A Tip on Tips – the DOL’s Tip Credit Rule is Upheld by a Federal Court

Contributed by Brandon Anderson

On May 29, 2012, a federal district court in Washington, D.C. upheld the Department of Labor’s (DOL) final rule on the Fair Labor Standards Act (FLSA) “tip credit.” 

The FLSA tip credit permits employers to take a tip credit toward its minimum wage obligation for tipped employees (those who customarily and regularly receive more than $30 a month in tips) equal to the difference between the required hourly cash wage (which must be at least $2.13) and the minimum wage (the current federal minimum wage is $7.25). In order for an employer to take advantage of the tip credit, however, the FLSA requires that employees be informed by the employer of certain tip credit provisions.

The DOL, who is charged with enforcing the FLSA, is authorized to develop rules (federal regulations) to explain and enforce the FLSA through the “notice-and-comment rulemaking process.”  As its name suggests, notice-and-comment rulemaking involves a governmental agency publishing a proposed rule, allowing the public to comment on the rule, and then publishing a “final rule” after considering the public’s comments. 

Through that process, the DOL created a regulation that explained and expanded on the requirement that employers notify tipped employees about the tip credit.  An issue arose when the final rule was published and, at least in the opinion of some, the final rule was substantially different in terms of detail than the proposed rule. 

The National Restaurant Association, along with two other trade associations, challenged the “final rule” and argued that the final rule was so drastically different that the DOL did not give the public adequate notice of the proposed change.  The federal district court disagreed. The judge held that the proposed rule met the notice requirement because the final rule was a “logical outgrowth” of the proposed rule. 

As a result of the court’s holding, tipped employees must be notified of the following:

  • The amount of the cash wage that is to be paid to the tipped employee by the employer;
  • The additional amount by which the wages of the tipped employee are increased on account of the tip credit claimed by the employer, which amount may not exceed the value of the tips actually received by the employee;
  • That all tips received by the tipped employee must be retained by the employee except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips; and
  • That the tip credit shall not apply to any employee who has not been informed of these requirements in this section.

It is always a good practice to provide these types of required notices in writing and require the employee to acknowledge receipt of the notice.  This type of “best-practice” can help employers avoid lengthy and costly litigation down the road.  If you have any questions about the tip credit or any other employment matters, it is also always a “best practice” to reach out to your labor and employment attorney.