Service Charges/Gratuities

Authored by Alex Passantino

‘Twas the week before Christmas, 2-0-1-5
When the poetry elves on the blog came alive.
Crafting their rhymes with a purpose so clear:
Presenting the wage-hour gems of the year.

In January, for new regs in this year our breath bated.
Then for six painful months, we speculated and waited.
And just as we geared up to celebrate Independence,
Out came a proposal that will create more defendants.

With a salary level that for 10 years has been flat,
They looked at New York’s and said “higher than that.”
More than double the old; and then they got clever …
The proposed sal’ry level will increase for forever.

Anticipated changes to duties caused quite a fuss
When DOL said “If you’ve got some ideas, just tell us.”
Of the Department’s proposal, employers were understandably wary,
So we wrote down some ideas on how to make it less scary.

Nearly 300 thousand comments they have to review,
It will be late into next year before they are through.

Next up on the list of your wage-hour joy,
Are the efforts to change what it means to employ:
ContractorsJoint employment. Fissured industry.
Interns. The “third way” and gig economy.

Economic realityRight to control.
They’re integral to your business? Now you’re in a deep hole.
So many angles, it can drive you berserk.
As agencies and courts figure out what is “work.”

And if divergent decisions bring you a sense of elation,
Then please focus attention on class certification.
Approvals, denials, and some decerts, too.
No matter the side, there’s a case for you.

But as summer approached, there arose quite a stir,
A case that’d explain what the class cert rules were.
A Supreme explanation, o my-o, o me-o
We’d learn about class via Bouaphakeo.

They’ve argued, but there’s no decision, not yet,
And a limited ruling on records might be all that we get.
But the cases keep coming. Their numbers broke the charts.
Whether giant class actions or cases broken in parts.

And the response to those filings? The employers’ retort?
A wide range of ways to get them out of court.

Some cases get mooted. Some cases do not.
At Genesis’s open question, SCOTUS might take a shot.
Does an offer of judgment that’s not been accepted
Mean the plaintiff cannot proceed with his class as expected?

Increasingly used as a litigation life saver
Arbitration agreements with a class action waiver;
And when asked if state laws could class waivers prevent, yo,
The Supremes laid the smack-down to dear Sacramento.

With all of these options, it comes as a surprise then,
That one resolution keeps on getting the Heisman.
For reasons that many cannot understand,
To settle wage claims courts think they must hold your hand.

That’s our year in review, we whipped you right through it.
Next year? The new regs and a mad dash to review it.
But before 2015 joins the past’s ranks,
You keep on reading our blog, and for that we give thanks!


Co-authored by Gerald L. Maatman, Jr. and Jennifer A. Riley

Restaurant servers are some of the few employees to whom employers can pay less than the minimum wage.  This is because they receive tips from customers that, so long as those tips are large enough, often push an employee’s income well above minimum wage.  The FLSA thus allows an employer to take a “tip credit” as to most restaurant servers, provided the employer dots its “i’s” and crosses its “t’s” in following the tip credit regulations.

The vague nature of some of those regulations, and the relatively undeveloped nature of the case law interpreting them, has allowed some plaintiff’s wage-hour lawyers to feast on unsuspecting restaurateurs in obtaining back wages and liquidated damages on behalf of servers, bartenders, and other tipped employees.

But late last month, a federal court judge in the Northern District of Illinois came up with a better recipe for analyzing the tip credit regulations.  In Schaefer v. Walker Bros. Enterprises, et al., Judge Norgle granted summary judgment against plaintiff-servers on their claims that the restaurants at which they work improperly failed to pay servers minimum wage while performing sidework tasks such as refilling, stocking, and chopping, and failed to provide proper notice of their intention to take the tip credit.

The decision in Schaefer represents a significant victory for restaurant employers, particularly the significant number that require their servers to perform end-of-shift and beginning-of-shift sidework duties at the tip credit rate of pay.

Factual Background

In 2010, plaintiff-servers brought suit against Walker Brothers contending that they violated federal and state minimum wage laws in two ways:  (1) by incorrectly using the tip credit to pay the servers an hourly rate less than minimum wage while requiring them to perform duties unrelated to their tipped occupation; and (2) by failing to inform the servers of their intent to apply the tip credit to the servers’ wages.

Walker Brothers own six restaurants in the Chicago suburbs that operate under the name “The Original Pancake House.”  Upon hire, Walker Brothers provides servers with an employee handbook that states, among other things, that they apply a tip credit that reduces servers’ hourly wages 40% below minimum wage.  They also display DOL-approved posters explaining the tip credit in well-traveled areas of all six restaurants.

In addition to serving customers, servers perform sidework tasks that vary by the station to which they are assigned and by other factors such as location, shift, and manager.  Before May 2011, servers regularly sliced produce like strawberries and mushrooms.  Before and after that time, servers also placed scoops of ice cream on customers’ waffles and stirred blueberries into fruit compote.  Some servers also performed duties like putting water in soup warmers, brewing iced tea, and occasionally dusting or polishing brass.

Servers predominantly performed side work at the beginning or ends of their shifts, but also replenished and restocked certain items throughout the day.  Servers did not perform maintenance or janitorial work, such as cleaning bathrooms, washing dishes, mopping or vacuuming floors, washing windows, or taking out garbage.

On September 19, 2013, the Court granted class certification on the servers’ claims.  The restaurant thereafter moved for summary judgment on the servers’ claims.

The Court’s Opinion

The Court extensively recounted the law relating to the tip credit as set forth in the regulations and the DOL Field Operations Handbook.  Employers may pay “tipped employees” a wage below the federally mandated minimum wage rate, so long as, with tips, they earn at least the minimum wage.  Employers can take the tip credit “only for hours worked by the employee in an occupation in which the employee qualifies as a ‘tipped employee.’”

When “an employee is employed in a dual job,” for example, when a “maintenance man in a hotel also serves as a waiter,” employers cannot take advantage of the tip credit when the employee performs tasks unrelated to his tipped occupation.   On the other hand, when employees perform duties “related” to their tipped occupation, such as when a waitress cleans and sets tables, toasts bread, and makes coffee, “employers may apply the tip credit and continue to pay employees below minimum wage.

The Court then issued three key holdings with respect to application of the tip credit.  First, it held that plaintiffs bear the burden of proving that they were not properly compensated.

Second, the Court held that, even viewed in the light most favorable to plaintiffs, the sidework tasks performed by servers were “incidental to the regular duties of the server (waiter/waitress) and generally assigned to the servers” and, therefore, fell within the DOL Handbook’s interpretation of the applicable regulation. In doing so, the Court also distinguished an earlier Northern District of Illinois case in which it was held that a different restaurant could not take a tip credit.  In that case, employees submitted declarations stating that they were assigned to clean bathrooms, wash dishes, scrub floors, pick up trash in the parking lot, take out garbage, and roll silverware.  In Schaefer, however, the servers admitted that they were not subjected to extensive cleaning duties.   The Court thus held:  “Where the related duties are performed intermittently and as part of the primary occupation,” such as the duties are here, “the duties are subject to the tip credit.”

Third, the Court held that summary judgment in favor of the restaurant was appropriate on the notice claims.  Defendants displayed posters approved by the Illinois Department of Labor in well-traveled areas of their restaurants and informed servers of the tip credit in multiple ways, including by giving servers an employee handbook.

Implications For Employers

The Court’s decision in Schaefer is a stunning victory for the restaurant industry.  Before the Court’s decision in Schaefer, few courts had addressed tip credit claims, and little favorable law existed to validate employers’ regular practice of using servers to perform incidental side work tasks.  As a result, restaurant employers can breathe a little easier in 2015.

Co-authored by John W. Egan and Nadia S. Bandukda

As we previously reported, the Second Circuit has been considering the validity of Starbucks’ tipping practices in light of the opinion from the New York Court of Appeals clarifying the prohibition in the New York Labor Law against participation in tip-pooling arrangements by employers and their “agents.”

With its certified questions answered, the Second Circuit has now upheld Starbucks’ policy allowing its shift supervisors to participate in tip pools.  In the decision, the Court observed that shift supervisors, like baristas, spend most of their time providing customers with food and drinks.  While acknowledging that they have some managerial responsibilities, the Court held that those responsibilities do not rise to the level of “meaningful or significant” authority over subordinates, which the New York court said was necessary to disqualify them from participating in the tip pool.  Specifically, the Second Circuit said that shift supervisors cannot issue formal employee discipline or create work schedules, even though they do designate break times during shifts and send baristas home who are not needed.  Accordingly, the Court affirmed summary judgment in favor of Starbucks.   

While the Court’s decision is a “Summary Order” and has limited precedential effect, it is nonetheless a favorable outcome for employers that administer tip pools.  For Starbucks, the decision means that this long-percolating dispute over distribution of its employees’ tips may finally be nearing the end of the brewing cycle.


NY CofA.bmpCo-authored by John W. Egan and Robert Whitman

Retail and hospitality employers should perk up at the recent decision (here) by the New York Court of Appeals to affirm Starbucks’ tip pooling policy.  On June 26, the Court resolved questions certified by the Second Circuit (as we previously reported here) regarding the New York Labor Law’s prohibition against employers and their “agents” participating in tip-pooling arrangements.

The first certified question was:  what factors make employees eligible or ineligible to participate in tip pools under state law?  The Court, in Barenboim v. Starbucks, held that an employee who provides personal service to customers as a regular or principal part of her duties is eligible, even if that employee has limited supervisory responsibilities.  The Court squarely rejected the argument by the “baristas” that shift supervisors cannot participate because they exercise some supervisory functions.

But the Court also held that employees with “meaningful authority or control” over subordinates cannot participate in tip pools.  An employee who, for example, has the ability to discipline subordinates, assist in performance evaluations, participate in hiring and firing decisions, or provide input in creating employee work schedules may have “meaningful authority or control.”  In reaching this conclusion, the Court rejected the argument by the plaintiffs in Winans v. Starbucks that only employees with final authority to hire and fire should be excluded.   

On the second question certified by the Second Circuit — can employers exclude otherwise eligible tip-earning employees from participating in tip pools? — the Court’s answer was, in essence, “yes, but there may be limits.”

The Court generally agreed with the U.S. District Court, which upheld Starbucks’ practice of excluding assistant store managers from tip pools.  Section 196-d prevents employers from retaining tips.  It does not require that employers mandate that any tip-eligible employees participate in these pools.  Thus, even if Starbucks’ assistant store managers were eligible to share tips, Starbucks did not violate Section 196-d by excluding them from tip pools, the Court reasoned.

But the Court also qualified its answer, opining that there may be an “outer limit” to this practice.  Employers should not, for example, be allowed to exclude all but the highest-ranking eligible employees from these pools.  However, to the Court, this was a mere hypothetical since Starbucks properly excluded assistant store managers from tip pooling.    

In Barenboim and Winans, the Court interpreted New York’s tip pooling statute in a manner generally favorable to employers.  Employees that are serving customers as a principal or regular part of their jobs are generally eligible to participate in tip pools, unless their managerial responsibilities are substantial.

The Court’s decision is important for employers to determine whether their employees that serve customers but also have managerial roles can share or pool tips.  The key question will be whether these employees have “meaningful authority or control” over subordinates.  The Court has not provided definitive guidance as to what supervisory or managerial duties qualify as “meaningful authority or control.”  Consequently, further litigation is sure to brew over whether various classes of employees meet this standard.

Oregon.jpgAuthored by Alex Passantino

As we reported previously, a federal judge in Oregon recently ruled that the U.S. Department of Labor’s 2011 tip-pooling regulations were invalid.  Earlier this week, the court entered a final judgment, striking down and setting aside those portions of the DOL regulations that state that “tips are the property of the employee when his/her employer has not taken a tip credit against its minimum wage obligations pursuant to 29 U.S.C. 203(m), and [that extend] tip pool limitations to employers who do not take a tip credit against their minimum wage obligations.”

As part of its final judgment, the court enjoined DOL’s enforcement of the regulation against the Washington Restaurant Association, the Oregon Restaurant and Lodging Association, Alaska CHARR, the National Restaurant Association, and/or any entity, employer, or individual who is able to demonstrate membership in one of those associations as of June 24, 2013.  In addition, where a member of one or more of the associations does not take a tip credit against the federal minimum wage, DOL is prohibited from taking any action based on tip pooling practices.

To be clear, the court’s decision is not a wholesale rejection of DOL’s rules with respect to tip credit.  Rather, the final judgment directly impacts only those employers (1) who are members of one or more of the associations and (2) who do not take a tip credit to satisfy the federal minimum wage.    

Given the importance of this issue — particularly in the context of DOL’s regulatory authority, as we discussed in our previous post — it seems likely that DOL will appeal.  We will, of course, keep you apprised of any further developments.      

Oregonpic.gifAuthored by Steve Shardonofsky

A federal judge in Oregon recently gave the Secretary of Labor a very important tip:  Just because the FLSA appears to be silent on a particular issue does not give the U.S. Department of Labor authority to fill the gap with regulations.  In a June 7, 2013 opinion [here], a district court ruled that the DOL’s April 2011 amended tip-pool regulations were invalid because they conflicted with the clear intent of Congress in the FLSA, even though the FLSA is silent regarding the use of tip pools when an employer does not take a tip credit.

In a “tip pool,” employees contribute a portion of their tips to a general fund that is later distributed and shared with other employees.  Although the FLSA permits the use of tip pools, the statute and its regulations limit the types of employees who can participate in a tip-pool to those who “customarily and regularly” receive tips like waiters, bartenders, busboys, bellhops, and other front-of-the-house employees.  But, if the employer does not take a tip credit (that is, if the employer does not pay less than the federal minimum wage to tipped employees), employers and employees can agree to include non-tipped employees like dishwashers and cooks in the tip pool.  At least this was the general consensus before April 2011, as illustrated by the Ninth Circuit’s decision in Cumbie v. Woody Woo, Inc.  In Woody Woo, the Ninth Circuit found that under the clear and unambiguous text of Section 3(m) of the FLSA, Congress intended only to limit the use of tips by employees when the employer claims a tip credit.  If the employer does not take a tip credit and restaurant employees thus receive wages at or above minimum wage, then federal minimum wage law does not regulate the tip pool.

In April 2011, however, the DOL expressly rejected Woody Woo and revised its regulations (29 C.F.R. §§ 531.52 and 531.54) to state that tips are the property of the employee whether or not the employer has taken a tip credit and that a valid tip pool may only include “those employees who customarily and regularly receive tips”—without exception.  As we discussed previously [here], the DOL issued a Field Assistance Bulletin (an internal document explaining its enforcement position to DOL personnel) in February 2012 in which the Wage Hour Division outlined its intent to actively enforce the revised regulations on a nationwide basis.  And enforce it they did.  Since 2012, the DOL has challenged tip pools in the hospitality industry, particularly in the western United States.

Some employers and industry groups have fought back, however, by suing the DOL and challenging the validity of the revised regulations in court.  The DOL’s Wage and Hour Division is authorized to enforce the FLSA’s minimum wage and overtime provisions.  Thus, many practitioners argue that the DOL lacked authority to issue the revised regulation and lacks authority enforce the regulation unless an employee’s tips are being used in violation of one of those provisions.  The district court in Oregon agreed, holding that the amended regulations were invalid because the clear intent of Section 3(m) of the FLSA was “only to limit the use of tips by employers when a tip credit is taken” and because “an employment practice does not violate the FLSA unless the FLSA prohibits it.”

Although Section 3(m) is silent regarding the use of tip pools when an employer does not take a tip credit, the court chastised the DOL’s practice of trying to fill this apparent gap with the revised regulations:

To express its intention that certain activities be left free from regulation, Congress need not lace the United States Code with the phrase, ‘You shall not pass!” . . .  For the DOL, silence is always an implicit gap to be filled by regulation.  The DOL’s position seems to be that Congressional silence regarding an area of economic activity is never a considered decision to let the economic actors make their own choices.  . . .  The Court’s ability to discern Congressional intent is no so limited.

Ultimately, the court concluded that it would “not alter the text of a statute in order to satisfy the policy preferences of the Secretary of Labor.”

Although this decision is significant for restaurants and other business in the hospitality industry, the court’s reasoning will have broader implications when the DOL or other federal agencies overstep their regulatory authority.  This much is sure: Just because the FLSA appears to be silent on a particular issue does not give the DOL authority to fill the gap with regulations.

NYCAppCt.jpgCo-authored by John W. Egan and Robert Whitman

We reported [here] in November on the Second Circuit’s referral of two important Labor Law questions to the New York Court of Appeals in a challenge to Starbucks’ tip-pooling policy.  Briefing is now complete and oral argument is scheduled for next week. 

The consolidated appeal, in Barenboim v. Starbucks and Winans v. Starbucks, will clarify Section 196-d of the Labor Law, which prohibits employers and their “agents” from participating in employee tip pools and tip-sharing arrangements.

In a relatively rare occurrence, the New York State Department of Labor filed an amicus brief with the Court of Appeals.  The Department argues that its Hospitality Industry Wage Order [here] fully answers the first question certified by the Second Circuit: what factors make an employee an “agent” of his employer under Section 196-d such that he or she is ineligible to participate in a tip pool? 

Under the Wage Order, employees who personally serve customers as a principal and regular part of their job duties may participate in tip pools, while those who do so only occasionally or incidentally may not.  The Starbucks “baristas” argue that shift supervisors are “agents” of their employer because of their supervisory responsibilities and therefore should not be permitted to obtain a share of their tips.  In its amicus brief, the Department took direct aim at that argument, stating that the Labor Law does not categorically bar employees with supervisory titles or authority from participating in tip pools, so long as they regularly provide direct personal service to customers.

On the second question certified on appeal — whether the Labor Law permits an employer to exclude otherwise eligible employees from participating in a tip pool — the Department’s answer is: not necessarily.  Whether such a practice is valid depends, it says, on whether the practice is consistent with two underlying purposes of Section 196-d: the protection of subordinate employees and the reasonable expectations of customers. 

The Department concluded, however, that the Court of Appeals cannot properly assess Starbucks’ policy of excluding Assistant Store Managers from tip pools, since the federal district court did not resolve factual disputes over their actual responsibilities and whether customers reasonably expect the proceeds of their gratuities to be shared with these employees.

We will continue to follow these cases and will grind out further updates (as well as additional coffee puns) as warranted.

N.D. Ind. Seal.jpgCo-authored by Arthur J. Rooney and Jeremy W. Stewart

When should a tipped employee no longer be treated as a tipped employee?  Plaintiffs’ lawyers argue that restaurants cannot utilize the tip credit, or pay tipped employees a sub-minimum wage, if tipped employees perform any “non-tipped” duties, such as washing dishes or taking out the trash.  Earlier this week, a District Court in the Northern District of Indiana rejected this argument.  (See here)  Specifically, the court dismissed a former server’s claim that the FLSA was violated by restaurants paying servers, bartenders, and hosts a sub-minimum wage while they performed non-tipped duties.  This decision could be far reaching because restaurants across the country are being hit with similar class or collective action lawsuits.  

The FLSA’s tip credit provision allows employers to pay tipped employees a sub-minimum wage as long as the employer:  (1) pays a cash wage of at least $2.13 per hour; (2) informs its employees of the FLSA’s tip credit provisions; (3) permits its employees to retain all their tips (w/ some exceptions); and (4) ensures that the cash wage plus the tip credit equal at least the minimum wage each week.  The rub is that the FLSA does not permit an employer to utilize the tip credit for all time worked by employees, just for time spent in a tipped occupation.  An example the regulations use is the hotel worker who is both a maintenance man and a waiter.  In this dual job scenario, the tip credit can be taken for the time the worker spends as a waiter, but not as a maintenance person.  There is no clear demarcation between when waiter becomes the maintenance person, but the DOL takes the position that if a tipped employee spends “substantial time” (more than 20%) performing related, but non-tipped duties referred to as “general preparation work or maintenance,” then the entire tip credit is lost.  The problem for employers is no authority explaining what duties constitute “general preparation work or maintenance.” 

Here, the plaintiff alleged that servers, bartenders and hosts were improperly denied minimum wage for time spent performing allegedly non-tipped duties such as dishwashing, food preparation, kitchen and bathroom cleaning, trash removal and other similar duties.  The Court reasoned that plaintiff’s bare claim that employees must be paid a minimum wage for performing these duties is “based on a faulty legal conclusion” that duties like these are those of a separate and distinct non-tipped occupation.  While leaving open the possibility that employees may, at times, be entitled to minimum wage for these duties, the district court stated that “[s]ervers, bartenders, and hosts – who directly related with customers – are not also employed in the second occupation of a dishwasher, cook, or janitor simply because an unspecified amount of time during their shift is spent performing duties that may be performed by individuals in those occupations.”  In other words, some overlap between tipped in non-tipped duties, however they are defined, is ok.

Because it was not before it, the district court refused to decide if the 20% formulation set forth in the DOL Handbook is entitled to controlling deference, but cautioned plaintiff that an order of dismissal would be imminent if she did nothing more than amend her complaint to include an allegation that the defendants required her to spend more than 20% of her time on duties that did not generate tips or that were outside her tipped occupation.  Rather, she must provide factual support for any such claims, such as the non-tip producing duties she performed, how many minutes or hours they took to perform, and place that time in the context of the hours worked during the entire shift.  

This decision potentially raises the bar as to the level of specificity that must be pled to support a tip credit claim.  Moreover, the decision underscores why tip credit cases are not susceptible to collective or class action treatment.  Because there is no clear line between tipped and non-tipped duties, tip credit claims must be determined on an individual-by-individual basis. 


Second Circuit Seal.jpgCo-authored by John W. Egan and Robert Whitman

Tip pools and tip sharing are hot topics in New York for employers in the food service and hospitality industries. The Second Circuit recently certified to the New York Court of Appeals two questions seeking to clarify the New York Labor Law’s prohibition against participation by an employer’s “agents” in tip pools and sharing arrangements.

The court’s certification order came in two consolidated class actions involving Starbucks “baristas.”  In Barenboim v. Starbucks Corp., the issue before the district court was whether shift supervisors are entitled to share in the gratuities deposited in tip jars. The plaintiffs argued that the shift supervisors, by assigning baristas to positions during their shifts, administering break periods, directing the flow of customers, and providing feedback on baristas’ performance, are supervisory “agents” of the employer and thus ineligible to participate in tip pooling under Section 196-d of the Labor Law.

The second case, Winans v. Starbucks Corp., presented a similar issue in inverse form: a putative class of assistant store managers claimed that they are not agents of the employer and thus are entitled to participate in the stores’ tip pools. Further, they argued that Starbucks was mandated by the Labor Law to include them in these pools.

The district court granted summary judgment to Starbucks in both Barenboim and Winans. The Second Circuit deferred decision on these appeals, and certified the following questions to the New York Court of Appeals: 

    1. “What factors determine whether an employee is an ‘agent’ of his employer for purposes of N.Y. Lab. Law § 196-d and, thus, ineligible to receive distributions from an employer-mandated tip pool?,” and
    2. “Does [the Labor Law] permit an employer to exclude an otherwise eligible tip-earning employee under § 196-d from receiving distributions from an employer-mandated tip pool?” 

We will be closely following any rulings from the Court of Appeals on Barenboim and Winans. Keep following the blog for future updates on these important cases.



TIPBlogPIc1.bmpAuthored by Alex Passantino

On February 29, 2012, the Deputy Administrator of the Wage and Hour Division (WHD) of the U.S. Department of Labor issued Field Assistance Bulletin (“FAB”) [*] 2012-2, in which she sets forth WHD’s enforcement policy with respect to the 2011 tip credit regulations.  Readers of this blog will recall that in April 2011 WHD published a final rule addressing a number of issues under the FLSA.  Among the topics in the rulemaking were several issues related to tip credit, including a detailed description of the disclosures an employer must provide to a tipped employee, the maximum contribution an employee can be required to make to a tip pool, and the ownership of tips.

It is the final point — the ownership of tips — that is discussed in the FAB.  Specifically, the FAB makes clear that WHD

will enforce nationwide the 2011 final rule explaining that a tip is the sole property of the tipped employee regardless of whether the employer takes a tip credit, and that the employer is prohibited from using an employee’s tips, whether or not it has taken a tip credit, except as a credit against its minimum wage obligations to the employee, or in furtherance of a valid tip pool. 

WHD will seek to enforce this position in the states making up the Ninth Circuit — Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington — notwithstanding that court’s decision in Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9th Cir. 2010).  In Woody Woo, the employer did not avail itself of the tip credit (which was prohibited by state law), but required that the tipped employees participate in a tip pool with employees who are not typically permitted in a mandatory tip pool (e.g., cooks and dishwashers).  The Ninth Circuit held that the limitations on an employer’s ability to use an employee’s tips are limited to those situations in which an employer takes the tip credit.  Specifically, the court concluded that the FLSA “imposes conditions on taking a tip credit and does not state freestanding requirements pertaining to all tipped employees.”

In the 2011 final rule, WHD expressly rejected the holding of Woody Woo and revised the regulations to state:

Tips are the property of the employee whether or not the employer has taken a tip credit under section 3(m) of the FLSA. The employer is prohibited from using an employee’s tips, whether or not it has taken a tip credit, for any reason other than that which is statutorily permitted in section 3(m): As a credit against its minimum wage obligations to the employee, or in furtherance of a valid tip pool.

29 C.F.R. 531.52.

In the FAB, WHD makes clear that this is its position across the country.  Because Woody Woo was decided prior to the publication of the final rule in 2011, WHD now concludes that it is not precluded from enforcing the rule everywhere, including the Ninth Circuit.

Notably, the FAB fails to remind field enforcement personnel (and the public) of a critical piece of the puzzle.  That piece was discussed in detail in the 2008 proposed rule and briefly in the 2011 final rule.  Notwithstanding the repeated statements by WHD that “tips are the property of the employee,” nothing in the FLSA creates an independent property right that can be enforced by WHD or in private litigation.  WHD has authority to enforce the minimum wage and overtime provisions of the FLSA, and, unless an employee’s tips are being used in a manner that results in a violation of one of those provisions, the FLSA does not provide a remedy.  As WHD noted in the preamble to the 2011 final rule:

Thus, if an employer pays the employee a direct wage in excess of the minimum wage–and thus did not claim a credit against any portion of the employee’s tips and did not utilize the employee’s tips in any way–the employer would be able to make deductions but only from the cash wage amount paid directly by the employer and only to the extent that the deductions did not reduce the employer’s direct wage payment to an amount below the minimum wage.

Ultimately, the rules and regulations surrounding tipped employees are often difficult to apply, especially when they are combined with concurrently-applicable state laws.  Employers — particularly those in the Ninth Circuit — should take this opportunity to review their practices with respect to tipped employees and ensure that they are in compliance.


 [*]  A FAB is an internal — but publicly released — document in which the National Office of WHD explains a change, clarification, or application of an enforcement policy or practice to WHD’s field enforcement personnel.