USDOL Revises Tip Credit Regulations, Leaves Others Unchanged
Following up on proposed regulations issued in 2008 for notice and comment, the U.S. Department of Labor issued final regulations last week, effective 30 days following publication in the Federal Register. These regulations address the issues below but other than in regard to use of the tip credit under Section 3(m), the changes to the text of the current regulations are minimal.
The final rule, consistent with the original proposed rulemaking, states that there is no maximum contribution percentage to valid mandatory tip pools, thus permitting employers to require tipped employees to pool their tips with other service personnel, without a hard cap restriction on the amount pooled. The DOL previously has taken the position that a "customary and reasonable" maximum contribution meant 15 percent of an employee's tips. However, the rule also states that mandating an employee share his or her tips with a lawful tip pool is the only permissible use to which an employer can put an employee’s tips. This regulatory position contradicts the Ninth Circuit’s decision in Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9th Cir. 2010). In Woody Woo, the Ninth Circuit ruled that an employee has no property right in his or her tips under the FLSA, unless the employer takes a tip credit pursuant to Section 3(m). The new rules also require advance notice of the employer’s use of the tip credit and how the employer calculates it.
In addition to these changes, the enacted regulations eliminated the “20 percent rule” applicable to employees engaged in fire protection activities. As the regulation creating such a rule – permitting fire protection employees to spend up to 20% of their time on non-exempt non-fire protection work – 29 C.F.R. § 553.212, had been superseded by an amended to Section 3 of the FLSA to define the term “employee in fire protection activities,” the DOL eliminated the rule as applied to such employees, consistent with case law interpreting the regulation in light of the new amendment.
Disappointingly, the DOL declined to adopt regulations clarifying the rules relating to the fluctuating workweek method of overtime compensation and the payment of compensatory time off to public sector employee under Section 7(o) of the Act.
It is vital to note that the DOL’s preamble raises significant questions regarding the application of the fluctuating workweek method of overtime in certain situations. Employers who utilize this payment method should discuss these issues with counsel.
Otherwise, the changes effected by the new rules are unlikely to be substantial. The hospitality industry should continue to monitor its tip practices closely under federal and state law.
