Apr 14, 2011

Labor Department Regulations on Tip Credits and More

Last week, the federal Department of Labor (DOL) issued its final "clean-up" regulations, tweaking a number of existing rules to bring them in line with laws that have passed and court cases that were decided since the regulations were last reviewed. Although the proposed regulations (issued during the Bush Administration) included several changes that generated a lot of discussion, the final regulations are more scaled back. 

The most significant discussion in the final regulations involves tip credits. Under the Fair Labor Standards Act (FLSA), employers may pay tipped employees less than the minimum wage -- down to a floor of $2.13 an hour -- as long as employees make enough in tips to bring their earnings up to at least the minimum hourly wage. If there is a shortfall, the employer must make up the difference. (Some states do not allow employers to take a tip credit; in these states, which include California, employers must pay service employees the full minimum wage for every hour worked.) This has long been the law, but the final regulations clarify a few points:

  • Whether or not an employer takes a tip credit, all tips an employee earns belong to that employee, except for any amount the employee is required to "tip out" (contribute to a legitimate tip pool). Employers aren't entitled to any part of the tip pool. At least one court had held that an employer who doesn't take a tip credit need not let employees keep their tips, as long as the employees were left with at least the minimum wage. The regulations specifically dispute the holding of this case. 
  • Only employees who regularly and customarily receive tips can participate in the tip pool -- and again, this rule applies whether or not the employer takes a tip credit. Employees who don't typically receive tips, such as cooks and dishwashers, may not participate in the pool. The final regulations don't set a limit on how much of their tips employees may be required to put in the pool; in fact, they state explicitly that the law "does not impose a maximum contribution percentage." Previous guidance documents and opinion letters from the DOL had put a maximum on the amount employees could be required to contribute, or said that employees could not be required to contribute more than was customary in their industry, but these limits did not make it into the final regulations. Once the employer comes up with an amount, however, it is required to notify employees how much they will be required to contribute to the pool.
  • Employees are entitled to notice if the employer will take a tip credit. This notice must include: (1) the hourly cash wage the employer will pay the employee; (2) the amount of tips that the employer will take as a tip credit (that is, the employer will count that amount toward the employee's wages, to meet the minimum wage requirement); (3) that the employee is entitled to retain all tips received except any amount the employee is required to contribute to a valid tip pooling arrangement limited to employees who customarily and regularly receive tips; and (4) that the tip credit shall not apply to any employee who has not been informed of these requirements. The final regulations do not require this notice to be in writing; employers may inform employees orally, if they wish. As a practical matter, however, employers who plan to take a tip credit should provide written notice, so they can later prove that they properly notified employees, if necessary. 
Some other changes included in the final regulations exclude stock options from an employee's regular rate of pay (used to determine overtime), clarify the exemptions for firefighters and salesmen, partsmen, and mechanics of certain vehicles; exclude volunteers at private nonprofit food banks from the definition of an "employee" covered by the FLSA, even if those volunteers receive groceries from the bank; and clarify that time an employee spends commuting in a company car doesn't count as compensable work time. 

The biggest change the regulations ultimately didn't make had to do with fluctuating workweeks, in which a nonexempt employee receives a fixed salary that is understood to compensate the employee for all hours worked during the week. If the employee works more than 40 hours in a week, the salary is divided by the number of hours worked that week to come up with an hourly wage, and the employee is entitled to half of that amount for every hour worked over 40 as an overtime premium. The proposed regulations sought to explicitly allow employers to pay these employees bonuses, commissions, and other types of compensation in addition to their set salary, without running afoul of the rule and without having to count those amounts toward the employee's hourly pay. Ultimately, the final regulations didn't allow this; in its comments, the DOL reasoned that this would give employers an incentive to reduce set salaries and move that money to bonuses and other types of excluded compensation, to minimize their overtime obligations.