Labor Department's Final Regulations Clarify Tip Credit Rules

Tip credits are among the topics clarified by the Department of Labor's final "clean up" regulations, issued in April of 2011.

The federal Department of Labor (DOL) has issued its final "clean-up" regulations, tweaking a number of existing rules to bring them in line with laws that have passed and court cases that were decided since the regulations were last reviewed.

The final regulations address tip credits in detail. Under the Fair Labor Standards Act (FLSA), employers may pay tipped employees less than the minimum wage -- down to a floor of $2.13 an hour -- as long as employees make enough in tips to bring their earnings up to at least the minimum hourly wage. If there is a shortfall, the employer must make up the difference. (Some states don't allow employers to take a tip credit; in these states, which include California, employers must pay service employees the full minimum wage for every hour worked.) This has long been the law, but the final regulations clarify a few points:

  • Tips always belong to employees. Whether or not an employer takes a tip credit, all tips an employee earns belong to that employee, except for any amount the employee is required to "tip out" (contribute to a legitimate tip pool). Employers aren't entitled to any part of the tip pool. One court had decided that an employer may keep a portion of employee tips, as long as the employer doesn’t take a tip credit and the employee earns at least the minimum wage; the final regulations specifically call out this case as an incorrect application of the rule.
  • Tip pools are limited to tipped employees. Only employees who regularly and customarily receive tips can participate in the tip pool -- and again, this rule applies whether or not the employer takes a tip credit. Employees who don't typically receive tips, such as cooks and dishwashers, may not participate in the pool. The final regulations don't set a limit on how much of their tips employees may be required to put in the pool. In fact, they state explicitly that the law "does not impose a maximum contribution percentage." Previous guidance documents and opinion letters from the DOL had put an upper limit on the amount employees could be required to contribute, or said that employees could not be required to contribute more than was customary in their industry, but these limits did not make it into the final regulations. Once the employer comes up with an amount, however, it is required to notify employees how much they will be required to contribute to the pool.
  • Notice is required for tip credits. Employees are entitled to notice if the employer will take a tip credit. This notice must include: (1) the hourly cash wage the employer will pay the employee; (2) the amount of tips that the employer will take as a tip credit (that is, the amount the employer will count toward the employee's wages, to meet the minimum wage requirement); (3) that the employee is entitled to retain all tips received except any amount the employee is required to contribute to a valid tip pooling arrangement; and (4) that the tip credit won’t apply to any employee who has not been informed of these requirements. The final regulations do not require this notice to be in writing; employers may inform employees orally, if they wish. As a practical matter, however, employers who plan to take a tip credit should provide written notice, so they can later prove that they properly notified employees, if necessary.

Some other changes included in the final regulations exclude stock options from an employee's regular rate of pay (used to determine overtime), clarify the exemptions for firefighters and salesmen, partsmen, and mechanics of certain vehicles; exclude volunteers at private nonprofit food banks from the definition of an "employee" covered by the FLSA (even if those volunteers receive groceries from the bank); and clarify that time an employee spends commuting in a company car doesn't count as compensable work time.