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In April 2011, the Department of Labor (“DOL”) issued a final rule that could have a significant impact on employers that use a “tip credit” to satisfy their obligation to pay employees minimum wage. Although courts have generally required employers to notify employees of (but not explain) the tip credit, the new rule requires employers to provide very specific and detailed information regarding their use of the tip credit. If an employer fails to satisfy this notice requirement, it may not rely on the tip-credit provision in the Fair Labor Standards Act (“FLSA”), and may be subject to substantial damages. There may, however, be relief on the way.

On June 16, 2011, the National Restaurant Association, the Council of State Restaurant Associations, and the National Federation of Independent Business sued the DOL, claiming that it failed to provide employers with sufficient notice to comment and comply with the new rule and that the new rule is arbitrary, capricious, an abuse of discretion, and contrary to established law. If successful, the lawsuit would nullify the new rule, which took effect on May 5, 2011, and the DOL would be forced to start over. It is unclear how this lawsuit will be decided; however, the safest approach is for employers to comply with the new rule.

Informing Employees of the Tip Credit

The FLSA requires employers to pay non-exempt employees at least the federal minimum wage, which is currently $7.25 per hour. The FLSA, however, allows employers to pay tipped employees only $2.13 per hour in direct wages, and to use tips actually received by the employees to make up the $5.12 difference between the minimum wage ($7.25) and the required minimum direct wage ($2.13). An employer may only take this “tip credit” if: (1) it notifies tipped employees of the FLSA’s tip-credit provisions; and (2) the employee retains all tips (except amounts paid into a valid “tip pool” to be shared among employees that regularly and customarily receive tips).

Until recently, courts generally found that the FLSA required employers that take the “tip credit” to notify employees that they took the credit but to do no more. The DOL’s new rule, however, greatly expands these requirements to provide that employers must provide detailed information about their use of the tip credit, including:

1.	the amount of cash wage the employer is paying a tipped employee, which must be at least $2.13 per hour;
2.	the additional amount claimed by the employer as a tip credit, which cannot exceed $5.12;
3.	that the tip credit claimed by the employer cannot exceed the amount of tips actually received by the tipped employee;
4.	that all tips received by the tipped employee are to be retained by the employee except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips;
5.	the amount, if any, the tipped employees are required to contribute to a tip pool; and
6.	that the tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions.

The employer may provide oral or written notice of this information; however, it is strongly advised that employers provide written notice in the form of individual acknowledgments signed by each tipped employee. Otherwise, employers will likely find themselves in a swearing match over whether all the required information was conveyed orally. An employer that fails to provide the required information cannot use the tip credit and therefore must pay tipped employees at least $7.25 per hour in wages and allow the tipped employee to keep all tips received.

If you have any questions regarding the DOL’s new rule, its application, or the lawsuits challenging the new rule, please visit the Haynes and Boone, LLP Labor and Employment or Franchise and Distribution pages of our website or contact one of the lawyers listed below.  

Joyce G. Mazero 214.651.5336 [email protected]	Lawrence Morales II 210.978.7440 [email protected]	Laura E. O'Donnell 210.978.7421 [email protected]
	Emma R. Harker 512.867.8435 [email protected]

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¹ According to the FLSA, tipped employees are those who customarily and regularly receive more than $30 per month in tips.

 

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