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Tipped Off: Recent Developments in Federal Wage Law Affecting Tipped Employees

Posted April 9th, 2018 by in Wages and Overtime Law.

The federal Fair Labor Standards Act (FLSA) generally requires that employers pay employees at least $7.25 per hour. One of the few exceptions to the rule is “tipped employees” – including waiters, bartenders, and other employees who regularly receive gratuities for performing their jobs. The FLSA allows employers to subsidize the minimum wage paid to the tipped employees with gratuities earned by the employees.

To be clear, tipped employees must still receive at least $7.25 per hour; however, most of the payment can come from customers, rather than the employer. In fact, under the FLSA, employers need only pay tipped employees $2.13 per hour, so long as the following provisions are met: (i) the employees make at least $5.12 per hour in tips, (ii) the employer has informed the employees about the tip credit rules, and (iii) the employee was not required to share their tips with anyone other than a tipped employee. The third factor would be violated if a tipped employee was required to share tips with a manager, non-service employees (for example, cooks and dishwashers), or the corporate employer itself.

However, the FLSA was traditionally silent about the handling of tips when no tip credit was taken. For years, courts interpreted this silence to mean that if an employer paid a tipped employee at least $7.25 per hour, it could do whatever it wanted with the workers’ tips under the FLSA.*

In 2011, the U.S. Department of Labor amended its regulations to say that “Tips are the property of the employee whether or not the employer has taken a tip credit under . . . the FLSA.” A flurry of litigation followed, with most, but not all, courts who considered the issue ruling that the DOL had overstepped, writing protections into the FLSA where it did not exist.

Six years later, with a new, employer-friendly administration in the White House, the Department of Labor proposed new regulations to roll back the 2011 tip rules. It would now be clear that the federal law allowed employers to take and use gratuity earned by tipped employees, so long as the employees were paid at least $7.25 per hour. Among other justifications, the DOL emphasized that several states had passed greater protections for tipped employees and required employers to pay cash wages of $7.25 or more per hour.  The DOL explained that this meant that fewer employers could now take the tip credit under the FLSA, suggesting that the labor agency was concerned about employers and whether they were still able to subsidize their payroll from tips.

While the DOL suggested that the proposed rule would allow greater tip sharing and potentially reduce wage disparities between tipped employees (for example, servers) and non-tipped employees (for example, cooks), many in the public expressed concern that management would pocket the tips. See e.g. https://www.eater.com/2018/1/31/16955620/tip-pooling-laws-whats-next. Indeed, after the DOL published the proposed rule, it was discovered that the agency had intentionally withheld analysis that the proposed regulation “could allow businesses to skim $640 million in gratuities.” https://bnanews.bna.com/daily-labor-report/mulvaney-acosta-override-regulatory-office-to-hide-tips-rule-data. Shockingly, this was the DOL’s conservative assessment; the original analysis was that employees would lose billions of dollars. Id.

The fallout was swift. As part of the 2018 budget bill, Congress included a rider which amended the FLSA to prohibit employers, including supervisors and managers, from keeping employees’ tips. See https://bnanews.bna.com/daily-labor-report/budget-brings-ambiguity-on-tip-sharing-issue. Further, the new provision provides that employers who violated the law could be fined and liable to employees for the retained tips plus liquidated damages.

While the matter is not fully resolved—for example, the DOL will draft new regulations in response to the tip law and may provide guidance as to who qualifies as a “supervisor” or “manager”—this is clearly a significant legislative win for tipped employees.

If you been denied your tips or other wages, you should consult with a lawyer to determine whether to bring a wage theft lawsuit. Sanford Heisler Sharp, LLP has experienced employment lawyers in New York, Washington, DC, San Francisco, San Diego, Tennessee, and Baltimore.

* While the FLSA traditionally allowed employers to take gratuity received by tipped employees so long as the employer paid at least the minimum wage, New York and other states have long prohibited such actions as wage theft.

Michael Palmer

Michael Palmer

Michael Palmer is a Partner in the New York office of Sanford Heisler Sharp. Mr. Palmer serves as Co-Chair of the Firm’s wage and hour practice and also has the expertise to represent individuals in False Claims Act and employment discrimination actions. Learn More

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