New Wage Regs Take Effect May 5

If you own a restaurant, you need to be aware of significant changes to tip credit regulations in the amendments to the federal Fair Labor Standards Act (FLSA) regulations that become effective May 5, 2011. They were issued with little notice or fanfare by the U.S. Department of Labor (DOL). Attorney Lisa Schreter explores some of the issues surrounding these amendments.

What are some of the most significant changes?
Perhaps the most significant change in the tip credit regulations is the new notice requirement. The new regulations resolve the dispute in the courts as to whether a tip credit must be explained to employees, or merely disclosed. The regulations now specify that, to take a tip credit, an employer must inform tipped employees, in advance, of the following:

What is the penalty if an employer does not provide employees with advance notice of the DOL’s tip credit requirements?

The DOL takes the position that an employer cannot claim a tip credit for any employee who has not received advance notice of the tip credit requirements. A number of courts have also adopted this view. Because of this “penalty,” employers who rely on the tip credit should pay close attention to the advance notice and timing requirements.

Does the notice have to be in writing?

Although the regulations do not require written notice of the above requirements, employers intending to take tip credit would be wise to provide notice in writing and obtain written acknowledgement of receipt as evidence of compliance. Please note, however, that the current FLSA recordkeeping regulation expressly requires that the amount per hour that the employer takes as a tip credit be reported to employees in writing each time it is changed from the amount per hour taken in the preceding week.

Can restaurants keep any of the tips employees receive?

Courts have disagreed about whether the FLSA prohibits employers from retaining any portion of employees’ tips, even if they pay employees the full minimum wage without taking a tip credit. Last year, a federal appellate court in the Ninth Circuit, which covers several western states including California, Oregon and Washington, issued a decision concluding that an employee must retain all tips paid to her only if the employer takes a tip credit. In the Preamble to the new regulations, the DOL expressly rejected this decision. he new regulations provide that “[t]ips are the property of the employee whether or not the employer has taken a tip credit” and prohibit employers from using an employee’s tips for any reason other than a valid tip pool. Although employers in the Ninth Circuit may follow the appellate court ruling, employers in other parts of the country are well advised to comply with the view expressed by the DOL in the new regulations until there is a consensus among the courts on the issue.

What requirements are there for a tip pool to be valid?

To be valid under the regulations, a tip pool may only include employees who “customarily and regularly receive tips.” The DOL’s Fact Sheet on tipped employees lists waiters, waitresses, bellhops, counter personnel who serve customers, bussers, and service bartenders as “among employees who customarily and regularly receive tips.” The Fact Sheet further states that a “valid tip pool may not include employees who do not customarily and regularly received tips, such as dishwashers, cooks, chefs, and janitors.” This is consistent with the definition of tipped employee, under both the FLSA and the regulations, which define “tipped employee” as any employee who regularly receives more than $30.00 per month in tips.

Is there a limit on the amount a restaurant can require an employee to contribute to a tip pool?
One positive development for restaurant owners, reflecting several court rulings and recommendations by Littler Mendelson and the Chamber of Commerce, is the DOL’s decision to reverse its position imposing caps on contributions by employees to mandatory tip pools. The amended regulation clarifies that the FLSA does not limit contributions to “valid mandatory tip pools.”

Are there any changes in the amount of tip credit a restaurant can claim?
The new regulations have adopted the FLSA’s formula for calculating the tip credit an employer may take as an offset against minimum wage. It is the difference between the minimum cash wage for tipped employees, which is $2.13 per hour, and the federal hourly minimum wage, which is currently $7.25, provided the tip credit does not exceed the amount of the tips the employee actually receives. Thus, at the present time the maximum tip credit an employer can claim under the FLSA and the new regulations is $5.12 per hour. The new regulations place the burden on the employer to prove the actual amount the employee received in tips.

Please note, however, employers should also check state law requirements to ensure compliance with federal and state law.

What should restaurants do to comply with the new regulations?

We recommend restaurants periodically review their compensation policies and programs for tipped employees with their employment law counsel to make sure they comply with the FLSA and the new federal regulations, as well as with state laws, which vary greatly on tip requirements. Particular attention should be paid to compliance with the new federal notice requirements. Restaurants should also consider keeping a written record, signed by employees, of tip payments they receive.

Lisa Schreter is an attorney and shareholder with Littler Mendelson. Schreter ([email protected]) represents employers in complex class and collective actions involving overtime and other wage-related claims.