DOL issues final rules on minimum wages for contractors

Executive Order 13658, which was signed by the President on February 12, 2014, requires that the hourly minimum wage paid by contractors to workers performing on or in connection with covered contracts with the federal government be at least: (1) $10.10 per hour, beginning January 1, 2015; and (2) an amount determined by the Secretary of Labor, beginning January 1, 2016, and annually thereafter (see Payroll Management Guide Report Letter 2344, February 25, 2014). The U.S Department of Labor Wage and Hour Division has issued final regulations implementing the order. There is a fact sheet and some questions and answers posted on DOL’s website: http://www.dol.gov/whd/flsa/eo13658/faq.htm.

The payroll-related highlights are summarized below:

Rate of pay

Contractors must pay each worker performing work on or in connection with a covered contract no less than the applicable minimum wage for all hours worked on or in connection with the covered contract, unless such worker is exempt. In determining whether a worker is performing within the scope of a covered contract, all workers who, on or after the date of award, are engaged in working on or in connection with the contract, either in performing the specific services called for by its terms or in performing other duties necessary to the performance of the contract, are subject to the Executive Order a specific exemption applies. Nothing in the Executive Order or the regulations excuses noncompliance with any applicable federal or state prevailing wage law or any applicable law or municipal ordinance establishing a minimum wage higher than the minimum wage established under Executive Order.

Fringe benefits

Contractors may not discharge any part of its minimum wage obligation by furnishing fringe benefits or, with respect to workers whose wages are governed by the Service Contract Act, the cash equivalent thereof.

Deductions

Deductions that reduce a worker’s wages below the minimum wage rate may be made only if such deduction qualifies as a: (a) deduction required by federal, state, or local law, such as federal or state withholding of income taxes; (b) deduction for payments made to third parties pursuant to court order; (c) deduction directed by a voluntary assignment of the worker or his or her authorized representative; or (d) deduction for the reasonable cost or fair value of furnishing such worker with “board, lodging, or other facilities.”

Overtime payments

The Fair Labor Standards Act and the Contract Work Hours and Safety Standards Act require overtime payment of not less than one and one-half times the regular rate of pay or basic rate of pay for all hours worked over 40 hours in a workweek to covered workers. The regular rate of pay under the Fair Labor Standards Act is generally determined by dividing the worker’s total earnings in any workweek by the total number of hours actually worked by the worker in that workweek for which such compensation was paid.

Frequency of pay

Wage payments to workers must be made no later than one pay period following the end of the regular pay period in which such wages were earned or accrued. A pay period may not be of any duration longer than semi-monthly.

Recordkeeping

Contractors and subcontractors must maintain, for three years, records containing the following information:

1. Name, address, and social security number of each worker;
2. The worker’s occupation(s) or classification(s);
3. The rate or rates of wages paid;
4. The number of daily and weekly hours worked by each worker;
5. Any deductions made; and
6. The total wages paid.

Tipped employees

Employers must pay tipped employees an hourly cash wage of at least: $4.90 an hour beginning on January 1, 2015. For each succeeding 1-year period until the hourly cash wage equals 70% of the minimum wage in effect under the Executive Order, the hourly cash wage applicable in the prior year, increased by the lesser of $0.95 or the amount necessary for the hourly cash wage to equal 70% of the minimum wage in effect under the Executive Order. Then, for each subsequent year, 70% of the minimum wage in effect under of the Executive Order for such year rounded to the nearest multiple of $0.05 plus an additional amount on account of the tips received by such employee (tip credit) which is equal to the difference between the hourly cash wage in paragraph above and the minimum wage in effect under the Executive Order.

Insufficient tips. Where tipped employees do not receive a sufficient amount of tips in the workweek to equal the amount of the tip credit, the employer must increase the cash wage paid for the workweek so that the amount of the cash wage paid and the tips received by the employee equal the minimum wage under s the Executive Order. An employer may pay a higher cash wage than required and take a lower tip credit but may not pay a lower cash wage than required and then take a greater tip credit. For the employer to claim a tip credit, the employer must demonstrate that the worker received at least the amount of the credit claimed in actual tips. If the worker received less than the claimed tip credit amount in tips during the workweek, the employer is required to pay the balance on the regular payday so that the worker receives the minimum wage in effect under the Executive Order with the defined combination of wages and tips. If the wage required to be paid under the Service Contract Act or any other applicable law or regulation is higher than the wage required by the Executive Order, the employer shall pay additional cash wages equal to the difference between the minimum wage in effect and the highest wage required to be paid.

A covered worker employed in an occupation in which he or she receives tips is a “tipped employee” when he or she customarily and regularly receives more than $30 a month in tips. Only tips actually retained by the employee after any tip pooling may be counted in determining whether the person is a “tipped employee” and in applying the Executive Order. An employee may be a “tipped employee” regardless of whether the employee is employed full time or part time so long as the employee customarily and regularly receives more than $30 a month in tips. An employee who does not receive more than $30 a month in tips customarily and regularly is not a tipped employee for purposes of the Executive Order and must receive the full minimum wage without any credit for tips received under the provisions of section 3.

Dual jobs. In some situations an employee is employed in a tipped occupation and a non-tipped occupation (dual jobs), as for example, where a maintenance person in a hotel also works as a server. In such a situation if the employee customarily and regularly receives at least $30 a month in tips for the work as a server, the employee is a tipped employee only when working as a server. The tip credit can only be taken for the hours spent in the tipped occupation and no tip credit can be taken for the hours of employment in the non-tipped occupation. Such a situation is distinguishable from that of a tipped employee performing incidental duties that are related to the tipped occupation but that are not directed toward producing tips, for example when a server spends part of his or her time cleaning and setting tables, toasting bread, making coffee and occasionally washing dishes or glasses. Related duties may not comprise more than 20% of the hours worked in the tipped occupation in a workweek.

Characteristics of tips. A tip is a sum presented by a customer as a gift or gratuity in recognition of some service performed for the customer. It is to be distinguished from payment of a fixed charge, if any, made for the service. Whether a tip is to be given, and its amount, are matters determined solely by the customer. Tips are the property of the employee whether or not the employer has taken a tip credit. The employer is prohibited from using an employee’s tips, whether or not it has taken a tip credit, for any reason other than as a credit against its minimum wage obligations under the Executive Order to the employee, or in furtherance of a valid tip pool. An employer and employee cannot agree to waive the workers right to retain his or her tips. Customers may present cash tips directly to the employee or may designate a tip amount to be added to their bill when paying with a credit card or by other electronic means. Special gifts in forms other than money or its equivalent such as theater tickets, passes, or merchandise, are not counted as tips received by the employee for purposes of determining wages paid under the Executive Order.
Service charges. Compulsory charge for service, such as 15% of the amount of the bill, imposed on a customer by an employer’s establishment, is not a tip and, even if distributed by the employer to its workers, cannot be counted as a tip for purposes of determining if the worker is a tipped employee. Similarly, where negotiations between a hotel and a customer for banquet facilities include amounts for distribution to workers of the hotel, the amounts so distributed are not tips. Where service charges are distributed by the employer to its workers, however, they may be used in their entirety to satisfy the wage payment requirements of the Executive Order.

Tip pooling. Where tipped employees share tips through a tip pool, only the amounts retained by the tipped employees after any redistribution through a tip pool are considered tips in applying the provisions of FLSA and the wage payment provisions of the Executive Order. There is no maximum contribution percentage on valid mandatory tip pools, which can only include tipped employees. However, an employer must notify its employees of any required tip pool contribution amount, may only take a tip credit for the amount of tips each employee ultimately receives, and may not retain any of the employees’ tips for any other purpose.

Notice. An employer is not eligible to take the tip credit unless it has informed its tipped employees in advance of the employer’s use of the tip credit. The employer must inform the tipped employee of the amount of the cash wage that is to be paid by the employer, which cannot be lower than the required cash wage; the additional amount by which the wages of the tipped employee will be considered 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 tipped employees; and that the tip credit shall not apply to any worker who has not been informed of the new requirements. In addition, contractors must notify all workers performing work on or in connection with a covered contract of the applicable minimum wage rate under the Executive Order. (Department of Labor, Final Rule 29 CFR Part 10, RIN 1235-AA10, October 1, 2014.)

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