated that ``the longstanding regulatory
language'' in Sec. Sec. 578.3(c)(2) and (3) and 579.2 stating that
violations ``shall be deemed'' willful in certain scenarios is ``not
in tension with language elsewhere in FLSA regulations and in
precedent requiring that `all of the facts and circumstances' be
considered in determining whether a violation was willful.''
---------------------------------------------------------------------------
The NRA and NFIB urged the Department to retain the 2020 Tip final
rule's revisions to Sec. Sec. 578.3(c)(2) and (3) and 579.2. The NRA
stated that it supported the 2020 Tip final rule's willfulness changes
``for the reasons that the Department already outlined'' in the 2020
Tip final rule before the Department's ``sudden'' change of opinion in
the CMP NPRM. The NFIB supported the 2020 Tip final rule's willfulness
changes over those proposed in the CMP NPRM as well, characterizing the
2020 revisions as ``reasonable and practical.'' In the alternative,
NFIB requested that the Department retain the 2020 Tip final rule's
willfulness changes for ``small and independent businesses.''
3. Discussion of Comments and Rationale for Finalizing Proposed Changes
to Portions of CMP Regulations Addressing When a Violation Is Willful
After considering all the comments, the Department is finalizing
the revisions to Sec. Sec. 578.3(c)(2) and (c)(3) and 579.2 as
proposed.
The Department continues to believe that revisions to its 1992
regulations regarding when a violation of the FLSA is willful are
necessary for the reasons identified in the 2020 Tip final rule: To
resolve the tensions identified by appellate courts within Sec.
578.3(c) and between Sec. 578.3(c) and Richland Shoe and to align
these provisions more closely with how the Department actually
litigates. Accordingly, as proposed in the CMP NPRM, the Department is
retaining the language in Sec. 578.3(c)(2) and the corresponding
language in Sec. 579.2 that an employer's receipt of advice from WHD
that its conduct is unlawful is ``not automatically dispositive'' of a
knowing violation. By clarifying that an employer's receipt of advice
from WHD that its conduct is unlawful is not automatically dispositive,
the Department also addresses the concern raised by CWC that such
evidence should not ``automatically subject'' an employer to CMPs where
the employer has a legitimate disagreement with WHD concerning the
FLSA's coverage.
At the same time, this rule's revisions to Sec. Sec. 578.3(c)(2)
and 579.2 affirm that an employer's receipt of advice from WHD that its
conduct is unlawful ``can be sufficient'' to show that a violation is
knowing and thus willful. In accordance with Sec. 578.3(c)(1), all
facts and circumstances surrounding the violation must be taken into
account when determining willfulness. However, an employer's receipt of
advice from WHD that its conduct is unlawful is a significant, and may
be a determining, factor regarding that employer's willfulness.
By finalizing the proposed changes to Sec. 578.2(c)(2) and the
corresponding language in Sec. 579.2, this rule also makes explicit,
consistent with considering all of the facts and circumstances, that
[[Page 52980]]
evidence other than an employer's receipt of advice from WHD that its
conduct was unlawful can be sufficient to show that a violation was
knowing. As noted above, the AG Coalition urged the Department to
finalize this proposed change. This rule thus makes clear that other
circumstances, not just the circumstance identified in Sec.
578.3(c)(2), can be sufficient to show that a violation is knowing.
This rule also restores regulatory text regarding the meaning of
willfulness by reinserting language regarding reckless disregard in
Sec. Sec. 578.3(c)(3) and 579.2. The Department agrees with the AG
Coalition and advocacy groups representing employees who argued that
simply deleting Sec. 578.3(c)(3) and the corresponding language in
Sec. 579.2 may have led to confusion and uncertainty. The revised
language in Sec. Sec. 578.3(c)(3) and 579.2 regarding reckless
disregard aligns the Department's regulations with appellate court
precedent, pursuant to which an employer's failure to adequately
inquire into whether it violated the FLSA when it should have done so
is considered tantamount to reckless disregard. See Davila v. Menendez,
717 F.3d 1179, 1184 (11th Cir. 2013). The revisions to Sec.
578.3(c)(3) and the corresponding language in Sec. 579.2 also make
clear that reckless disregard can be proven by evidence other than that
the employer should have inquired further but did not do so adequately.
When determining reckless disregard, the Department must still consider
all of the relevant facts and circumstances. See Sec. 578.3(c)(1).
Accordingly, under revised Sec. Sec. 578.3(c)(3) and 579.2, an
employer is in reckless disregard of the FLSA when, among other
situations, the Department determines based on all of the facts and
circumstances that the employer should have inquired into whether its
conduct was lawful but failed to do so adequately.
The Department appreciates the concern of commenters representing
employees that the circumstances identified in Sec. Sec. 578.3(c)(2)
and (3) be accorded appropriate weight in the willfulness analysis.
However, the Department declines to incorporate into its regulations a
rebuttable presumption that a violation of the FLSA is willful in these
scenarios. Any rebuttable presumption would need to be carefully
calibrated to ensure that it is consistent with Sec. 578.3(c)(1)'s
requirement, derived from Richland Shoe, that all facts and
circumstances be considered in determining willfulness.\13\
Incorporating a rebuttable presumption into these provisions would also
create administrative difficulties, as it would require a change in how
WHD assesses CMPs and how the Department litigates CMP proceedings.
---------------------------------------------------------------------------
\13\ Additionally, courts have made clear that the burden of
proving that an employer acted willfully ultimately falls in the
employee. See, e.g., Davila, 717 F.3d at 1184-85.
---------------------------------------------------------------------------
Moreover, the Department does not agree that incorporating a
rebuttable presumption of willfulness into its CMP regulations would
accord greater weight to the scenarios identified in Sec. Sec.
578.3(c)(2) and (3) than is accorded by its revisions to these
provisions. As discussed above, under the proposed revisions--which
this rule finalizes--an employer's receipt of advice from WHD that its
conduct was unlawful ``can be sufficient'' to establish a knowing
violation; thus, the revisions accord significant, and possibly
determinative, weight to this fact in the willfulness analysis.
Additionally, as noted above, an employer is in reckless disregard of
the FLSA when, based on all of the facts and circumstances, it should
have inquired into the lawfulness of its conduct but failed to do so
adequately. Since any rebuttable presumption would need to be carefully
calibrated to avoid conflicting with the requirement that all facts and
circumstances be considered and would necessitate a change in how the
Department administers CMPs and litigates willfulness, and given that
incorporating a rebuttable presumption into the regulations would not
necessarily accord greater weight to the scenarios in Sec. Sec.
578.3(c)(2) and (3) and 579.2, the Department declines to incorporate a
rebuttable presumption of willfulness into its CMP regulations.
Finally, the Department declines to retain the 2020 Tip final
rule's willfulness revisions, as urged by the NRA and NFIB. Upon review
of the comments and for the reasons discussed above, the Department
believes that the proposed revisions to Sec. Sec. 578.3(c)(2) and (3)
and 579.2 make needed modifications to its CMP regulations.\14\ The
Department also declines NFIB's suggestion to preserve the 2020 Tip
final rule's willfulness revisions for smaller employers. Consistent
with the text of section 16(e)(2) of the FLSA, which provides that
``any person who repeatedly or willfully violates'' section 6 or 7 of
the FLSA ``shall be subject to a civil penalty,'' 29 U.S.C. 216(e)(2),
the Department has always maintained a uniform standard of willfulness
applicable to all persons who violate the FLSA. See 57 FR 49128.
Adopting different standards of willfulness for different sizes of
employers would present administrative difficulties for WHD.
---------------------------------------------------------------------------
\14\ The Department notes that it disagrees with the NRA's
assertion that the proposed willfulness changes represent a
``sudden'' change in position from the 2020 Tip final rule. Although
the proposed revisions make important and needed modifications to
Sec. Sec. 578.3(c)(2) and (3) and 579.2, these revisions clearly
build upon rather than depart from the fundamental reasoning behind
and objectives of the 2020 Tip final rule's willfulness revisions:
To better align the Department's CMP regulations with appellate
court precedent and with how the Department actually litigates
willfulness.
---------------------------------------------------------------------------
Accordingly, the final rule adopts the revisions to Sec. Sec.
578.3(c)(2) and (c)(3) and 579.2 as proposed.
C. Managers and Supervisors Under 3(m)(2)(B)
Section 3(m)(2)(B) prohibits employers, regardless of whether they
take a tip credit, from keeping tips received by employees, ``including
allowing managers or supervisors to keep any portion of employees'
tips.'' 29 U.S.C. 203(m)(2)(B). Section 531.52(b)(2), as amended by the
2020 Tip final rule, reiterates the prohibition in section 3(m)(2)(B)
that ``[a]n 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.'' 29 CFR 531.52(b)(2). However, Sec. 531.52(b)(2)
clarifies that an employer does not violate 3(m)(2)(B) when a manager
or supervisor keeps tips that ``he or she receives directly from
customers based on the service that he or she directly provides.'' The
Department explained in the 2020 Tip final rule that section 3(m)(2)(B)
does not bar managers and supervisors from keeping their own tips but
only prohibits managers and supervisors from keeping ``tips received by
employees other than themselves.'' See 85 FR 86764. Thus, for example,
a salon manager may ``keep tips left by customers whose hair she
personally styles,'' without violating the statute. Id.
In the CMP NPRM, the Department observed that some managers and
supervisors may directly engage in a significant amount of tipped work
for which they earn tips, and requested comments on whether it could
make additional adjustments to the regulations to better address these
employees without running afoul of section 3(m)(2)(B)'s prohibition of
these individuals ``keeping'' other employees' tips. The Department
asked whether language in the current regulation is sufficient to allow
managers and supervisors to retain the tips they earn from customer
service work. The Department also requested comment on whether it
should modify the regulation to clarify that managers and supervisors
can contribute tips to mandatory tip
[[Page 52981]]
pools. In addition, the Department asked general questions about
managers and supervisors and tipped work, including: (1) How commonly
managers and supervisors perform tipped work; (2) whether, prior to the
CAA, managers and supervisors who perform tipped work typically
participated in tip pools or tip sharing arrangements; and (3) whether
it is common for tips provided for work performed by a manager or
supervisor to be commingled with other employees' tips.
1. Managers and Supervisors May Keep Tips They Directly Receive for
Service They Directly and Solely Provide
Commenters--representing both employers and employees--generally
noted that it is not unusual for managers and supervisors in service
industries to perform tipped work. See Werman Salas; NRA. NRA stated
that, in the restaurant industry, managers and supervisors ``take
orders,'' and ``serve food . . . on [a] daily basis throughout the
country.'' NRA also explained that, in ``some circumstances,'' a
``manager might be the only individual serving tables because it is a
slow day or because it is an event outside the restaurant location and
only supervisors are managing it.'' One brewery employer noted that its
bar manager has three jobs codes--manager, bartender, and brewery
assistant--and that ``there are many times'' when the manager ``must
change roles and work under a bartender job code for 4 hours of a 6
hour shift.'' The commenter further noted that even in large
restaurants, ``[i]f a bartender doesn't show up for work,'' the manager
may be ``forced to stop managing and become the bartender for a
night.'' Commenters also indicated that managers and supervisors are
performing more tipped work as a result of the COVID-19 pandemic. The
Employment Rights Center commented that, as a result of the pandemic, a
manager might, for example, be more likely to ``serve an unexpected in-
person table, while a server is staffing a takeout counter or preparing
to-go orders.'' ROC United stated that managers and supervisors at
full-service restaurants ``have performed tipped work on a daily and
hourly basis over the last year.''
Nearly all commenters supported regulatory language allowing
managers and supervisors who receive their own tips for services they
directly provide to keep those tips. See, e.g., Economic Policy
Institute (EPI); Employee Rights Center; Public Justice Center;
Kentucky Equal Justice Center; National Employment Lawyers Association;
National Employment Law Project; NFIB; National Partnership for Women
and Families; National Women's Law Center; ROC United; and Worker
Justice Center of New York. NFIB stated that this policy, ``reasonably
recognizes situations in which a manager or supervisor provides
leadership services with respect to other employees, but also furnishes
services to customers on the same basis as those employees, as happens
frequently, for example, in the restaurant business.'' One individual
commenter, however, argued that managers and supervisors should not be
able to keep the tips that they receive for their direct service, as
this would incentivize managers or supervisors to ``use less staff, so
they `have to' lend a hand.''
Commenters also described instances in which tips provided for work
performed by a manager or supervisor may be commingled with tips
provided to other tipped employees. Werman Salas commented that
commingling frequently occurs in two scenarios: When a manager or
supervisor ``performs tipped work alongside other tipped employees and
there is a common tip jar,'' or when the manager or supervisor assists
with tipped work, but ``is not solely responsible for the service that
results in the gratuity being given by the customer.'' For example a
manager or supervisor might run food to a table, but the ``server is
otherwise responsible for the balance of the guest experience.'' Id.
The Department requested comments on whether it was possible to
modify the regulations so that a manager or supervisor could retain
tips in commingling scenarios without allowing the manager or
supervisor to keep other employees' tips in violation of 3(m)(2)(B).
Commenters who responded to this question generally stated that such an
approach was not feasible because it will often be impossible to
determine the amount of the tip ``earned'' by the manager or
supervisor. See Werman Salas; NWLC. For example, NWLC stated that when
a customer leaves a single tip for a service experience in which both a
manager or supervisor and a non-managerial tipped employee participate,
it is not possible to attribute a portion of the tip to the manager or
supervisor. Rather than revise the language in Sec. 531.52(b)(2) to
allow a manager or supervisor to keep commingled tips, these commenters
proposed revising the regulation to ``state the opposite'' and provide
that a manager or supervisor may keep a tip he or she directly receives
for service he or she directly provides only if the tip is not
commingled with and is segregable from other employees' tips. Werman
Salas Law Firm; see also NWLC. NRA, on the other hand, agreed generally
that ``tips to managers and supervisors should not be `commingled' with
tips provided to tipped employees,'' but suggested that managers and
supervisors could pool tips among themselves. According to the NRA,
``no tipped employee shares tips with a supervisor or manager'' in
these scenarios.
Having carefully considered the comments, the Department has
decided to slightly modify the statement in Sec. 531.52(b)(2) that a
manager or supervisor may keep tips that ``he or she receives directly
from customers based on the service that he or she directly provides.''
In this final rule, the Department amends the regulatory language to
clarify that a manager or supervisor may keep tips only for services
the manager or supervisor directly and ``solely'' provides.
Particularly given comments highlighting the prevalence of tipped work
among managers and supervisors in the service industry, it is important
that the Department's regulations continue to reflect the fact that
section 3(m)(2)(B) does not prohibit managers and supervisors who are
tipped employees from keeping tips that are theirs alone. Moreover, as
one individual commenter noted, if managers and supervisor cannot keep
such tips, it is unclear who would be entitled to them.
However, by clarifying that a manager or supervisor may keep tips
only for services the manager or supervisor directly and ``solely''
provides, the modified regulatory text will prevent managers and
supervisors from keeping tips when it is not possible to attribute the
tip solely to the manager or supervisor. The modified regulatory text
thus helps to ensure that managers and supervisors do not keep ``any
portion'' of other employees' tips, see 29 U.S.C. 203(m)(2)(B). With
respect to commenters' suggestion that the Department specify that such
tips must be segregable from or not commingled with other employees'
tips, the Department believes that the clarified language of Sec.
531.52(b)(2) makes clear that a manager or supervisor may keep only
those tips that the manager or supervisor receives directly for a
service that the manager or supervisor directly and solely provides.
Thus, a manager who serves her own tables may keep her own tips, for
example. However, when a manager simply runs food to a table for which
a server is otherwise responsible, she may not keep any portion of the
tip the customer leaves for the server since that tip was not earned
solely by the manager or supervisor.
[[Page 52982]]
The Department also declines to amend the regulations to allow
mandatory tip pools comprised only of managers and supervisors, as
proposed by NRA. The statute does not permit such arrangements:
Managers and supervisors are employees under the FLSA, see 29 U.S.C.
203(e)(1), and 3(m)(2)(B) prohibits employers from allowing managers or
supervisors to keep other ``employees' tips.'' \15\ This includes other
managers and supervisors' tips. Moreover, to permit scenarios in which
a higher-ranking manager or supervisor--for example, the general
manager of a restaurant--could keep tips from a lower-ranking manager
or supervisor--for example, a shift supervisor who also tends bar--
would undermine the CAA's mandate of preventing employers and their
agents from keeping employees' tips.
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\15\ A manager or supervisor who performs tipped work may
satisfy the definition of a ``tipped'' employee under section 3(t)
because they are engaged in an occupation in which they
``customarily and regularly receive[ ] more than $30 a month in
tips.'' See 29 U.S.C. 203(t). Under those circumstances, an employer
may take a tip credit for the hours worked in the tipped occupation
pursuant to section 3(m)(2)(A), assuming that all other requirements
for the tip credit are satisfied. If the employer does so, it may
not require the tipped manager to contribute tips to a
nontraditional tip pool, and may only require the tipped manager or
supervisor to contribute their tips to a traditional tip pool
comprised of other tipped employees. Regardless of whether an
employee is engaged in a tipped occupation, however, if the employee
satisfies the duties test for managers and supervisors, including
the requirement that management is the employee's primary duty, the
employee cannot receive other employees' tips from a mandatory tip
pool or tip sharing arrangement pursuant to section 3(m)(2)(B).
Thus, even if a manager or supervisor is engaged as a tipped
employee under section 3(t) and can be paid with a tip credit and
participate in a tip pool under section 3(m)(2)(A), they may also
still qualify as manager or supervisor under 3(m)(2)(B), in which
case they would be prohibited from receiving tips from the tip pool,
and from otherwise keeping other employees' tips.
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2. Managers and Supervisors May Contribute Tips To, But Not Receive
Tips From, Tip Pools
In this final rule, the Department also amends Sec. Sec.
531.54(c)(3) and 531.54(d) to clarify that an employer may not allow a
manager or supervisor to receive tips from employer-mandated tip pools
or tip sharing arrangements, but may require a manager and supervisor
to contribute tips to such an arrangement. As discussed above, section
3(m)(2)(B) prohibits managers and supervisors from keeping any portion
of other employees' tips. See also Sec. 531.52(b)(2). Sections
531.54(c)(3) and (d), as amended by the 2020 Tip final rule, implement
this prohibition by barring employers from ``includ[ing]'' such
managers and supervisors in mandatory tip pools. The preamble
accompanying the 2020 Tip final rule interpreted Sec. 531.54(c)(3) and
(d) to prohibit employers from requiring managers and supervisors to
contribute, as well as from allowing them to receive, tips from
mandatory tip pooling or sharing arrangements. 85 FR 86764. As a result
of the Department's interpretation in the 2020 Tip final rule, a
restaurant employer, for example, can require non-managerial servers to
give a portion of their tips to the bussers, but is prohibited from
requiring a manager who also serves tables to similarly contribute. Or
a salon employer may require non-supervisory stylists to share a
portion of tips with the shampoo assistant, but cannot require a
stylist who is also a supervisor to do the same. In the CMP NPRM, the
Department therefore sought comment on whether it should adjust its
regulations to allow managers and supervisors, like other employees who
receive tips, to contribute tips to eligible employees in mandatory tip
pools or tip sharing arrangements, so long as: (1) They do not receive
any tips from a pool; or (2) alternatively, so long as they receive out
of the tip pool no more than what they contributed.
Commenters overwhelmingly supported a change to allow employers to
require managers and supervisors, like other employees who receive
tips, to contribute to tip pooling or sharing arrangements. See, e.g.,
EPI; Employee Rights Center; Public Justice Center; ROC United; North
Carolina Justice Center; Workplace Justice Project; National Employment
Lawyers Association; National Employment Law Project; Kentucky Equal
Justice Center; National Partnership for Women and Families; National
Women's Law Center; Worker Justice Center of New York; NRA.\16\ NRA
noted that mandatory tip sharing arrangements in which managers or
supervisors who have ``responsibility for serving tables'' share a
portion of their tips with bartenders, bussers, or other employees who
help them, are common in the restaurant industry. Commenters also
stated that allowing managers and supervisors who earn tips to
contribute them to eligible employees in mandatory tip pools would
benefit non-managerial employees. See Werman Salas; NRA. In addition,
the Center for Workplace Compliance commented that modifying the
regulations to allow managers and supervisors to contribute to
mandatory tip pools would benefit employers by giving them ``a little
more flexibility to adopt tip pooling practices that work best in their
industry.'' NRA also stated that the statute does not prohibit
employers from requiring managers and supervisors to share their own
tips.
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\16\ Several commenters argued that permitting managers and
supervisors to contribute to mandatory tip sharing arrangements
``makes it all the more important that only employees who are bona
fide managers and supervisors are classified as such,'' and urged
the Department to reconsider the definition of ``manager or
supervisor'' adopted in its 2018 FAB and 2020 Tip final rule. ROC
United; NELP; National Partnership for Women and Families. These
commenters urged the Department to include a salary component in the
definition. The CMP NPRM did not contemplate changes to the
regulatory definition of the terms ``manager or supervisor,''
however, and revisions incorporating a salary level are outside of
the scope of this rulemaking. The Department lacks sufficient
information to consider such changes as part of the final rule.
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To the extent that commenters addressed the possibility of allowing
managers and supervisors who contribute tips to a tip pool to receive
tips from the arrangement up to the amount they contributed, commenters
opposed this alternative. See Werman Salas; NRA. Werman Salas asserted
that a policy allowing managers or supervisors to receive some tips
from a tip pool, but no more than what the manager or supervisor
contributes, ``would be difficult or impossible to apply.'' In
contrast, allowing employers to require managers and supervisors to
contribute a portion of their tips to mandatory tip pooling or sharing
arrangements, while preserving ``the prohibition on managers and
supervisors receiving any tips from such pooling or sharing
arrangements'' would maintain ``the integrity of the tip pooling
arrangements without improper participation from managers or
supervisors.''
Having considered the comments, the Department adopts changes to
its regulations to clarify that, while an employer may not allow a
manager or supervisor to keep other employees' tips by receiving tips
from a tip pool or tip sharing arrangement, section 3(m)(2)(B) does not
prohibit an employer from requiring a manager and supervisor who
receives tips directly from customers to contribute some portion of
those tips to eligible employees in an employer-mandated tip pooling or
tip sharing arrangement. The final rule similarly provides that
employers--some of whom may themselves be managers or supervisors who
perform tipped work--may not receive tips from a tip pool or sharing
arrangement, but does not bar employers who receive tips directly from
customers from sharing those tips with their employees.
The Department agrees with commenters that allowing employers to
require managers and supervisors to
[[Page 52983]]
share their tips with other eligible employees will benefit non-
managerial employees. When managers or supervisors contribute tips to
mandatory tip pools, non-managerial employees (e.g., bussers, other
servers, and bartenders) may earn more from the pool and tipped non-
managerial employees (e.g., servers and bartenders) may be required to
contribute less to the pool. The Department believes that allowing
employers to require managers and supervisors, like other employees who
receive tips, to contribute to tip sharing is particularly important
given that managers or supervisors may have the opportunity to serve
the largest tables or groups of customers, or work the more desirable
shifts. In addition, the Department takes note of commenters' statement
that section 3(m)(2)(B) does not expressly prohibit employers from
requiring managers or supervisors to share tips.
The Department expressed concerns in the 2020 Tip final rule that
allowing managers and supervisors to participate in tip pools for one
purpose (contributing tips) and not for another (receiving tips) could
``create confusion among employers and employees,'' and lead to
situations in which compliance is difficult. 85 FR 86764. On further
consideration, however, the Department has determined that any
compliance difficulties created by this policy are minimal and are
outweighed by the benefits noted above. The far more intractable
challenge for compliance and enforcement, as commenters noted, would be
to allow managers and supervisors to contribute to employer-mandated
tip pooling or tip sharing arrangements and also receive tips from the
pool. Under such a policy, it would be very difficult to ensure that
managers and supervisors are not taking more than the equivalent of
their own tips in violation of the statute. The Department believes,
however, that employers can more easily implement a bright line rule in
which managers or supervisors contribute tips to mandatory tip sharing
arrangements, but do not receive any tips from those arrangements.
As finalized, Sec. 531.54(c)(3) and (d) provide that, consistent
with section 3(m)(2)(B) of the FLSA, an employer may not receive and
may not allow a manager or supervisor to receive any tips from a tip
pool or tip sharing arrangement. As amended, the regulations do not
prohibit an employer from contributing tips to, or from requiring a
manager and supervisor who receives tips to contribute tips to,
eligible employees in an employer-mandated tip pooling or tip sharing
arrangement. When a manager or supervisor directly receives tips for a
service the manager or supervisor directly and solely provides, an
employer may allow the manager or supervisor to keep the tips, and may
also require the manager or supervisor to share some portion of the
tips with other eligible employees. Neither of these options runs afoul
of section 3(m)(2)(B)'s prohibition on managers and supervisors
``keep[ing]'' other employees' tips.
IV. 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, the impact of paperwork and other information
collection burdens imposed on the public, and how to minimize those
burdens. This final rule does not contain a collection of information
subject to OMB approval under the PRA.
V. Analysis Conducted in Accordance With Executive Order 12866,
Regulatory Planning and Review and Executive Order 13563, Improved
Regulation and Regulatory Review
A. Introduction
Under Executive Order 12866, OMB's Office of Information and
Regulatory Affairs (OIRA) determines whether a regulatory action is
significant and, therefore, subject to the requirements of the
Executive Order and OMB review.\17\ Section 3(f) of Executive Order
12866 defines a ``significant regulatory action'' as a regulatory
action that is likely to result in a rule that may: (1) Have an annual
effect on the economy of $100 million or more, or adversely affect 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) create serious inconsistency or otherwise interfere
with an action taken or planned by another agency; (3) materially alter
the budgetary impact of entitlements, grants, user fees, or loan
programs, or the rights and obligations of recipients thereof; or (4)
raise novel legal or policy issues arising out of legal mandates, the
President's priorities, or the principles set forth in the Executive
Order. OIRA has determined that this rule is not economically
significant under section 3(f) of Executive Order 12866.
---------------------------------------------------------------------------
\17\ See 58 FR 51735, 51741 (Oct. 4, 1993).
---------------------------------------------------------------------------
Executive Order 13563 directs agencies to, among other things,
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 obtaining the regulatory objectives;
and that, in choosing among alternative regulatory approaches, the
agency has selected those approaches that maximize net benefits.
Executive Order 13563 recognizes that some costs and 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. The analysis below outlines the
impacts that the Department anticipates may result from this rule and
was prepared pursuant to the above-mentioned executive orders.
Pursuant to Subtitle E of the Small Business Regulatory Enforcement
Fairness Act of 1996 (also known as the Congressional Review Act) (5
U.S.C. 801 et seq.), OIRA has not designated this rule as a major rule,
as defined by 5 U.S.C. 804(2).
B. Background
In this final rule, the Department modifies the portion of the 2020
Tip final rule incorporating the CAA's new provisions authorizing the
assessment of CMPs for violations of section 3(m)(2)(B) of the Act. The
Department also modifies an additional portion of its CMP regulations
addressing willful violations. Because these changes will only apply
when an employer violates the FLSA, the Department does not believe
that they will have an impact on costs or transfers. The Department has
also decided to clarify in this final rule that while managers and
supervisors may not receive tips from tip pools or tip sharing
arrangements, managers or supervisors are not prohibited from
contributing to mandatory tip pools or sharing arrangements. The
Department has discussed this change qualitatively due to data
limitations. Other provisions codifying the CAA amendments were already
discussed and quantified in the 2020 Tip final rule, and so have not
been quantified again here. The only costs quantified here are the rule
familiarization costs associated with reviewing the rule. The
Department qualitatively discusses possible benefits associated with
this rule.
[[Page 52984]]
C. Costs
1. Rule 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.\18\ Presumably, the
headquarters of a firm will conduct the regulatory review for
businesses with multiple locations, and may also require these
locations to familiarize themselves with the regulation at the
establishment level. To avoid underestimating the costs of this rule,
the Department uses both the number of establishments and the number of
firms to estimate a potential range for regulatory familiarization
costs. The lower bound of the range is calculated assuming that one
specialist per firm will review the rule, and the upper bound of the
range assumes one specialist per establishment.
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\18\ An establishment is a single economic unit that produces
goods or services. Establishments are typically at one physical
location and engaged in one, or predominantly one, type of economic
activity. An establishment is in contrast to a firm, or a company,
which is a business and may consist of one or more establishments.
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The most recent data on private sector entities at the time this
rule was drafted are from the 2017 Statistics of U.S. Businesses
(SUSB).\19\ The Department limited this analysis to a few industries
that were acknowledged to have tipped workers in the 2020 Tip final
rule. These industries are classified under the North American Industry
Classification System (NAICS) as 713210 (Casinos), 721110 (Hotels and
Motels), 722410 (Drinking Places (Alcoholic Beverages)), 722511 (Full-
service Restaurants), 722513 (Limited Service Restaurants), and 722515
(Snack and Nonalcoholic Beverage Bars). The Department understands that
there may be entities in other industries with tipped workers who may
review this rule, but did not receive any comments about other
industries that should be included in the analysis. See Table 1 for a
list of the number of firms and establishments in each of these
industries.
---------------------------------------------------------------------------
\19\ Statistics of U.S. Businesses 2017, <a href="https://www.census.gov/data/tables/2017/econ/susb/2017-susb-annual.html">https://www.census.gov/data/tables/2017/econ/susb/2017-susb-annual.html</a>, 2017 SUSB Annual
Data Tables by Establishment Industry.
Table 1--Firms and Establishments in Tipped Industries
------------------------------------------------------------------------
Industry Firms Establishments
------------------------------------------------------------------------
NAICS 713210 (Casinos)............ 221 292
NAICS 721110 (Hotels and Motels).. 42,795 53,869
NAICS 722410 (Drinking Places 39,323 40,156
(Alcoholic Beverages))...........
NAICS 722511 (Full-Service 217,111 250,871
Restaurants).....................
NAICS 722513 (Limited Service 157,353 251,100
Restaurants).....................
NAICS 722515 (Snack and 47,112 65,010
Nonalcoholic Beverage Bars)......
-------------------------------------
Total......................... 503,915 661,198
------------------------------------------------------------------------
Source: Statistics of U.S. Businesses 2017.
The Department believes 30 minutes per entity, on average, to be an
appropriate review time for this rule, because most of the information
related to the CAA amendments that employers would have to familiarize
themselves with was already captured in the 2020 Tip final rule. The
changes in this rule are small, and one is consistent with the
Department's existing enforcement. This review time represents an
average of employers who will spend less than 30 minutes reviewing, and
others who will spend more time. In the NPRM, the Department estimated
that average review time would be 15 minutes, but has increased it here
to account for the additional provisions on managers' participation in
tip pools.
The Department's analysis assumes that the rule would be reviewed
by Compensation, Benefits, and Job Analysis Specialists (SOC 13-1141)
or employees of similar status and comparable pay. The median hourly
wage for these workers was $32.30 per hour in 2020, the most recent
year of data available.\20\ The Department also assumes that benefits
are paid at a rate of 46 percent \21\ and overhead costs are paid at a
rate of 17 percent of the base wage, resulting in a fully loaded hourly
rate of $52.65.
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\20\ Occupational Employment and Wages, May 2020. <a href="https://www.bls.gov/oes/current/oes131141.htm">https://www.bls.gov/oes/current/oes131141.htm</a>.
\21\ The benefits-earnings ratio is derived from the Bureau of
Labor Statistics' Employer Costs for Employee Compensation data
using variables CMU1020000000000D and CMU1030000000000D.
---------------------------------------------------------------------------
The Department estimates that the lower bound of regulatory
familiarization cost range would be $13,265,562 (503,915 firms x $52.65
x 0.5 hours), and the upper bound, $17,406,037 (661,198 establishments
x $52.65 x 0.5 hours). The Department estimates that all regulatory
familiarization costs would occur in Year 1.
Additionally, the Department estimated average annualized costs of
this rule over 10 years. Over 10 years, it would have an average annual
cost of $1.8 million to $2.3 million, calculated at a 7 percent
discount rate ($1.5 million to $1.9 million calculated at a 3 percent
discount rate). All costs are in 2020 dollars.
D. Transfers Associated With Managers' Contributing to Tip Pools
As noted above, in the 2020 Tip final rule, the Department
implemented section 3(m)(2)(B) of the FLSA by prohibiting employers
from including managers or supervisors in mandatory tip pooling or
sharing arrangements. See 29 CFR 531.54(c)(3), (d) (April 30, 2021).
The preamble accompanying the 2020 Tip final rule interpreted Sec.
531.54(c)(3) and (d) to prohibit employers from requiring managers and
supervisors to contribute, as well as from allowing them to receive,
tips from mandatory tip pooling or sharing arrangements. 85 FR 86764.
This final rule clarifies that managers and supervisors are not
prohibited from contributing to eligible employees in mandatory tip
pools or sharing arrangements, but they may not receive tips from tip
pools or tip sharing arrangements. If, prior to this final rule, a
manager was prevented from contributing to tip pools, but is now able
to contribute following this rule, their tipped income and overall
earnings could decrease, while the tipped income and overall earnings
of the other employees in the tip pool could increase. The magnitude of
this change could be estimated by observing how managers' and non-
manager employees' tipped income and overall earnings changed following
the provisions of the 2020 Tip final rule that
[[Page 52985]]
prevented managers from contributing to tip pools. Although the
Department lacks comprehensive data on the number of managers who
perform tipped work, the Department used data from the Current
Population Survey (CPS) to estimate the number of people in the
occupation ``First-Line Supervisors of Food Preparation and Serving
Workers.'' The Department acknowledges that this could be an undercount
of the number of food service managers or supervisors who receive tips,
and that this is not the only industry in which managers may receive
tips. According to CPS, in 2019 there were 590,900 First-Line
Supervisors of Food Preparation and Serving Workers.\22\ Their overall
average hourly earnings were $17.48 (includes hourly and non-hourly
workers and tipped and non-tipped workers). Of those workers who are
paid hourly, 24 percent report regularly receiving tips, overtime, or
commissions (this question is only asked of hourly workers). After
backing out estimated overtime pay, the Department estimates that these
First-Line Supervisors of Food Preparation and Serving Workers earned
an average of $19.71 per hour, which includes $5.68 per hour in tips.
Several commenters asserted that it is common for managers and
supervisors to perform tipped work. For example, Werman Salas stated,
``Our experience from litigation is that managers and supervisors who
arguably satisfy the executive employee duties test also frequently
perform tipped work. For example, in litigation against a national
casual dining establishment, both assistant managers and managers who
arguably met the duties test for executive employees, frequently
greeted customers and ran food to tables as part of promoting the
`guest experience.' '' The Department did not receive any comments with
data on the earnings of these managers and supervisors.
---------------------------------------------------------------------------
\22\ The Department notes that this analysis relies on data from
2019, which is prior to the COVID pandemic, because it believes that
2019 data provides a more accurate picture of the restaurant
industry going forward than 2020 data. Due to the COVID-19 pandemic,
many food services and drinking places (NAICS 722) adjusted their
business models, and employment in this industry subsector fell in
2020. See Ansell, R. and Mullins, J. (2021), ``COVID-19 ends longest
employment recovery and expansion in CES history, causing
unprecedented job losses in 2020,'' Monthly Labor Review, U.S.
Bureau of Labor Statistics, June 2021, <a href="https://doi.org/10.21916/mlr.2021.13">https://doi.org/10.21916/mlr.2021.13</a>. However, although employment in this industry subsector
has recovered significantly in 2021, it still remains below its
January 2020 level. See Id.
---------------------------------------------------------------------------
It would also be difficult to discern whether any change in
earnings would be related to the provisions of the 2020 Tip final rule
that prevented managers from contributing to mandatory tip pools,
because the rule had only been in effect since April 30, 2021. Prior to
the 2020 Tip final rule, it was unclear to the regulated community
whether an employer could require a manager to contribute to tip pools
following the 2018 CAA amendments. See NRA, Comment on the 2019 Tip
NPRM (requesting clarity on this issue).
E. Benefits
This rule replaces regulatory language in the CMP regulations so
that the Department is not limited in its assessment of tip CMPs to
only repeated and willful violations of section 3(m)(2)(B). This change
is consistent with the text of section 16(e) of the FLSA, which
provides that ``[a]ny person who violates section 3(m)(2)(B) shall be
subject to a civil penalty . . . for each such violation, as the
Secretary determines appropriate.'' 29 U.S.C. 216(e). The Department
believes that this change, by ensuring that the Department has the
ability to impose CMPs for violations of section 3(m)(2)(B) when it
deems appropriate, can help improve the enforcement of the statute,
potentially discourage more employers from violating the FLSA, and
better ensure that employees keep the tips they receive.
This rule also revises portions of the Department's CMP regulations
regarding when a violation of section 6 (minimum wage) or section 7
(overtime) of the FLSA is ``willful,'' and thus subject to a CMP under
section 16(e). As discussed above, these portions of the Department's
regulations are based on McLaughlin v. Richland Shoe Co., 486 U.S. 128,
133 (1988), which held that a violation is willful if the employer
``knew or showed reckless disregard.'' This rule modifies the CMP
regulations to clarify that multiple circumstances, including those not
specified in the rule, can be sufficient to show a knowing violation of
section 6 or 7. The Department also reinserts language in the CMP
regulations to address the meaning of reckless disregard. The
Department believes that these revisions will better align its CMP
regulations with how it actually litigates willfulness and make clearer
to the regulated community when a violation is knowing or in reckless
disregard and thus willful. This increased clarity will enable
employers to better understand when they may be subject to a CMP for
violating the FLSA's minimum wage or overtime requirements, which may
enhance the penalty's deterrent effect.
This rule revises the Department's regulation addressing managers
and supervisors who cannot keep other employees' tips under section
3(m)(2)(B) of the FLSA. The final rule provides that managers and
supervisors cannot receive tips from tip pools or tip sharing
arrangements, but does not prohibit managers and supervisors, who may
earn their own tips from customers, from contributing tips to such
arrangements. The Department believes that these changes will result in
increased flexibility in tip pooling arrangements.
VI. Regulatory Flexibility Act (RFA) 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 this rule to
determine whether it would have a significant economic impact on a
substantial number of small entities. The most recent data on private
sector entities at the time this rule was drafted are from the 2017
Statistics of U.S. Businesses (SUSB).\23\ The Department limited this
analysis to a few industries that were acknowledged to have tipped
workers in the 2020 Tip final rule. These industries are classified
under the North American Industry Classification System (NAICS) as
713210 (Casinos), 721110 (Hotels and Motels), 722410 (Drinking Places
(Alcoholic Beverages)), 722511 (Full-service Restaurants), 722513
(Limited Service Restaurants), and 722515 (Snack and Nonalcoholic
Beverage Bars). The SUSB reports that these industries have 503,915
private firms and 661,198 private establishments. Of these, 501,322
firms and 554,088 establishments have fewer than 500 employees.
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\23\ Statistics of U.S. Businesses 2017, <a href="https://www.census.gov/data/tables/2017/econ/susb/2017-susb-annual.html">https://www.census.gov/data/tables/2017/econ/susb/2017-susb-annual.html</a>, 2016 SUSB Annual
Data Tables by Establishment Industry.
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The per-entity cost for small business employers is the regulatory
familiarization cost of $26.33, or the fully loaded mean hourly wage of
a Compensation, Benefits, and Job Analysis Specialist ($52.65)
multiplied by \1/2\ hour (thirty minutes). Because this cost is minimal
for small business entities, and well below one percent of
[[Page 52986]]
their gross annual revenues, which is typically at least $100,000 per
year for the smallest businesses, the Department certifies that this
rule will not have a significant economic impact on a substantial
number of small entities.
VII. Unfunded Mandates Reform Act of 1995
The Unfunded Mandates Reform Act of 1995 (UMRA) \24\ requires
agencies to prepare a written statement for rules with a federal
mandate that may result in increased expenditures by state, local, and
tribal governments, in the aggregate, or by the private sector, of $165
million ($100 million in 1995 dollars adjusted for inflation) or more
in at least one year.\25\ This statement must: (1) Identify the
authorizing legislation; (2) present the estimated costs and benefits
of the rule and, to the extent that such estimates are feasible and
relevant, its estimated effects on the national economy; (3) summarize
and evaluate state, local, and tribal government input; and (4)
identify reasonable alternatives and select, or explain the non-
selection, of the least costly, most cost-effective, or least
burdensome alternative. This rule is not expected to result in
increased expenditures by the private sector or by state, local, and
tribal governments of $165 million or more in any one year.
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\24\ See 2 U.S.C. 1501.
\25\ Calculated using growth in the Gross Domestic Product
deflator from 1995 to 2019. Bureau of Economic Analysis. Table
1.1.9. Implicit Price Deflators for Gross Domestic Product.
---------------------------------------------------------------------------
VIII. Executive Order 13132, Federalism
The Department has (1) reviewed this rule in accordance with
Executive Order 13132 regarding federalism and (2) determined that it
does not have federalism implications. The 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.
VII. Executive Order 13175, Indian Tribal Governments
This 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 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 amends title 29,
parts 531, 578, 579, and 580 of the Code of Federal Regulations as
follows:
PART 531--WAGE PAYMENTS UNDER THE FAIR LABOR STANDARDS ACT OF 1938
0
1. The authority citation for part 531 continues 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
2. Revise Sec. 531.52(b)(2) to read as follows:
* * * * *
(b) * * *
(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. A manager or supervisor may keep tips that he or she
receives directly from customers based on the service that he or she
directly and solely provides. 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 of this chapter.
0
3. Amend Sec. 531.54 by revising paragraphs (c)(3) and (d) to read as
follows:
* * * * *
(c) * * *
(3) An employer may not receive tips from such a tip pool and may
not allow managers and supervisors to receive tips from the tip pool.
(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 receive tips. An employer may not receive tips from such
a tip pool and may not allow supervisors and managers to receive tips
from the tip pool.
PART 578--TIP RETENTION, MINIMUM WAGE, AND OVERTIME VIOLATIONS--
CIVIL MONEY PENALTIES
0
4. The authority citation for part 578 continues 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
5. Revise Sec. 578.3 to read as follows:
Sec. 578.3 What types of violations may result in a penalty being
assessed?
(a) In general. (1) A penalty of up to $1,162 per violation may be
assessed against any person who violates section 3(m)(2)(B) of the Act.
(2) A penalty of up to $2,074 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 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 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 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 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
[[Page 52987]]
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, among other situations, can
be sufficient to show that the employer's conduct is knowing, but is
not automatically dispositive.
(3) For purposes of this section, reckless disregard of the
requirements of the Act means, among other situations, that the
employer should have inquired further into whether its conduct was in
compliance with the Act and failed to make adequate further inquiry.
0
6. 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
violation of section 3(m)(2)(B) or repeated or willful violation of
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
7. The authority citation for part 579 continues 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, Pub.
L. 93-257, 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.
0
8. Amend Sec. 579.1 by redesignating paragraph (a)(2) as paragraph
(a)(2)(i), revising newly designated paragraph (a)(2)(i) and adding
paragraph (a)(2)(ii) to read as follows:
Sec. 579.1 Purpose and scope.
(a) * * *
(2)(i) Any person who repeatedly or willfully violates section 206
or 207 of the FLSA, relating to wages, shall be subject to a civil
penalty not to exceed $2,074 for each such violation.
(ii) Any person who 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 $1,162 for each such violation.
* * * * *
0
9. 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, among other situations, can be
sufficient to show that the employer's conduct is knowing, but is not
automatically dispositive. For purposes of this section, reckless
disregard of the requirements of the Act means, among other situations,
that the employer should have inquired further into whether its conduct
was in compliance with the Act and failed to make adequate further
inquiry.
PART 580--CIVIL MONEY PENALTIES--PROCEDURES FOR ASSESSING AND
CONTESTING PENALTIES
0
10. 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
11. 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 forth in part 579 of this chapter, and
for assessment of civil money penalties for any violation of the tip
retention provisions of section 3(m)(2)(B) or any repeated or willful
violation of 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
12. 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 thereunder as set forth in part 579 of this
chapter, or determines that there has been a violation by any person of
section 3(m)(2)(B), or determines that there has been a repeated or
willful violation by any person of 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
13. Amend Sec. 580.12 by revising the first sentence of paragraph (b)
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, a violation of section 3(m)(2)(B), or a repeated or
willful violation of section 6 or section 7 of the Act, and the
appropriateness of the penalty assessed by the Administrator. * * *
* * * * *
0
14. 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 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. * * *
Signed in Washington, DC, this 8th day of September, 2021.
Jessica Looman,
Acting Administrator, Wage and Hour Division.
[FR Doc. 2021-19795 Filed 9-23-21; 8:45 am]
BILLING CODE 4510-27-P
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</html>Indexed from Federal Register on September 24, 2021.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.