H.R. 5112 — Tipped Worker Protection Act

This section phases out the tip credit under the Fair Labor Standards Act (FLSA)—which allows employers to pay tipped employees (e.g., waitstaff) a subminimum cash wage if tips make up the difference to the full minimum wage—by establishing a transition period during which the required cash wage increases in annual increments of $1.50 from $3.60 per hour (upon enactment) until it equals the full minimum wage under FLSA section 6(a)(1). Upon the cash wage reaching the full minimum wage, the section fully repeals the tip credit (i.e., requires employers to pay tipped employees the full minimum wage rate), makes conforming amendments to (1) employer tip retention requirements, (2) repeal the standalone definition of a tipped employee, and (3) civil money penalties (eliminating references to unlawfully taken tip credits), with the repeal delayed until the start of the applicable phase-in year; provides a special rule accelerating applicability for employers establishing tip pools during the transition. The section further revises the definition of a tipped employee to one who customarily receives monthly tips equal to or exceeding the difference between the cash wage and full minimum wage and spends no more than 20% of hours on non-tip-producing duties (from receiving more than $30 per month in tips).

This section revises tip rules under the Fair Labor Standards Act (FLSA), which governs minimum wages and allows employers to claim a tip credit against minimum wage obligations if tips received by employees meet or exceed the credit amount. Specifically, it (1) expands the definition of "tip" to include any discretionary amount paid directly by a customer to an employee and any portion of a mandatory charge that may reasonably lead the customer to believe it will be paid in full to the employee; (2) affirms that employees retain the right to keep any tips received, even if part of an authorized pooling system; (3) prohibits employers from keeping or using employees' tips for any purpose other than distribution through an authorized pool—including by managers or supervisors or to cover financial transaction fees (e.g., payment card network fees as defined in the Electronic Fund Transfer Act, 15 U.S.C. 1693o-2(c)); (4) authorizes tip pooling systems among non-supervisory employees (defined as those without authority over other employees' scheduling, hiring, or termination) if initiated by written request from at least 30% of such employees and approved by majority (51%) vote, with employer administration at its expense ensuring voluntary participation, separate funds, recordkeeping, and limited mediation rights; and (5) requires employers imposing mandatory service charges to disclose to customers and involved employees the charge's rate and purpose.

This section provides that the portion of mandatory service charges specified in section 3(m)(2)(E)(I)(bb) of the Fair Labor Standards Act—generally, amounts above the federal minimum wage that employers may retain—is treated as tips for purposes of the employer credit against its share of Social Security taxes on employee tips (under IRC §3121(q)). The change applies to amounts received on or after the date of enactment.