On December 22 the Federal Department of Labor (DOL) published a Final Rule changing the FLSA regulations for tipped employees. The Final Rule takes effect 60 days after publication. A caveat before we dig into the Final Rule; the change affects only federal law. As with all things wage-and-hour-related, many states, and some local governments, enforce more stringent requirements. Some jurisdictions prohibit tip credits entirely. This post focuses on the federal standard only. Employers must adhere to the requirements applicable to their particular business in each location in which they operate.
The FLSA has long allowed a “tip credit” to cover a portion of the minimum wage an employer would otherwise be required to pay certain employees who regularly receive gratuities. One requirement is that the tipped employees retain all of their tips with the exception of a qualified tip pool. The regulations surrounding tip pools have changed over the years due to a range of court rulings, legislative action, and agency rule making. The Final Rule is the latest iteration of regulations surrounding the “tip credit provision” [29 USC § 203(m)(2)(A) often referred to as simply “section 3(m)”].
Under the newly published Final Rule:
Employers may continue to enforce mandatory tip pooling arrangements;
If the tip credit is taken, the employer may not include employees who do not routinely receive tips (i.e. kitchen staff) in a mandatory tip pool;
Employers that do not take the tip credit (i.e. those that pay tipped employees a set hourly wage that is at or above the applicable minimum wage for non-tipped employees) may include employees who do not routinely receive tips in mandatory tip pools;
Managers and supervisors (as determined based on the duties portion of the test for the FLSA’s executive exemption) are prohibited from participating in tip pools (regardless of whether a tip credit is taken);
Tip pool funds must be paid out at least as frequently as the employer pays out base hourly wages; and
Finally, employers may take a tip credit for time spent performing tasks that do not generate tips (i.e. cleaning, stocking, rolling silverware, etc.) as long as the non-tip generating duties relate to the tipped occupation and are performed contemporaneously with, or immediately before or after, the duties for which the employee does receive tips. The Rule expressly rejects the 80/20 rule referenced in some opinion letters and court decisions.
A final reminder that is particularly relevant in light of the massive sustained blow the service industry has taken of late; the tip credit cannot exceed the amount of tips the employee actually receives. Also, if an employee’s base hourly rate, plus the tips actually received, adds up to less than the applicable minimum wage for any particular shift, the employer must make up the difference.
In a follow up to our recent
post, the US Department of Labor (DOL) has now issued its final rule regarding the
salary thresholds for exempt status. The final rule will go into effect on
January 1, 2020 and establishes the following rules:
Salary exempt employees must earn at least $684/week (equivalent to $35,568 per year for a full-year worker) (which is slightly more than was proposed in March 2019 due to inflation/updated data but less than was proposed during the Obama Era);
Employers can use non-discretionary bonuses and incentive payments that are paid at least annually to satisfy up to 10% of the salary basis for the white collar exemptions (if this is utilized the minimum salary paid can be no less than $615.60/week) (however, it should be noted that (1) if the employee does not earn the bonus the employer will need to pay the amount anyway no later than one week from the end of the 52 week period or the salary basis will not be met and (2) if the employee leaves employment before the bonus is paid/earned the employer will have to pay the pro-rata share of the bonus at termination to ensure the minimum salary threshold was met);
In order to qualify for the “highly compensated exemption” employees must earn at least $107,432/year (formerly $100,000/year) and must be paid at least $684/week (however, Illinois employers should note this is not applicable in Illinois because Illinois did not adopt the highly compensated exemption); and
Revises the special salary level for the motion picture industry and US territories.
We anticipate the new rule will receive legal challenge. However, litigation is unpredictable, so employers should begin preparing now to ensure they are ready for January 1, 2020.
Today the US Department of Labor (“DOL”) issued its long awaited final rule increasing the minimum salary requirements under the Fair Labor Standards Act (“FLSA”).
Key Provisions of the Final Rule
The Final Rule focuses primarily on updating the salary and compensation levels needed for Executive, Administrative and Professional workers to be exempt.
Of particular significance, the Final Rule:
Sets the standard salary level at $913 per week – $47,476 annually;
Sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to $134,00; and
Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels using the above percentiles.
Additionally, the Final Rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level.
The effective date of the final rule is December 1, 2016. The initial increases to the standard salary level (from $455 to $913 per week) and HCE total annual compensation requirement (from $100,000 to $134,004 per year) will be effective on that date. Future automatic updates to those thresholds will occur every three years, beginning on January 1, 2020.
A copy of the final rule as well as other information can be found here.
In Light of these Final Regulations, Employers MUST Analyze the Following:
How many of your current employees are affected by this final rule?
Is a salary increase for those who do not currently meet the salary requirement a plausible financial decision to the required increases?
Are there job positions that should now be reclassified as non-exempt and the employees will now be entitled to overtime if they work over 40 hours?
Review your handbooks and policies regarding exempt and non-exempt status.
Tighten up your policies regarding working overtime and analyze the possibility of limiting the number of overtime hours worked for non-exempt employees.
Review and update policies and practices concerning “off the clock” time and ensure that there are proper controls regarding all hours actually worked by non-exempt employees.
Review benefits applicable to exempt and non-exempt employees and how a change in status may impact the benefits to your employees.
Employers have OPTIONS Regarding these Proposed DOL Changes:
Increase the employee’s salary to meet the new regulations so the employee continues to meet the exemption;
Keep the salary the same and pay the required overtime payments based on the employee’s regular rate of pay when the employee works over 40 hours (but you must track all hours worked);
Reduce the employee’s salary or change the employee’s pay to a lower hourly rate so the total earnings do not change after overtime is paid;
Eliminate the employee working any overtime hours; or
Some combination of the above options including possible Reductions in Force.
Legal counsel will be able to assist employers in navigating these business changes.