DOL’s prohibition on employers retaining tips is invalid

The Department of Labor (DOL) exceeded its authority when it implemented a regulation categorically prohibiting employers from retaining tips regardless of whether they avail themselves of the tip credit, the Tenth Circuit held. The underlying suit was brought by a catering employee whose employer pocketed the gratuities added by customers when paying the final bill after catering events. Because the caterer did not take the tip credit-in fact, the server earned well above the minimum wage-the tip-credit provision did not apply. The bottom line: “An employer that pays its employees a set wage greater than the minimum wage does not violate the FLSA when it retains tips paid by customers,” the appeals court wrote, affirming a district court’s grant of judgment on the pleadings to her employer. The Department of Justice (DOJ) had filed an amicus brief in the case to defend the DOL regulation, to no avail.
The caterer paid its servers a base wage of $12 an hour ($18 an hour for overtime). Catering customers typically added gratuities when paying their final bill at the end of events, and the caterer retained those gratuities rather than pass them on to the servers. Contending that the FLSA requires the caterer to turn over at least a share of those tips, one of the servers filed suit, asserting a cause of action based on the FLSA’s tip-credit provision. She also cited the DOL’s regulation, which mandates that employers may not retain employees’ tips, regardless of whether those employees earn at least the $7.25 federal hourly minimum wage. However, neither entitled her to relief. The tip-credit provision did not apply, since the caterer didn’t take the tip credit. And the 2011 regulatory interpretation of the tip-credit provision was an overreach on the DOL’s part.

Tip-credit provision

The tip credit provision at 29 U.S.C. §203(m) applies to employers that satisfy their statutory minimum-wage obligations in part with tips earned by employees. The FLSA clearly states that restrictions on employers’ use of tips apply only if the employer seeks to offset employees’ tips as a credit against the minimum wage. Consequently, if the employer pays employees an hourly wage greater than the minimum wage, without regard to tips, then the employer may use those tips as it sees fit, as far as the FLSA is concerned. Such was the case here: the employer never invoked the tip credit; the employee’s $12 an hour pay rate was well above the $7.25 federal minimum. Therefore, the tip credit provision did not apply.
The employee offered a flawed, if novel argument, in support of her contrary contention: that the employer’s retaining her tips here was “the economic equivalent of paying a below-minimum wage.” If she was paid her $12 hourly rate, but the employer kept $11 in tips for each hour she worked, her theory goes, then the employer was essentially paying her only $1 an hour-well below the minimum wage (or the $2.13 tipped rate, for that matter). The appeals court was not persuaded. The “FLSA’s concern is only with the wage payments that employees receive,” it noted, “not with tracing the sources of the money ultimately used by the employer to pay the wage.”
The employee also pointed to 1974 FLSA amendments to bolster her claim, but the amendment said nothing about who owns tips, as a general matter, let alone provide that those tips are the property
of the employee. Thus, having not taken the tip credit, the employer was entitled to make it a condition of employment that it would keep the tips. “When the employer does not take the tip credit, it must do only what all employers must do-pay the full minimum wage,” the court stressed. And the employer did so here.

DOL rule invalid

Although the FLSA does not address who owns tips, the DOL sought to do so through rulemaking. 29 C.F.R. §531.52, promulgated in 2011, states that tips are the property of employees and, as such, the employer may not use them for any other purpose than as a tip credit (or a valid tip pool), whether or not it takes the tip credit.
The employee would have had ground to stand on with this provision. However, the rule was invalid, as the DOL lacked authority to implement it. Section 203(m) is not ambiguous; it clearly applies only when an employer uses the tip credit, the appeals court stressed, and the DOL was not authorized to regulate to the contrary. The court rejected the DOJ’s argument that the FLSA was “silent” on the question, leaving the DOL free to fill the perceived “gap.” Although the Ninth Circuit bought this argument in Oregon Restaurant & Lodging Assn v. Perez, a 2016 decision, the Tenth Circuit was not swayed.

The circuit split deepens

“The Tenth Circuit’s decision now deepens the existing split among the circuits regarding DOL&’s lack of authority to regulate the tips of employees who earn more than the federal minimum wage,” noted Paul DeCamp, a Principal in the Washington, D.C. office of Jackson Lewis, and the DOL’s Wage and Hour Administrator during the Bush administration. DeCamp is lead counsel for the National Restaurant Association and several state restaurant associations in a declaratory judgment action challenging the DOL tip credit regulations at issue in this case. The trade association’s petition for certiorari is currently pending in the Supreme Court in National Restaurant Association v. Department of Labor, No. 16-920.
“The Ninth Circuit stands alone among the circuits in endorsing DOL’s viewpoint, and it is not even clear that DOL continues to stand by its tip credit regulations,” DeCamp added. “It is becoming clearer that the Supreme Court will need to step in to declare what the law is (and is not).” (Marlow v. The New Food Guy, Inc., 10thCir, 167 LC 36,541.)

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