On July 20th the U.S. Department of Labor signaled its plan to rescind the tip-pooling restrictions put in place under the Obama Administration. It stated it will issue a “Notice of Proposed Rulemaking,”specifically, “in this Notice of Proposed Rulemaking, the Department will propose to rescind the current restrictions on tip pooling by employers that pay tipped employees the full minimum wage directly.” This notice does not immediately change the law, but is the first step in future change.
Below is an analysis of a recent 10th circuit court ruling on the ownership of tips when an employee is paid above the minimum wage.
Plaintiff Marlow (employee) sued her employer, The New Food Guy, Inc. dba Relish Catering (employer) for alleged violations of The Fair Labor Standards Act (FLSA). The Fair Labor Standards Act (FLSA) requires a minimum wage of $7.25 plus time and a half for overtime. Relish paid Marlow $12 per hour and $18 per hour for overtime. Employer retained all tips paid by customers and did not share any amount of the tips with employee. Marlow claims her employer is obligated to give her a share of all tips paid by customers. Marlow’s argument relies on FLSA tip-credit provision that applies to employers who satisfy their minimum wage obligations with tips retained by their employees, and on a regulation promulgated by the Department of Labor (DOL).
1. Does an employer violate the FLSA tip-credit provision when it pays its employees a set wage that is greater that the minimum wage but the employer retains all tips paid by its customers?
2. Does the DOL have the authority to promulgate regulations that make tips the property of the employee even if an employer pays its employees a set wage that is greater than the minimum wage and has not taken the tip credit?
In the 10th Circuit, an employer does not violate the FLSA tip-credit provision when it pays its employees a set wage greater than minimum wage. The DOL did not have the authority to promulgate the FLSA tip-credit provision to make tips the property of the employee if the employee receives a set wage greater than minimum wage.
In general, the FLSA’s concern is with the wage payments employees receive, and not with tracing the source of the money used by the employer to pay the wage. The employer has the right to make it a condition of employment that it would retain or own all tips. The tip-credit provision does not extend to this scenario. The provision gives employers of “tipped employees” the option of paying a reduced hourly wage of $2.13 as long as the employees receive enough tips to bring them to the $7.25 minimum. If the employee does not receive enough tips, the employer pays the difference. Excess tips would also go to the employee. Here, the employer never invoked the tip-credit provision in the first place because it paid Marlow a wage above the $7.25 minimum wage. That wage was not dependent on tips. All that the tip-credit provision does is permit a limited tip credit and then state what the employer must do if it wishes to take that credit. When employers do not take the credit, they must do what all employers must do – pay full minimum wage.
Congress empowered the DOL to promulgate necessary rules and regulations with regard to the FLSA. DOL sought to exercise this power through a regulation that stated “tips are the property of the employee whether or not employer has taken the tip credit.” Here, Marlow relied on this regulation, because on its face, it supports her position. However, the DOL did not have the authority to promulgate this regulation in the first place. Agencies may promulgate rules to fill “ambiguities” or “gaps” in statutes. Silence or gaps are undefined terms in a statute or a statutory directive to perform a task without giving detailed instructions. Here, there is no statutory language directing the DOL to regulate ownership of tips when an employer does not invoke the tip-credit provision. The text of the tip-credit provision limits tip restrictions to those employers who take the tip credit. By its clear language, the tip-credit provision applies only when the employer uses tips as a credit against minimum wage. It does not apply to employers who pay employees a set wage above the minimum wage. When the intent of the statute is clear and unambiguous as in the present case of the tip-credit provision, agencies must always defer to the unambiguous expressed intent of Congress. Thus, the DOL did not have the authority to promulgate its regulation concerning the the tip-credit provision because the clear language of the tip-credit provision is not ambiguous.
Takeaway for the NMRA:
New Mexico restaurants that pay employees a fixed wage above the set minimum wage and do not take advantage of the tip-credit have no obligation to share tips with employees and may retain all tips. In this situation, the tips belong to the restaurant and the employee is only entitled to receive his/her hourly wages. It is advisable that any restaurant include discussion of any such arrangements in its Employee Handbook as a best practice.
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