Tips & Employees - FLSA Update No. 3

April 27, 2018

By: Barry Dorans

In prior articles, I discussed the bumpy road involving an employer keeping tips left by customers. In what may be the final chapter of this story, the United States Congress has now amended the Fair Labor Standards Act (“FLSA”) to explicitly prevent employers from keeping any tips. The statute does make a few other changes on tips, but to understand it, we need to go back in time.

Originally, the FLSA required employers to pay a minimum wage (currently $7.25 per hour) except that if an employee customarily received tips, the employer could pay a lower minimum wage (currently $2.13 per hour) and take a tip credit so long as it complied with certain procedures and that the tips plus the lower minimum wage equaled or exceeded the standard minimum wage. Some employers found it difficult to track and instead had the employees turn over all the tips to the employer and paid the employees an hourly wage equal to or higher than the standard minimum wage. This practice was challenged in the courts and most courts found that nothing in the statute prohibited the employer from keeping the tips, so long as the employees were paid the standard minimum wage. After losing one of these cases on appeal, the Department of Labor issued a new regulation which prohibited the practice. They then sued employers for violating the new regulation and had mixed results. Many courts sided with the employers and said the regulation was invalid and some sided with the Department of Labor and said that employers could not keep tips.

With the change of personnel resulting from the Trump election, the Department of Labor issued a notice that it was reconsidering that regulation and it postponed briefing and argument on a case involving the validity of the regulation. To many observers, it appeared that the Department of Labor would reverse itself and rescind the regulation and allow employers to keep tips.

In March of 2018, the United States Congress adopted a 2,223 page omnibus spending bill. Deep in the bill was an amendment that dealt with tips. As amended, no employer may keep tips received by its employees for any purpose. If the employer does, the employer must pay to the employee the tip credit, plus all tips kept from the employee, plus an equal amount of liquidated damages, plus a civil penalty of up to $1,100 for each violation. Further, the bill specifically states that the regulation issued by the Department of Labor on April 5, 2011 is no longer of any force or effect. So for employers, the story seems to be concluded. An employer who has tipped employees must allow the employees to retain their tips. This is true whether the employer pays the standard minimum wage of $7.25 per hour, or the reduced minimum wage of $2.13 per hour for tipped employees. Remember that if the employer chooses to pay less than $7.25 per hour for tipped employees, there are numerous hurdles it must jump through and the employer should carefully review its pay plan to make sure it is compliant.