Last week, the federal government passed its new budget proposal, which included an amendment of the Fair Labor Standards Act (FLSA) to protect the rights of tipped workers. Prior to this law, tip sharing rules were governed by DOL wage and hour regulations.

The new law is in direct opposition to a proposed Department of Labor (DOL) regulation that would have allowed employers who pay all of their employees the full minimum wage (not the tipped minimum) to retain all tips or distribute the tips among management or any non-tipped employees (e.g. cooks, dishwashers, etc.). The new regulation was proposed by the DOL last year and its announcement prompted a large backlash that resulted in the legislative action.

The new law (i) prohibits employers and supervisors from collecting or retaining tips made by employees and (ii) allows tip sharing between tipped and non-tipped employees if the employer pays the full minimum wage to all employees.

The National Restaurant Association opposed the legislation and downplayed the consequence of the proposed DOL regulations, arguing that most employers wouldn’t retain tips even if they were allowed to because of the adverse reaction of tipped employees and customers. Employers have voiced concerns over income equality in the restaurant industry between front of the house servers and back of the house employees such as cooks and dishwashers.

The new law contains several remedial measures. Violations will prompt a civil penalty not to exceed $1,100 for each such violation and, in addition to being liable for all tips unlawfully kept and associated damages, employers will also be liable for the difference between the sub-minimum wage and the regular minimum wage for all hours worked.

Employers of tipped employees will have some additional flexibility in tip distribution from the prior regulatory scheme, but must still protect against retention of any portion of tips by management.