As we head towards the end of the year, the Department of Labor (DOL) is making some major moves towards fulfilling its regulatory agenda. On October 24, 2017, DOL submitted notice to the Office of Management and Budget that it intends to rescind controversial Obama-era regulations which place limitations on employer use of tips received by employees.
Under the Fair Labor Standards Act (FLSA), employees must be paid at a rate which meets or exceeds the minimum wage of $7.25 per hour. However, employers of employees who regularly receive tips may take advantage of is commonly referred to as a “tip credit,” which allows them to use tips to pay a specified portion of the minimum wage. Employers who wish to take advantage of the tip credit must pay employees a direct cash wage of at least $2.13 per hour and, if the employee’s direct wage plus tips do not meet or exceed the minimum wage, any amount required to make up the difference.
The law prohibits use of a tip credit unless “all tips received by such employee have been retained by the employee,” although it specifies that “this… shall not be construed to prohibit the pooling of tips among employees who customarily and regularly receive tips” (29 U.S.C. 203(m)). It does not explicitly address how tips can be used by employers who directly pay employees the full minimum wage, rather than using a tip credit.
In 2011, DOL issued regulations to clarify that “tips are the property of the employee [who received them] whether or not the employer has taken a tip credit.” The regulations state that, as a tip is a gift or gratuity presented by a customer in recognition of service, the customer “has the right to determine who shall be the recipient of the gratuity” (29 C.F.R. 531.52). They also specify that, while employees can engage in “tip splitting” by voluntarily giving a portion of their own tips to non-tipped employees, a mandatory tip pool imposed by an employer “can only include those employees who regularly and customarily receive tips” (29 C.F.R. 531.51).
These rules have been a bane to many employers in the restaurant industry that prefer to create tip pools which include “back of house” employees who are essential to service but don’t receive tips, such as cooks and dishwashers, in order to avoid a pay scale that is tipped in favor of waiters. However, employee organizations argue that the rules serve to protect employee wages, as rescinding the regulations would mean that employers can appropriate tips for whatever purpose they like, including simply keeping them for the employer’s use.
Most recently, the regulations were addressed in the 10th Circuit Court of Appeals. In that case, the employer paid tipped employees well above the minimum wage but maintained all tips for itself. The Court found this to be permissible under FLSA as the employer had fulfilled its minimum wage responsibilities and was not required to use a tip credit or be bound by the restrictions of a tip credit. Additionally, the Court found that DOL had exceeded its regulatory authority when attempting to “solve” an ambiguity within the law that does not exist, as the FLSA statute “clearly applies only when the employer uses tips received by the employee as a credit against the employee’s minimum wage.”
Other federal courts, including the 9th Circuit, have disagreed that the law is quite so clear-cut. However, the most recent move from DOL shows that the agency prefers not to argue it. The agency should open their proposed rule for rescission within the next few weeks.
Employers should keep in mind that several states have their own laws and regulations covering employee tips and employer responsibilities. For example, California does not allow employers to take a tip credit at all, but does restrict tip pools to only customer-facing “direct service employees,” while Minnesota prohibits employers from requiring employees to share tips or gratuities with either the employer or other employees.
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