Tipped Employees Under the Fair Labor Standards Act

By Lehr Middlebrooks Vreeland & Thompson, P.C.

November 21, 2019

This article was prepared by Lyndel L. Erwin, Wage and Hour Consultant for the law firm of Lehr Middlebrooks Vreeland & Thompson, P.C. Prior to working with the firm, Mr. Erwin was the Area Director for Alabama and Mississippi for the U. S. Department of Labor, Wage and Hour Division, and worked for 36 years with the Wage and Hour Division on enforcement issues concerning the Fair Labor Standards Act, Service Contract Act, Davis Bacon Act, Family and Medical Leave Act and Walsh-Healey Act. Mr. Erwin can be reached at 205.323.9272.

In October, the U.S. Department of Labor announced a proposed rule regarding the tip provisions of the Fair Labor Standards Act implementing provisions of the Consolidated Appropriations Act of 2018 (CAA). The proposal would also codify existing Wage and Hour Division guidance into a rule. The proposal allows for a 60-day comment period and invites comments from interested parties. As the comment period does not end until late in 2019 and then Wage Hour will have to review those comments it is not expected the revised regulations will become effective until sometime in 2020.

The CAA prohibits employers from keeping employees’ tips. During the development of those provisions, the Department provided technical assistance to Members of Congress. DOL’s proposed rule would allow employers who do not take a tip credit to establish a tip pool to be shared between workers who receive tips and are paid the full minimum wage, and employees that do not traditionally receive tips, such as dishwashers and cooks.

The proposed rule would not impact regulations providing that employers who take a tip credit may only have a tip pool among traditionally tipped employees. An employer may take a tip credit toward its minimum wage obligationfor tipped employees equal to the difference between the required cash wage (currently $2.13 per hour) and the federal minimum wage. Establishments utilizing a tip credit may only have a tip pool among traditionally tipped employees. Employers should be aware that several states do not allow the use of tip credit toward the minimum wage. If you operate in multiple states, you should consult with counsel to determine whether you may claim a tip credit in all locations.

Additionally, the proposed rule reflects the Department’s guidance that an employer may take a tip credit for any amount of time an employee in a tipped occupation performs related non-tipped duties with tipped duties. For the employer to use the tip credit, the employee must perform non-tipped duties contemporaneous with, or within a reasonable time immediately before or after, performing the tipped duties. The proposed regulation also addresses which non-tipped duties are related to a tip -producing occupation.

With its Notice of Proposed Rulemaking (NPRM), the Department proposes to:

• Explicitly prohibit employers, managers, and supervisors from keeping tips received by employees.
• Remove regulatory language imposing restrictions on an employer’s use of tips when the employer does not take a tip credit. This would allow employers that do not take an FLSA tip credit to include a broader group of workers, such as cooks or dishwashers, in a mandatory tip pool.
• Incorporate in the regulations, as provided under the CAA, new civil money penalties, currently not to exceed $1,100, that may be imposed when employers unlawfully keep tips.
• Amend the regulations to reflect recent guidance explaining that an employer may take a tip credit for any amount of time that an employee in a tipped occupation performs related non-tipped duties contemporaneously with his or her tipped duties, or for a reasonable time immediately before or after performing the tipped duties.

The Act defines tipped employees as those who customarily and regularly receive more than $30 per month in tips. Section 3(m) of the FLSA permits an employer to take a tip credit toward its minimum wage obligation for tipped employees equal to the difference between the required cash wage of $2.13 and the minimum wage. Thus, the maximum tip credit that an employer can currently claim under the FLSA is $5.12 per hour (the minimum wage of $7.25 minus the minimum required cash wage of $2.13).

The current regulations, which became effective in April 2011, state that the employer must provide the following information to a tipped employee before using the tip credit:

1. The amount of cash wage the employer is paying a tipped employee, which must be at least $2.13 per hour.
2. The additional amount claimed by the employer as a tip credit;
3. That the tip credit claimed by the employer cannot exceed the amount of tips actually received by the tipped employee;
4. That all tips received by the tipped employee are to be retained by the employee except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips; and
5. That the tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions.

The regulations state that the employer may provide oral or written notice to its tipped employees informing them of the items above. Further, they state that an employer must be able to show that he has provided such notice. They also state that an employer who fails to provide the required information cannot use the tip credit provisions and thus must pay the tipped employee at least $7.25 per hour in wages plus allow the tipped employee to keep all tips received. For an employer to be able to prove that the notice has been furnished the employees, I recommend that a written notice be provided signed by the employee.

Employers electing to use the tip credit provision must be able to show that tipped employees receive at least the minimum wage when direct (or cash) wages and the tip credit amount are combined. If an employee's tips combined with the employer's direct (or cash) wages of at least $2.13 per hour do not equal the minimum hourly wage of $7.25 per hour, the employer must make up the difference.

Currently, the regulations also state that a tip is the sole property of the tipped employee regardless of whether the employer takes a tip credit and prohibit any arrangement between the employer and the tipped employee whereby any part of the tip received becomes the property of the employer. However, the proposed regulations will remove this prohibition as related to employers that do not claim tip credit against the minimum wage requirements.

Yet, the current regulations do allow for tip pooling among employees who customarily and regularly receive tips, such as waiters, waitresses, bellhops, and service bartenders. Conversely, a valid tip pool may not include employees who do not customarily and regularly receive tips, such as dishwashers, cooks, chefs, and janitors. A factor in who may be included in the tip pool concerns whether the employee has direct interaction with the customer. One positive change is the regulations no longer impose a maximum contribution amount or percentage on valid mandatory tip pools. The employer, however, must notify tipped employees of any required tip pool contribution amount, may only take a tip credit for the actual amount of tips each tipped employee ultimately receives.

Under the current regulations, when an employee is employed in both a tipped and a non-tipped occupation, the tip credit is available only for the hours spent by the employee in the tipped occupation. An employer may take the tip credit for time that the tipped employee spends in duties related to the tipped occupation, even though such duties may not produce tips. For example, a server who spends some time cleaning and setting tables, making coffee, and occasionally washing dishes or glasses is considered to be engaged in a tipped occupation even though these duties are not tip producing. The October 2019 proposed regulations remove this section of the regulations relating to the amount of time a tipped employee may spend in non-tipped duties.

A compulsory charge for service, such as a charge that is placed on a ticket where the number of guests at a table exceeds a specified limit, is not a tip. The service charges cannot be counted as tips received but may be used to satisfy the employer's minimum wage and overtime obligations under the FLSA. If an employee receives tips in addition to the compulsory service charge, those tips may be considered in determining whether the employee is a tipped employee and in the application of the tip credit.

Where tips are charged on a credit card and the employer must pay the credit card company a fee, the employer may pay deduct the fee from the employee’s tips. Further if an employee does not receive enough tips to make up the difference between the direct (or cash) wage payment (which must be at least $2.13 per hour) and the minimum wage, the employer must make up the difference. When an employee receives tips only and is paid no cash wage, the full minimum wage is owed.

Deductions from an employee’s wages for walkouts, breakage, or cash register shortages that reduce the employee’s wages below the minimum wage are illegal. If a tipped employee is paid $2.13 per hour in direct (or cash) wages and the employer claims the maximum tip credit of $5.12 per hour, no deductions can be made without reducing the employee below the minimum wage (even where the employee receives more than $5.12 per hour in tips).

The current regulations state that if a tipped employee is required to contribute to a tip pool that includes employees who do not customarily and regularly receive tips, the employee is owed all tips he or she contributed to the pool and the full $7.25 minimum wage.

Computing Overtime Compensation for Tipped Employees:

When an employer takes the tip credit, overtime is calculated on the full minimum wage, not the lower direct (or cash) wage payment. The employer may not take a larger tip credit for overtime hours than for a straight time hours. For example, if an employee works 45 hours during a workweek, the employee is due 40 hours X $2.13 straight time pay and 5 hours overtime at $5.76 per hour ($7.25 X 1.5 minus $5.12 in tip credit). If you have questions regarding these rules or other Wage Hour issues, do not hesitate to give me a call.