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Tips for employees: DOL proposes updated rules for tipped employee

Employers have until January 4 to submit comments

Posted December 5, 2017

The Department of Labor (DOL) released a Notice of Proposed Rulemaking (NPRM) on December 5, 2017, to update tip regulations under the Fair Labor Standards Act (FLSA). The proposed rule seeks to allow employers to share tips between a larger pool of employees. The DOL is hoping to decrease wage disparities between tipped and non-tipped workers.

Current tipped-employee rules

The Fair Labor Standards Act (FLSA) allows employers to take a tip credit, essentially allowing employers to pay a reduced minimum wage rate of $2.13 per hour, as long as the employee receives enough tips to earn the federal minimum wage of $7.25 per hour. If an employee does not make enough in tips to earn the full minimum wage, the employer must make up the difference.

Under the current tipped-employee regulations released in 2011, tips belong solely to the employee earning the tips and may not be kept by the employer or shared with employees who do not traditionally receive direct tips (such as cooks or dish washers). Even when employers choose to pay tipped employees the full minimum wage, all tips received belong to employees.

Courts have split tips decisions

The validity of the current tipped-employee rules has been challenged in several federal appeals courts. Most recently, challenges have been heard by the Ninth and Tenth Circuit Courts of Appeals. Both challenges came from employers who felt they could retain employee tips because they paid at least the minimum wage, and had met their compensation obligations: The FLSA requires employees to be paid minimum wage for all hours worked and overtime for any hours worked over 40 in a workweek.

In the case before the Tenth Circuit, the court agreed with the employer, stating the current regulation is at odds with the FLSA (the statute) and does not apply to employers who pay tipped employees at least full minimum wage (not taking any kind of tip credit). In these situations, according to the Tenth Circuit, employers may keep the tips.

The Ninth Circuit, however, upheld the validity of the regulations and sided with tipped employees. The Ninth Circuit concluded that the FLSA does not specifically address whether employers who pay the full minimum wage may keep tips, and the 2011 rule from the DOL clarifies the gap in the law, stating employers are not entitled to employee tips.

Based on the split decisions by the Circuit Courts, the U.S. Supreme Court has been asked to hear an appeal of the Ninth Circuit decision, but the DOL’s intention to withdraw the current regulatory restrictions may make a hearing by the Supreme Court unnecessary.

Public comment period

Employers have until January 4, 2018, and are encouraged by the DOL to submit comments regarding the proposed rule.

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