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Department of Labor Revises Tip Credit Rule, Articulates New Policy View on Fluctuating Workweek

Date: 4.20.2011

The U.S. Department of Labor has issued a final rule on the use of the tip credit under Section 3(m) of the Fair Labor Standards Act.  In addition to updating the amount allowed, the final rule will require employers to provide employees with additional information before taking a tip credit.  The new rule will become effective on May 5, 2011.
 
At the same time, the DOL issued other changes to the text of its current regulations.  These changes are not significant.

Tip Credit, Notification

The FLSA allows an employer to pay a tipped employee an hourly wage less than the legal minimum wage under certain circumstances.  The tipped employee’s tips and hourly wage combined must equal at least the legal minimum wage.  The difference between minimum wage and the employee’s hourly wage is known as a tip credit.  Federal law currently allows an hourly wage as low as $2.13 per hour, resulting in a maximum tip credit of $5.12 per hour (i.e., current minimum wage of $7.25 per hour minus $2.13 per hour minimum tip wage = $5.12 per hour maximum tip credit).

The final rule specified what information an employer must provide to tipped employees as a condition to being able to take the tip credit.  An employer must notify the employee that it will be using a tip credit.  The notice must include the following:

  • The amount of wage the employer will pay the employee;
  • The amount the employer will credit against tips received;
  • That the tip credit will be no greater than the value of tips actually received;
  • That the tip credit cannot be applied unless the tipped employee has been informed of the tip credit provisions of the FLSA; and
  • That, except for valid tip pooling, all tips received by the tipped employee must be retained by the employee.

The rule states that requiring an employee share his or her tips with a lawful tip pool is the only permissible use to which an employer can put an employee’s tips.  This regulatory position rejects the U.S. Court of Appeals for the Ninth Circuit’s decision in Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9th Cir. 2010).  The Ninth Circuit ruled that an employee has no property right in his or her tips under the FLSA, unless the employer takes a tip credit pursuant to Section 3(m).

The final rule also states that there is no cap on the percentage of an employee’s tips that may be contributed to a valid tip pool.  This portion of the rule discards long-standing agency policy and acquiesces in the rulings of several courts that had rejected DOL’s position on this issue.  Thus, employers may require tipped employees to pool their tips with other service personnel without a restriction on the amount pooled.

Fluctuating Workweek Rule Unchanged

Disappointingly, the DOL declined to clarify the rules relating to the fluctuating workweek method of overtime compensation.  The DOL’s preamble, however, raises significant concerns regarding the application of the fluctuating workweek in certain situations.  Specifically, DOL now apparently takes the position that paying additional compensation — such as a bonus or commissions — to a non-exempt employee paid a fixed salary for fluctuating hours is inconsistent with the policies behind the fluctuating workweek.  DOL’s rationale for this new policy seems tenuous, and it remains to be seen what weight, if any, courts will give to DOL’s preamble, particularly given that it directly contradicts a position the Department articulated less than three years ago.  Nevertheless, employers who use this payment method should consult with employment counsel, particularly if their employees receive any form of compensation above and beyond their fixed salary.

Jackson Lewis attorneys are available to answer inquiries regarding FLSA regulations and assist employers in achieving compliance.

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