Even non-exempt employees can cause confusion and employer liability under the FLSA. Often, employers run into trouble when attempting to classify their employees for purposes of pay exemptions. But equally tricky is how to pay non-exempt employees who have non-traditional forms of payment, such as tipped employees.
The recent slew of major FLSA wage and hour cases (most notably Top Chef Mario Batali’s $5.25 million dollar settlement with his employees!) related to tipped employees shows that employers nationwide are confused about how to properly pay tipped employees, particularly those who work in restaurants.
The New York Attorney General’s Office, after investigating a Manhattan restaurant and nightclub, found that the restaurant paid workers less than minimum wage, denied them overtime pay, illegally distributed tips to management, and fired employees who complained about the pay practices. In a settlement agreement with New York Attorney General Eric Schneiderman, the restaurant must pay $200,000 to those employees. The settlement was particularly noteworthy because it involved New York’s recently-enacted Wage Theft Prevention Act. The new law creates additional remedies for workers, and a significant portion of the settlement was based on new remedies available only under the new law.
Other states are seeing wage and hour violations with regard to tipped employees, too. In Colorado, for example, several restaurants have been sued for failing to pay workers minimum wage and overtime, and (as in the New York investigation) for illegally distributing tips. Under the FLSA, the only employees who can collect from a tip pool are workers who regularly receive tips, such as servers or bartenders. The Colorado suits allege that chefs, dishwashers and food preparers — who were not regularly tipped — also participated in the tip pool.
To that end, the DOL recently addressed the FLSA’s discussion of employee tips. The DOL memorandum, “Enforcement of 2011 Tip Credit Regulations,” explains its 2011 regulations and disagrees with earlier Ninth Circuit interpretations of the FLSA’s provisions regarding tipped employees. Prior to the DOL regulations and memorandum, the FLSA was silent on the topic of how to pay tipped employees when the employer does not apply tips to satisfy minimum wage requirements. In the absence of FLSA guidance, the Ninth Circuit ruled that the FLSA’s restrictions on the use of employees’ tips do not apply when the employer does not take a tip credit. The Ninth Circuit’s ruling reflected a gap in the FLSA: how employees’ tips may be used when the employer does not take a tip credit.
Now, the DOL has filled that gap, and those Ninth Circuit rulings are no longer the law in that jurisdiction. After the DOL interpretation, a tip is the sole property of the tipped employee, regardless of whether the employer takes a tip credit, and the employer is prohibited from using the employee’s tips in any way other than those prescribed by the FLSA.
Under the FLSA, “tipped employees” are those who regularly receive more than $30 a month in tips. Tips actually received by tipped employees may be counted as wages, but the employer must pay at least $2.13 an hour in direct wages. If an employee’s tips combined with the employer’s direct wages of at least $2.13 an hour do not equal the federal minimum hourly wage, the employer must make up the difference.
If an employer chooses to count tips against the employee’s minimum wage, the employer must:
1) Inform each tipped employee about the tip credit allowance (including amount to be credited) before the credit is utilized.
2) Be able to show that the employee receives at least the minimum wage when direct wages and the tip credit allowance are combined.
3) Allow the tipped employee to retain all tips, whether or not the employer elects to take a tip credit for tips received, except to the extent the employee participates in a valid tip pooling arrangement.
The FLSA prohibits any arrangement where any part of the tip received becomes the property of the employer. Again, a tip is the sole property of the tipped employee. Where an employer does not strictly observe the FLSA’s tip credit provisions (above), no tip credit may be claimed and the employees are entitled to receive the full cash minimum wage, in addition to retaining tips they may have received.