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Labor and Employment Law

Department of Labor Publishes New FLSA Rules Clarifying Tip Credit Rules and Limiting Use of the Fluctuating Workweek

by: David C. Burton & Igor M. Babichenko

On April 5, 2011, the Department of Labor ("DOL") published a final rule[1] updating the regulations under the Fair Labor Standards Act ("FLSA").  The final rule, which will take effect on May 5, 2011, is particularly significant to employers with salaried non-exempt employees who are compensated under the fluctuating workweek method of payment, as well as employers who use the FLSA "tip credit" to fulfill their minimum wage requirements.

Final Rule Provides Guidance on "Tip Credit" and "Tip Pooling"

The FLSA generally requires employers to pay employees a minimum wage of $7.25 per hour.[2]  The "tip credit" provision, however, allows an employer to pay "tipped employees[3]" below minimum wage, provided that the wage and the employees' tips, taken together, equal at least the minimum wage.[4]

The final rule clarifies the "tip credit" disclosure requirement and resolves the issue of whether an employer must "explain" to its employees how the "tip credit" provision operates or simply "inform" its employees that the employer will treat tips as satisfying part of the minimum wage requirement.

Under the final rule, an employer intending to take advantage of the "tip credit" provision need only inform its employees that it intends to use the "tip credit" before doing so.  The employer, however, must also inform its employees of the following:

  • the direct cash wage the employer is paying a tipped employee;[5]
  • the additional amount the employer is using as a credit against tips received;[6]
  • that the additional amount claimed by the employer on account of tips as the tips credit may not exceed the value of the tips actually received by the employee;
  • that the tip credit shall not apply with respect to any tipped employee unless the employee has been informed of the tip credit provisions; and
  • that all tips received by the tipped employee must be retained by the employee except for the pooling of tips among employees who customarily and regularly receive tips.

Furthermore, the final rule does not require employers to provide these notifications in writing.  The DOL, however, noted that it is preferable for employers to do so because a physical document would permit an employer to demonstrate that it has met these requirements.

What is more, the DOL clarified that an employer is prohibited from using its employees' tips for any other reason than as a "tip credit" or a legitimate "tip pool."  The DOL criticized a recent Ninth Circuit decision, which held that the FLSA's limitations on the employer's use of an employee's tips apply only when a "tip credit" is taken, and that, when a "tip credit" is not taken, tips are the property of the employee only absent an agreement to the contrary.[7]  Contrary to the result in Woody Woo, the final rule makes clear that tips are the property of the employee regardless of whether the employer has elected to use the "tip credit."  Consequently, employers who take advantage of the FLSA's "tip credit" provision must review their notice protocols and "tip pool" arrangements to ensure compliance with the final rule.

DOL Limits the Fluctuating Workweek Method of Payment

Another significant development under the final rule is the DOL's rejection of a proposal clarifying the fluctuating workweek method of payment.  Under this method, an employer may pay a non-exempt salaried employee a fixed salary where the employee's hours vary from week to week.  If the employee works in excess of 40 hours in any workweek, the employer may calculate the employee's overtime rate by dividing the salary by the number of hours worked and dividing the resulting rate in half.[8]

The proposed rule rejected by the DOL would have made clear that, in addition to a fixed salary, the employer could also pay an employee bonuses and other non-overtime premiums without losing the benefit of the fluctuating workweek pay method.[9]  Instead, the DOL concluded that "bonus and premium payments...are incompatible with the fluctuating workweek method of computing overtime[10]" and that payment of bonuses or other premium amounts to non-exempt salaried employees may eliminate the employer's ability to use the fluctuating workweek method.

As a result of the DOL's position on the fluctuating workweek method of pay, employers should examine their payroll practices to ensure compliance.  Specifically, employers must determine whether their non-exempt salaried employees receive any bonuses or other premium non-overtime payments.[11] 

DOL Final Rule Addresses Additional FLSA Concerns

In addition to addressing the issues discussed above, the DOL:

  • clarified that the use of an employer's vehicle for travel by an employee shall not be considered part of the employee's principal activities if the use of the vehicle is within the normal commuting area for the employer and the use of the vehicle is subject to an agreement;
  • adopted a statutory amendment regarding employees engaged in fire protection activities and eliminated the existing 20% tolerance rule for such employees;[12]
  • declined to adopt a proposed rule to exempt service managers, service writers, service advisors, and service salesmen of automobiles from overtime requirements;
  • declined to amend the regulations to reflect its current enforcement policy allowing employers to take a "tip credit" for employer-provided meals even if the employee's acceptance is not voluntary; and
  • rejected a proposal to allow public-sector employers to grant compensatory time requested "within a reasonable period" of the request, instead of on the specific dates requested.

Although these new rule changes may affect only specific industries, employers must be aware of them and review their policies to ensure compliance.

[1] 76 Fed. Reg. 18832 (Apr. 5, 2011).

[2] 29 U.S.C.  § 206(a)(1)(C).

[3] "Tipped employees" are employees that "are engaged in an occupation in which [they] customarily and regularly receive [] more than $30 a month in tips."  29 U.S.C. § 203(t).

[4] 29 U.S.C. § 203(m).

[5] The direct cash wage cannot be less than $2.13 per hour.  Thus, the employer's "tip credit" is capped at $5.12 per hour.

[6] This amount cannot exceed the difference between the minimum wage and the actual cash wage paid by the employer to the employee.

[7] Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9th Cir. 2010).

[8] 29 C.F.R. § 778.114.  Because the fixed salary is considered straight time compensation for all of the employee's hours, including those worked above forty, the employer needs to pay the employee only the additional  half rate of pay for the overtime hours, rather than the traditional time-and-one-half rate.

[9] 73 Fed. Reg. 43654 (Jul. 28, 2008).

[10] 76 Fed. Reg. 18832 (Apr. 5, 2011).

[11] E.g., attendance bonuses, personal safety bonuses, shift-differential premium pay.

[12] The DOL, however, maintained the 20% tolerance rule for law enforcement personnel


For more information about this topic, please contact the authors or any member of the Williams Mullen Labor & Employment Team.