C. Burton & Igor M. Babichenko
On April 5, 2011, the Department of Labor ("DOL")
published a final rule 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. The "tip
credit" provision, however, allows an employer to pay "tipped employees" below minimum wage, provided that the wage and the
employees' tips, taken together, equal at least the minimum wage.
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
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:
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. 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
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.
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. Instead,
the DOL concluded that "bonus and premium payments...are incompatible with the
fluctuating workweek method of computing overtime"
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
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
DOL Final Rule Addresses Additional FLSA
In addition to addressing the issues discussed above, the
Although these new rule changes may affect only specific
industries, employers must be aware of them and review their policies to ensure
 76 Fed. Reg. 18832
(Apr. 5, 2011).
 29 U.S.C. §
 "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. §
 29 U.S.C. § 203(m).
 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.
 This amount cannot
exceed the difference between the minimum wage and the actual cash wage paid by
the employer to the employee.
 Cumbie v. Woody
Woo, Inc., 596 F.3d 577 (9th Cir. 2010).
 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
 73 Fed. Reg. 43654
(Jul. 28, 2008).
 76 Fed. Reg. 18832
(Apr. 5, 2011).
 E.g., attendance
bonuses, personal safety bonuses, shift-differential premium pay.
 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 &