As Expected, DOL Delays Independent Contractor Final Rule

On March 2, 2021, the U.S. Department of Labor (DOL) formally delayed the effective date of the Independent Contractor Final Rule, from March 8, 2021 to May 7, 2021. The Final Rule, published during the last two weeks of the prior administration, provides that “an individual is an independent contractor, as distinguished from an ‘employee’ under the Act, if the individual is, as a matter of economic reality, in business for him or herself.” Under the Rule, the “economic dependence” inquiry focuses on five, non-exclusive factors, two of which are considered primary – the nature and degree of the worker’s control over the work and the worker’s opportunity for profit or loss – and three additional factors that come into play if the first two factors are inconclusive: the amount of skilled required, the “degree of permanence” of the parties’ work relationship, and whether the putative employee’s work is “part of an integrated unit of production.” The actual practices of the working relationship, and not what the parties’ contract may theoretically allow, is emphasized.

Although only a minority of the more than 1,500 comments supported the proposed delay, the DOL concluded that “allowing more time for consideration of the [] Rule is reasonable given the significant and complex issues the [] Rule raises, including whether the [] Rule is consistent with the statutory intent to broadly cover workers as employees as well as the costs and benefits of the rule, including its effect on workers.” Ultimately, the Final Rule as currently constituted may be revised to make it more difficult to classify workers as independent contractors.

Jackson Lewis will continue to monitor and report any further developments concerning both this Final Rule and the Tip Regulations Final Rule that was delayed just last week. In the meantime, if you have any questions about these Final Rules or any other wage and hour issue, please consult a Jackson Lewis attorney.

DOL Delays Tip Regulations Final Rule, Independent Contractor Final Rule Likely Next

As expected, the U.S. Department of Labor (DOL) has formally delayed the effective date of the Tip Regulations Final Rule, from March 1, 2021 to April 30, 2021. The Tip Regulations Final Rule, issued in late December 2020, implemented a 2018 amendment to the FLSA that permits tipped employees, such as restaurant servers, to pool tips with non-tipped workers, such as cooks and dishwashers, so long as the employer does not take a “tip credit,” while prohibiting employers, including managers and supervisors, from keeping tips received by employees under any circumstances. The Final Rule also codified, with minor changes, the DOL’s elimination of the so-called “20%” or “80/20” Rule, limiting the percentage of time (i.e., 20%) a tipped worker could spend performing allegedly non-tipped duties and still take a tip credit. Because the change to the law permitting tipped and non-tipped workers to share tips (when a tip credit is not taken) is set forth in an amendment to the FLSA, no regulation can change that rule. But the Final Rule also provides details of who qualifies as a “supervisor” or “manager” and thus is excluded from receiving tips, issues not specifically addressed in the statute.

The DOL received only 19 comments regarding its proposed delay of the effective date of the Final Rule and agreed with the vast majority of those comments supporting the delay. The DOL noted that shortly after the Final Rule was published, nine attorneys general filed a lawsuit in a Pennsylvania federal court seeking to upend the Rule, and the delay would provide time for the Agency to evaluate that complaint. The lawsuit focuses primarily on the 80/20 Rule, asserting that the DOL’s elimination of that Rule was arbitrary and thus violates the Administrative Procedures Act because, among other things, the DOL did not adequately identify and weigh the costs and benefits of the Rule’s elimination.

At about the same time as it sought to delay the Tip Regulations Final Rule, the DOL also proposed delaying the effective date of the Independent Contractor Final Rule, published in the waning days of the previous administration. We anticipate that this delay is forthcoming soon.

Jackson Lewis will continue to monitor and report any further developments concerning these Final Rules. In the meantime, if you have any questions about these Final Rules or any other wage and hour issue, please consult a Jackson Lewis attorney.

DOL Withdraws Opinion Letters Regarding Sleeper Berth Time, Independent Contractor Status

Continuing its early pattern of reversing positions adopted during the former administration, on February 19, 2021 the Wage and Hour Division (WHD) of the U.S. Department of Labor (DOL) withdrew two more Opinion Letters. The first, Opinion Letter FLSA2019-6, addressed whether service providers for a virtual market company were properly classified as independent contractors or in fact were employees. Given the DOL’s recent proposal to delay the effective date of the Independent Contractor Final Rule that was published in early January 2021, with the likely intent of ultimately issuing a new rule, the Agency’s withdrawal of FLSA2019-6 was not surprising.

Perhaps more surprising was the withdrawal of Opinion Letter FLSA2019-10, issued in July 2019. In that Opinion Letter, the DOL concluded that if a truck driver, or driver’s assistant or helper, is completely relieved of duty and is provided with adequate sleeping facilities (including the truck’s sleeping berth), the individual is not “working while riding” and therefore is not entitled to compensation for that time – regardless of how many hours a particular trip lasts or how much duty-free time is provided on that trip. Despite its acknowledgment when issuing FLSA2019-10 that its prior guidance was “unnecessarily burdensome” on employers and that the position taken in FLSA2019-10 promoted a more straightforward reading of the applicable regulations, the DOL nevertheless has now readopted its former position, that only up to 8 hours of sleeping time may be excluded in a trip 24 hours or longer, and no sleeping time may be excluded for trips under 24 hours.

If you have any questions about this development, or any wage and hour or  issue, please consult the Jackson Lewis attorney(s) with whom you regularly work.

The Proposed Federal Covid-19 Relief Bill Includes a $15 Minimum Wage Hike and Elimination of the Tip Credit. Will Those Provisions Survive?

Making good on President Biden’s campaign promise, the House of Representatives has included in its $1.9 trillion Covid-19 relief bill, known as the “American Rescue Plan Act of 2021,” revisions to the Fair Labor Standards Act (FLSA) that would increase the federal minimum wage to $15 per hour by 2025. The current federal minimum wage is $7.25 and has not increased since 2009. Under the proposal, the minimum wage would almost immediately increase to $9.50 per hour, then would increase annually by $1.50 per hour until reaching $15 in 2025. Each year thereafter, any further increase would be based on the median hourly wage of all employees for the prior year.

In addition, under the bill the $2.13 minimum wage, known as the “tip credit,” that employers currently may pay to employees who customarily and regularly receive at least $30 per month in tips, would be eliminated by 2025, requiring employers by then to pay both tipped and non-tipped employees the same. In a similar, stepped fashion to the standard minimum wage, the tip credit initially would increase to $4.95 per hour and then would annually increase $2.00 per hour until it matched the standard minimum wage.

The bill also would eventually eliminate an FLSA provision that currently allows employers to pay a subminimum wage to employees under the age of 20 who are within the first 90 days of their employment, as well as a provision that allows an employer to obtain a certificate from the Secretary of Labor to pay a subminimum wage to its employees with physical or mental disabilities.

Whether these minimum wage provisions will remain in the Covid-19 relief belief is questionable. The non-partisan Congressional Budget Office (CBO) estimates that, by 2025, a $15 minimum wage would increase pay for 17 million people and pull 900,000 out of poverty. But the CBO also estimates that about 1.4 million jobs would be lost, as employers eliminate jobs to account for their higher labor costs. Some economists disagree with the CBO’s latter conclusion, pointing to studies that show minimum wage increases at the state level over the past several years have not resulted in significant job losses, if any at all. How Economists See Biden’s $15 Wage Proposal.

Nevertheless, the minimum wage provisions may not be allowed to remain in the pandemic relief bill if, as anticipated, Congressional Democrats seek to pass it without significant Republican support, using the procedure known as reconciliation. While the Senate may use reconciliation to pass bills with only a simple 51-vote majority versus the 60-vote supermajority threshold required to defeat a filibuster, there are limits on the types of laws that may be passed using reconciliation – and the minimum wage provisions may be deemed outside of those limits. Specifically, the fact that the minimum wage provisions are merely incidental to the primary purpose of the relief bill, as well as the fact that the minimum wage provisions are not within the jurisdiction of the Budget Committee proposing the bill, likely would cause some senators to object to the provisions, which would then require a 60-vote supermajority to overcome. As a result, President Biden has acknowledged that due to the limits of reconciliation, his proposed minimum wage hike is unlikely to ultimately remain in the relief bill and would instead have to be addressed separately. Biden Doesn’t Think $15 Minimum Wage Hike Will Survive COVID-19 Relief Bill.

Jackson Lewis will continue to monitor and report any developments concerning the minimum wage proposal. If you have any questions about this or any wage and hour or  issue, please consult the Jackson Lewis attorney(s) with whom you regularly work.

DOL Seeks to Delay Tip Regulations, Independent Contractor Final Rules

One day after President Biden entered office, the White House issued a memorandum directing all agencies to review, and consider delaying, any rules that had been issued by the former administration but that were not yet effective. Following that directive, the U.S. Department of Labor (DOL) has proposed delaying the effective dates of the recently-issued Tip Regulations and Independent Contractor Final Rules. Under the proposal, the effective dates of these Final Rules would be postponed 60 days, from March 1, 2021 to April 30, 2021 for the Tip Regulations Final Rule and from March 8, 2021 to May 7, 2021 for the Independent Contractor Final Rule.

To effectuate these delays, the DOL is required to formally provide a public comment period, which it has now done. These comment periods will expire on February 17, 2021 and February 24, 2021 for the Tip Regulations Final Rule and the Independent Contractor Final Rule, respectively.

The Tip Regulations Final Rule, issued in late December 2020, implements a 2018 amendment to the FLSA that permits tipped employees, such as restaurant servers, to pool tips with non-tipped workers, such as cooks and dishwashers, so long as the employer does not take a “tip credit,” while prohibiting employers, including managers and supervisors, from keeping tips received by employees under any circumstances. Because these aspects of the Final Rule implement statutory amendments to the FLSA, no regulatory change may alter those provisions. However, the Final Rule also clarified who is a considered to be a “manager” or “supervisor,” and thus ineligible to participate in sharing of tips, and further regulatory changes may alter those nuances. Most notably, the Final Rule also codifies, with minor changes, the DOL’s previous guidance eliminating the so-called “20%” or “80/20” Rule, limiting the percentage of time (i.e., 20%) a tipped worker could spend performing allegedly non-tipped duties while still allowing the employer to take a tip credit. Instead, under the Final Rule, if tipped employees perform duties related to their tipped occupation, either contemporaneously or for a reasonable period before or after their tipped duties, an employer is permitted to pay them using a tip credit, regardless of whether those duties directly generate a tip. To read about the Tip Regulations Final Rule in greater detail, go to Labor Department Issues Final Rule on Tip Pooling Amendments, Elimination of ‘20%’ Dual Jobs Rule. The DOL may attempt to eliminate this regulation and revert to the DOL’s former application of the so-called “20% Rule.”

The Independent Contractor Final Rule, which was issued less than two weeks before the end of the Trump administration in January 2021, provides that “an individual is an independent contractor, as distinguished from an ‘employee’ under the Act, if the individual is, as a matter of economic reality, in business for him or herself.” Under the Final Rule, the “economic dependence” inquiry focuses on five, non-exclusive factors, two of which are considered primary – the nature and degree of the worker’s control over the work and the worker’s opportunity for profit or loss – and three additional factors that come into play if the first two factors are inconclusive: the amount of skilled required, the “degree of permanence” of the parties’ work relationship, and whether the putative employee’s work is “part of an integrated unit of production.” Under the Final Rule, the actual practices of the working relationship, and not what the parties’ contract may theoretically allow, is emphasized. To read about this Final Rule in more detail, go to Department of Labor Issues Final Independent Contractor Rule.

Ultimately, the temporary delay of these Final Rules may result in their permanent withdrawal through issuance of new final rules. Jackson Lewis will continue to monitor and report any developments in this respect. In the meantime, if you have any questions about these Final Rules or any other wage and hour issue, please consult a Jackson Lewis attorney.

Employers Will No Longer Get PAID

On January 29, 2020, the U.S. Department of Labor (DOL) announced that it was abandoning the Payroll Audit Independent Determination (PAID) program, effective immediately. PAID was introduced in 2018 as a self-audit program, designed to allow an employer who uncovered potential Fair Labor Standards Act (FLSA) wage violations to voluntarily report those findings to the Wage Hour Division (WHD), which would work with the employer to pay any wages due to employees without the additional risk of the penalties or liquidated damages the WHD might impose if it had initiated the audit.

While the intent of the PAID program was to resolve potential wage and hour claims more expediently, and presumably with less financial cost to employers, historically many employers have become wary of proactively contacting a federal agency with the admission of an error. Moreover, under the program employees were not obligated to accept the proposed settlement terms simply because the WHD had endorsed them. In addition, employers could not use the PAID program to resolve issues that already were being investigated by the WHD, that were the subject of litigation or arbitration (whether actual or threatened), or about which the employer already had been contacted by an employee’s attorney or other representative to settle. Notably, shortly after the program was announced, the attorneys general of a number of states formally voiced their objections to the program, concerned that it would subvert the actions of state agencies enforced with wage laws that often provide greater potential relief than found under the FLSA.

While the DOL’s announcement did not provide an explanation for the decision to end the program, it may signal the current administration’s return to a greater focus on agency-initiated audits and enforcement through litigation.

If you have any questions about this development or any other wage and hour issue, please consult the Jackson Lewis attorney(s) with whom you regularly work.

 

States Challenge DOL’s Tip Regulations Final Rule, DOL Withdraws Opinion Letters

On January 19, 2021, eight states (Delaware, Illinois, Maryland, Massachusetts, Michigan, New Jersey, New York, and Pennsylvania), along with the District of Columbia, filed a lawsuit seeking to enjoin the Tip Regulations Final Rule published by the U.S. Department of Labor (DOL) in late December 2020. The Final Rule, which currently is scheduled to become effective in early March, focuses primarily on two things: (1) implementing the Congressional amendment to the Fair Labor Standards Act (FLSA) that permits tip sharing between “back of the house” employees (e.g. cooks and bussers) and “front of the house” employees (e.g. servers) if a tip credit is not taken, while expressly prohibiting managers and supervisors (as defined in the Final Rule) from sharing in tips; and (2) rejecting the so-called “80/20 Rule” limiting the time tipped employees may spend performing allegedly non-tipped duties. The lawsuit focuses primarily on the 80/20 Rule, asserting that the DOL’s elimination of the Rule was arbitrary and thus violates the Administrative Procedures Act because, among other things, the DOL did not adequately identify and weigh the costs and benefits of the Rule’s elimination.

Because Congress amended the FLSA to permit tip pooling between traditionally tipped and traditionally non-tipped employees, the lawsuit does not (and practically could not) challenge that aspect of the Final Rule, but it does assert that the Rule’s definition of who qualifies as a supervisor or manager likewise is invalid. In addition to the DOL’s incorporation of the “duties” test of the FLSA’s administrative exemption into the Rule’s definition of a supervisor or manager, the lawsuit asserts that the DOL should have incorporated the exemption’s salary requirements (i.e. being paid on a salary basis at least $684 per week). By failing to do so, the lawsuit alleges, the Final Rule excludes some workers who otherwise should be eligible for tip sharing.

Whether President Biden’s administration will defend the Final Rule remains to be seen. Notably, in adopting an approach taken at the beginning of the recently departed administration, the White House already has issued a memorandum instructing all agencies to consider delaying the effective date of any regulation that has yet to become effective; if necessary, to consider issuing a rule to further delay the effective date; and if further necessary, to ultimately issue a new rule revising the pending regulation. Much like what occurred with the Obama-era Final Rule that sought to significantly increase the salary level for the FLSA’s “white collar” (Executive, Administrative, and Professional) exemptions, this directive may result in the DOL eventually rescinding both the Tip Regulations Final Rule and the Independent Contractor Final Rule issued earlier this month, neither of which has yet to become effective.

Notably, on January 26, 2021, the DOL withdrew three Opinion Letters that were issued during the last two weeks of the Trump administration. As the basis for the withdrawal, the DOL stated that these Opinion Letters (FLSA2021-4, involving the Tip Regulations Final Rule, and FLSA2021-8 and FLSA2021-9, involving the Independent Contractor Final Rule) improperly referenced regulations that were not yet effective. This action very well may portend the Biden administration’s initial efforts to undo these Final Rules. On a related note, under the Congressional Review Act (CRA), Congress has the power to disapprove any regulation issued during the sixty (60) session days prior the regulation’s effective date. With both houses of Congress now under Democratic control, this provides a further path to the potential demise of these pending regulations.

Jackson Lewis will continue to monitor the lawsuit and related events and will keep you apprised of any significant developments. In the meantime, if you have any questions about this or any other wage and hour issue, please contact a Jackson Lewis attorney.

2020 Wage & Hour Developments: A Year in Review

The laws governing wages and hours of work affect nearly everyone. How employees are paid, whether as hourly non-exempt, salaried-exempt, tipped, or commissioned sales workers, and how much they are paid, are questions of deep interest to employees and employers alike. And because the laws regulating wages generally apply only to employees, as opposed to independent contractors, who qualifies as an employee is also a significant issue of concern.

All these issues were addressed in 2020 by the U.S. Department of Labor (DOL), the U.S. Circuit Courts of Appeal, and state legislatures. Federal and state laws regulating wages and hours of work continued to change and develop last year, expanding in some areas and contracting in others.

In “2020 Wage & Hour Developments: A Year in Review,” attorneys in Jackson Lewis’ Wage and Hour Practice Group look back on the past year’s significant wage and hour developments  in the laws governing the payment of wages and limitations on hours of work.

DOL Issues Opinion Letters Regarding Pay Calculations for Teleworkers, In-Home Caregivers

On the last day of 2020, the Wage and Hour Division of the U.S. Department of Labor (DOL) ushered out the year with two new Opinion Letters. These may be the final two Opinion Letters of the Trump Administration and perhaps the last two for a while, depending on whether the Biden Administration continues the practice, reimplemented during the current administration, or abandons it, perhaps in favor of the informal administrator interpretation letters issued during the Obama Administration. That remains to be seen but, for now, here is a quick summary of these latest Opinion Letters:

FLSA2020-19:

In FLSA2020-19, the DOL addressed an issue that has arisen during the Covid-19 pandemic, namely, what time qualifies as compensable work time for an employee who works in part at home (“teleworks”) and in part at the employer’s regular worksite (e.g. “the office”), particularly when the employee also attends to personal business at times during the day. In other words, how does the “continuous workday” rule come into play with remote employees? In setting forth its analysis, the DOL reiterated that compensable worktime is only that time spent “primarily for the benefit of the employer,” and if the employee is completely relieved of duties for a sufficient period of time such that it may effectively be spent for her own purposes, this latter time is not compensable worktime. Moreover, the DOL reminds us, normal commute time – whether to or from the workplace – is not compensable worktime.

In the Opinion Letter, the employer provides hypothetical scenarios, premised generally on an employee who normally works from 8:00 a.m. to 4:30 p.m. and has a one-hour commute but is now teleworking in part (presumably due to the pandemic). The employer then asks whether the employee’s travel time would be compensable, first under the following scenarios:

  1. The employee leaves the office at 1:00, drives to a parent-teacher conference (PTC), attends the PTC for 45 minutes, then drives home and works at home the remainder of the day.
  2. Same facts as Scenario 1, but the employee attends to personal business for an hour after arriving home and before resuming work.
  3. Same facts as Scenario 1, but the employee’s personal time is extended to two hours.
  4. Same facts as Scenario 1, but after the PTC ends, the employee attends to personal business for an hour, drives home, attends to more personal business for an hour, then resumes work.

The DOL concluded that under all of these variations, only the time spent working at the office or working at home is compensable. The travel time is normal commute time, and the personal time is not primarily for the benefit of the employer and is long enough to effectively be spent for the employee’s own purposes. Moreover, this is NOT the “worksite-to-worksite” travel that is considered compensable under the regulations. The employer is not requiring that the employee travel as part of her work duties; rather, she is traveling of her own volition and for her own personal purposes. “When an employee arranges for her workday to be divided into a block worked at home and a block worked at the office, separated by a block reserved by the employee to use for her own purposes, the reserved time is not compensable, even if the employee uses some of that time to travel between home and the office,” notes the DOL (emphasis added).

In the second scenario, the employee has a doctor’s appointment from 8:30 to 9:15. With permission, she works for an hour at home before the appointment but, after working from 5:00 a.m. to 6:00 a.m., she attends to personal affairs for two hours before leaving for the appointment. Following the appointment, she travels directly to the office, where she works until the end of the normal workday. She then drives directly home, where she undertakes no more work for that day.

Just as with the first scenario, the DOL concludes that only the time spent actually working, either at home or at the office, is compensable worktime. The employer did not require the employee to work from 5:00 a.m. to 6:00 a.m. – and that is important, because the outcome may have been different if the employer mandated when the work had to be undertaken (a scenario the DOL expressly notes it is not considering in this Opinion Letter). Rather, the employee chose to work at this time before undertaking personal tasks. As one court noted, if it were otherwise, an employee could get up and perform work in the middle of the night, then go back to sleep for several hours before arising again to leave for the office, and “she would be entitled to compensation for the time she spent unconscious….It simply cannot be the case that an employee is empowered unilaterally to convert her commute into compensable time merely by deciding to perform her daily routine in a particular manner.” Garcia v. Crossmark, Inc., 157 F. Supp.3d 1046 (D.N.M. 2015) (emphasis added) (quoting 29 C.F.R. § 785.16).

FLSA2020-20:

In FLSA2020-20, another pandemic-related Opinion Letter (albeit one with a narrower audience), the employees at issue are in-home or live-in caregivers who typically work shifts of 24 hours or more (commonly, 5-day/120-hour shifts). Because of the difficulty of tracking hours spent by the employees performing work-related tasks versus time that can be used effectively for their own purposes, the employer “pre-calculates,” based on a presumed 120-hour workweek, that all hours not reported for sleeping or bona fide meal periods (up to 8 hours per day) are considered compensable. For these hours, it pays the employees a half-time premium for all hours over 40 per week or 8 hours per day, and then pays an additional amount at 1.5 times the standard hourly rate for any hours worked in excess of the presumption (due, for example, to shortened sleep periods or meal breaks). The employer wants to know whether the overtime payments are excludable from the regular rate and whether they may be credited toward any overtime owed.

Yes to both, says the DOL. Provided there is an agreement or understanding (written or unwritten) between the employer and employee, 29 U.S.C. § 207(e)(5) “permits an employer to exclude extra compensation provided by a premium rate paid for certain hours worked in any day or workweek because such hours are in excess of 8 in a workday or 40 in a workweek. Section 207(h) further permits an employer to credit any payments excludable under Section [207(e)(5)] towards overtime pay owed under the FLSA” (citing 29 C.F.R. 778.202(a)).

If you have any questions about these Opinion Letters or any other wage and hour issue, please consult the Jackson Lewis attorney(s) with whom you regularly work.

Mandatory Gratuities Are Not “Tips” But May Qualify as Commissions Under the FLSA, Fourth Circuit Holds

Agreeing with the district court, the Court of Appeals for the Fourth Circuit has concluded that the mandatory service charges imposed by a restaurant on dining parties of six or more were not “tips” under the FLSA. However, the Court of Appeals reversed and remanded the trial court’s determination that the FLSA’s “commissioned salesperson” overtime exemption applied, as well as the trial court’s determination that the tip pool in question was valid.  Tom v. Hospitality Ventures, LLC, 2020 U.S. App. LEXIS 37074 (4th Cir. Nov. 24, 2020).

Background

Ãn Asian Cuisine (“Ãn”) was a sushi restaurant formerly operating in Cary, North Carolina. Ãn characterized its employees as either “front-of-the-house” or “back-of-the-house” staff. Servers and Server Assistants, who fell in the “front-of-the-house” category, received compensation from four sources: (1) an hourly wage of at least $2.13 for the first forty hours of the week and at least $5.76 for all additional hours; (2) cash tips; (3) credit card tips and (4) automatic gratuities. Ãn generally applied an automatic gratuity of 20% to the bill for parties of six or more people.

In July 2014, Ãn implemented a tip pool for its evening shifts. That tip pool included Captains, Servers, Bartenders, Sushi Chefs, and Server Assistants/Runners/Expediters. In addition, the Hostess received 100% of all tips received from to-go orders. Under this system, many of the Servers were paid so well that they surpassed the income of the restaurant’s managers. Plaintiffs Wai Man Tom and Brandon Kelly, who held the position of Captain (the most experienced servers), filed suit, claiming that their employer operated an unlawful tip pool because it included individuals who did not customarily and regularly receive tips. Moreover, they argued, the automatic gratuities were a form of tips. Therefore, because the tip pool was invalid, the restaurant was not entitled to take a tip credit and, without including the tips or the automatic gratuities, failed to satisfy its minimum wage and overtime obligations under the FLSA. Ãn countered that the automatic gratuities were not tips but instead were commissions under 29 U.S.C. § 207(i), entitling it to invoke the “commissioned salesperson” overtime exemption. Regardless, added the restaurant, its tip pool nevertheless was valid during those weeks where the 207(i) exemption was inapplicable. The district court agreed with the defendant and entered summary judgment in its favor.

The Circuit Court Decision

On appeal, the Fourth Circuit agreed with the trial court that the 20% automatic gratuity was not a “tip” as defined under the FLSA. Reviewing the Act’s regulations, the Court of Appeals noted that a tip is “a sum presented by a customer as a gift or gratuity in recognition of some service performed for him . . . [the amount of which is] determined solely by the customer, who has the right to determine who shall be the recipient of the gratuity.” 29 C.F.R. § 531.52. Conversely, under the FLSA regulations, “[a] compulsory charge for service, such as 15 percent of the amount of the bill, imposed on a customer by an employer’s establishment, is not a tip,” but instead is a service charge that “may be used in [its] entirety to satisfy the monetary requirements of the [FLSA]” if it “[is] distributed by the employer to its employees.” Id. § 531.55(a)-(b). So, compensation that qualifies as service charges can satisfy the FLSA minimum-wage and overtime obligations.

In this case, concluded the Fourth Circuit, it was “undisputed that the customers did not have unfettered discretion to leave (or not leave) the twenty-percent gratuity.” Even though a customer could request that the service charge be removed or revised, ultimately that decision remained with the restaurant’s management. “Consequently, even if the Employees could prove that Ãn would occasionally waive the automatic gratuities, that fact would not be material as it still would not enable a reasonable jury to find the twenty-percent automatic gratuity was a tip.”

However, added the Court of Appeals, the district court erred in its application of the 207(i) exemption because that exemption applies only to the overtime obligations of the FLSA, not to its minimum wage obligations. Furthermore, this exemption requires that “more than half [of the employee’s] compensation . . . represents commissions on goods or services.” 29 U.S.C. § 207(i). In this case, the only way this majority-commissions threshold was met was if both the automatic gratuities and the tips were included in the calculation of an employee’s total compensation. Moreover, while the FLSA regulations make clear that “all compensation” must be considered in determining whether the majority-commissions requirement of 207(i) is met, 29 C.F.R. § 779.415, the district court had improperly omitted tips from the calculation. Therefore, the Court of Appeals remanded the case to the district court to determine whether, using the proper calculation, the automatic gratuities met the requirements of the 207(i) overtime exemption. In addition, because this revised calculation will be needed to determine whether the restaurant will have to rely on the tip credit to satisfy its minimum wage or overtime obligations, the Court of Appeals likewise remanded the issue of whether a valid tip pool existed, or was even relevant.

If you have any questions about this decision, exemptions under the FLSA, or any other wage and hour issue, please contact the Jackson Lewis attorney(s) with whom you regularly work.

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