Wage & Hour Counsel : Wage & Hour Lawyer & Attorney : Littler Mendelson Law Firm : Employment Law, Labor Relations

The final regulations reflect the DOL’s reaction to comments received during the 2008 proposed rules’ notice period, including comments submitted to the Department by Littler Mendelson. Citing comments it received, the DOL explained its decision not to include some language contained in amendments it originally proposed in 2008 and stated the final amendments update only those sections it determined “required change to reflect statutory enactment or outdated examples contained in the regulations.” The final rules also include changes to regulations concerning tipped employees that the DOL says are designed to bring its tip credit regulations in line with the Wage and Hour Division’s “long-standing and settled policies” concerning tipped employees.

The amendments to the DOL’s tip credit regulations are the regulations’ first changes in more than 44 years. The DOL’s original tip credit regulations were promulgated in 1967, one year after the 1966 FLSA amendment which enacted section 3(m) and created the tip credit provision. Although section 3(m) was amended in 1974 and again in 1996, the tip credit regulations remained unchanged. The DOL attempted to bridge the differences between the 1967 regulations and the amended Act through positions and policy expressed in opinion letters and its Field Operations Handbook. Courts, however, have not consistently adopted these DOL positions and policies, creating considerable uncertainty in this area.

Specifically, the final tip credit regulations clarify that:

• An employer is prohibited from using an employee’s tips for any reason other than as a tip credit to make up the difference between the minimum wage and required tip credit cash wage, or in furtherance of a legitimate tip pool.
• An employer must notify employees of any required tip pool contribution amount, but there is no maximum contribution percentage on valid mandatory tip pools.
• An employer must advise an employee in advance of its use of the tip credit pursuant to the provisions of section 3(m) of the FLSA (i.e., the amount of the cash wage that is to be paid to the tipped employee; the amount by which the wages of the tipped employee are increased on account of the tip credit; that all tips received by the employee must be retained by the employee except for tips contributed to a valid tip pool; and that the tip credit shall not apply to any employee who does not receive the notice).

Notably, the DOL rejected a position urged by many commenters that employers should be required to provide written notice of an employer’s intent to use the tip credit. Instead, the DOL adopted the position advocated by Littler Mendelson in its comment to the 2008 proposed rule that verbal notice was sufficient.

Other changes included in the final amendments to the regulations include:

• Incorporation of the language from the Employee Commuting Flexibility Act of 1996 into the regulations.
• Revising regulations concerning the Youth Opportunity Wage (a temporary sub-minimum wage paid to workers under age 20) to cite provisions of the Small Business Job Protection Act of 1996.
• Modifying regulations concerning agricultural workers on water storage/irrigation projects to be consistent with the 1997 Departments of Labor, Health and Human Services, Education, and Related Agencies Appropriations Act.
• Revising regulations pertaining to volunteers at private non-profit food banks to include exemptions included in the Amy Somers Volunteers at Food Banks Act of 1998.
• Changing the regulatory definition of an “employee . . . in fire protection activities” to be consistent with a 1999 amendment to the FLSA that defines the term.
• Revising overtime regulations concerning calculations of the “regular rate” of pay to include provisions from the Worker Economic Opportunity Act of 2000 that exclude the value of stock options from the regular rate calculation.
• Addition of language to regulations pertaining to the exempt status of salesmen, partsmen, or mechanics of automobiles, trucks, or farm implements that reflects a 1974 amendment to section 13(b)(10) of the FLSA.
• Updating the regulations with “technical amendments” to reflect the increase in the amount of the minimum wage and other outdated threshold amounts, and eliminating outdated references in the regulations to former minimum wage rates.

The final amendments also reflect the DOL’s decision to abandon certain 2008 proposed changes. The DOL elected not to make proposed substantive changes to regulations regarding: compensatory time (continuing to allow public employees to use compensatory time on a date requested absent undue disruption to the employer); the fluctuating workweek (making only editorial revisions to these regulations); and meal credits (determining that further study concerning the impact of dietary or religious restrictions and whether employees had adequate time to eat was warranted before proposed changes were adopted). While the DOL amended language of its regulations pertaining to automobile salesmen, partsmen, or mechanics, it decided not to change its regulations concerning industry service advisors or writers, rejecting a proposed rule change that would have provided these employees with exempt status.

For more information, see Littler's ASAP, Final Amended FLSA Regulations Make Significant Changes to Tip Credit Processes and Proposed Fluctuating Work Week Rules.

The defendant owner argued that the language, context, and legislative history of the FLSA compels a conclusion that an owner can be both an employer and employee for purposes of the tip pool provision. The court disagreed, stating that “it would be an anathema to the purpose behind the FLSA to simultaneously allow [an owner] to take tips from a collective tip pool that was set up to allow him to pay his employees at a rate substantially below the minimum wage” and that a contrary finding “would broaden the FLSA’s tip credit provisions to a point where they would become meaningless.”

The court also held that the defendant owner violated the Maryland Wage and Hour Law (MWHL), the state equivalent of the FLSA, by improperly participating in the tip pool. However, the court ruled that the bartender employees who sued were not entitled to recover overtime wages under the MWHL because the law specifically exempts restaurants from its overtime provision. MD. CODE ANN. LAB. & EMPL. § 3-415.

This entry was written by Steven E. Kaplan.

Photo credit: chestnutphoto

Tip Sharing and Tip Pooling: Employers now may require tip pooling and set the percentages for each position. The regulations clarify that, in order to be eligible to receive shared tips or a distribution from a tip pool, employees must perform, or assist in performing, personal service to patrons at a level that is a “principal and regular part of their duties and is not merely occasional or incidental.” Employers who operate a tip sharing or tip pooling system must also maintain records for six years.

Service Charges: Any added charge for service or the like is presumed to be a gratuity and must be distributed to the food service workers who provided the service. To avoid having a mandatory charge purport to be a gratuity, administrative charges, overhead fees, operations charges or similar charges in connection with a banquet or special function must be clearly identified as such, and customers must be specifically notified that the charge is not a gratuity or tip. Adequate notification must include a statement in the banquet or event agreement, and on any menu or bill listing practices, that the fee is not purported to be a gratuity and will not be distributed as a gratuity to the employees who provide service to guests. The notice must appear, at least, in font size similar to surrounding text, and must immediately follow the disclosure of the charge.

Written Notice of Pay Rates, Tip Credit and Pay Day: Prior to the start of employment, and any time an employee’s hourly rate of pay is changed, an employer must give an employee written notice of the: (1) regular hourly pay rate; (2) overtime hourly pay rate; (3) the amount of tip credit taken, if any; and (4) the regular pay day. The notice must also state that extra pay is required if the employee’s tips are ever insufficient to bring the employee up to the basic minimum hourly rate. The notice must be provided in English and any other language spoken by the employee as his or her primary language. Employers must obtain an acknowledgement of receipt from their employees of this notice, and such acknowledgment must be retained by the employer for six years.

This entry was written by Andrew Marks.

The court of appeal in Dave & Busters first observed that § 351 does not distinguish on its face between “direct” and “indirect” servers. (See our previous entries on recent DOL and judicial interpretation of tip pooling arrangements here and here).  The court explained that § 351 contains only two conditions: (1) the person must be an employee, and (2) the tip must have been “paid, given or left for” the employee. The court then “put to rest a controversy” caused by a 1990 case, Leighton v. Old Heidelberg, Ltd., 219 Cal. App. 3d 1062 (“Old Heidelberg”). The employee in Old Heidelberg contended that § 351 prohibits an employer from appropriating tips left for the server, and that requiring the servers to give part of his or her tip to the busboys was unlawful. The appellate court rejected the employee’s argument, reasoning that in leaving a tip, the patron intends to tip more than just the server or waiter. The plaintiff in Dave & Buster’s seized on language in Old Heidelberg “[i]f more than one employee, for example a waitress or a busboy, directly serve the table of a patron, the gratuity is left for the ‘employees’ within the meaning of section 351, and thereunder becomes their sole property as against the employer, to be equitably distributed between them” Old Heidelberg, 219 Cal. App. 3d at 1070.

The Dave & Buster’s court rejected the plaintiff’s “direct service” limitation on tip-pooling for four reasons: (1) Old Heidelberg did not define “direct” versus “indirect” service. A reasonable interpretation is that a bartender who mixes or pours a drink that a server delivers to a patron is “directly” serving the table. (2) Old Heidelberg made no attempt to fashion a rule that would limit tips to servers and busboys. (3) Old Heidelberg only held that busboys were entitled to share in tips; it did not address who is excluded from tip-pooling arrangements. (4) Old Heidelberg may have recognized some limitations on which employees could share in tips, but the court “did not decide what those limitations are, nor did it address the criteria or standards under which those limitations should be set.” The court noted that tip-pooling exists to “minimize friction between employees and to enable the employer to manage the potential confusion about gratuities in a way that is fair to the employees.” The court found it unnecessary to “ignite an artificial controversy over “direct” versus “indirect” service when the statute’s test is whether the tip was “paid, given to, or left for” the employee.

The Dave & Buster’s court provided helpful language for employers in different industries:

It is in the nature of a tip pool that it is based on the general experience of each particular establishment, that it is only broadly predictive of the reasons for and the patterns of tipping in that particular restaurant and that, in the final analysis, this is the best that anyone can do. It is simply not possible to devise a system that works with mathematical precision and Solomonic justice in each one of the millions of transactions that take place every day.

The Dave & Buster’s court also determined that the bartenders need not personally deliver the drinks to the table, and rejected the plaintiff’s reliance on a DLSE Opinion Letter dated Dec. 28, 1998, which identifies dishwashers, cooks and, for the most part, chefs, as employees who “do not provide direct table service” and therefore cannot share in tips. The court noted that “the propriety of administrative action predicated on the phrase ‘direct table service’ is not before us and therefore we do not express an opinion about any such administrative action involving the phrase ‘direct table service.’” Finally, in light of its holding, Dave & Buster’s did not address the employer’s arguments that the plaintiff could not invoke Cal. Bus. & Prof. Code § 17200 because he was not injured, and Labor Code § 355 mandates that the Department of Industrial Relations, and thus by implication not private parties, enforces § 351, i.e., there is no private right of action for an alleged violation of § 351. Employers should also note that California Labor Code § 353 and the FLSA require employers to retain accurate records of tips paid.

Until the Supreme Court of California decides the pending Starbucks tip-pooling class action case (in which a San Diego judge awarded $86 million, plus interest and attorneys’ fees) Chou v. Starbucks, trial court case no. GIC 836925, employers should ensure that anyone with any management responsibilities does not share in the tips. A more conservative approach would be to limit the sharing only to those employees (1) without any management responsibilities and (2) with direct face-to-face contact with customers. 

This blog entry was authored by Tyler Paetkau.