Wage and Hour Division Will Uniformly Enforce New Tip Credit Rule

According to a recently-released Field Assistance Bulletin, the Department of Labor’s Wage and Hour Division (WHD) has advised its staff to uniformly enforce a rule that became effective on May 5, 2011 governing ownership of employee tips under the Fair Labor Standards Act (FLSA).  In many states employers are permitted to take a “tip credit,” or pay employees less than the minimum wage so long as the employees receive sufficient tip income to make up the difference. The new WHD tip rule stipulates, among other things, that tips are the property of the employee regardless of whether the employer has taken a tip credit under section 3(m) of the FLSA, (pdf) and that an employer is prohibited from using an employee’s tips for any reason other than as a tip credit or in furtherance of a legitimate tip pool. The bulletin sent to WHD regional administrators and district directors emphasizes that this rule will be enforced in all states, even the nine states under the jurisdiction of the Ninth Circuit.

Before the WHD issued the final tip credit rule, the Ninth Circuit in 2010 had taken the position in Cumbie v. Woody Woo, Inc. (pdf) that the limitations imposed by section 3(m) of the FLSA would not apply if the employer did not take a tip credit. This decision ran contrary to long-standing WHD policy on this topic, as detailed in the WHD bulletin. To that end, the final rule contravenes the Ninth Circuit’s FLSA interpretation by explicitly stating that:

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.

According to the WHD bulletin, “[t]hese regulations fill a gap in the statutory scheme left by the Act's silence on the use of employees' tips when no tip credit is taken.” The WHD avers further that nothing in the Ninth Circuit decision “precludes the agency from filling this gap with its legislative rules promulgated pursuant to specific congressional authorization and after notice and comment,” and that the agency’s gap-filling rule has the “force of law.”

Whether the WHD’s interpretation of the FLSA is indeed valid may ultimately be tested and determined by the court system.

Photo credit: DigitalZombie

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.