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Executive Summary: A federal trial court recently upheld the Department of Labor's regulation requiring employers to provide notice to tipped employees of the requirements of the tip credit provisions under the Fair Labor Standards Act (FLSA).
In National Restaurant Ass'n v. Solis, (D.D.C. May 29, 2012), the court held that the Department of Labor (DOL) complied with the requirements of the Administrative Procedures Act (APA) when it promulgated a regulation in April 2011 requiring employers to provide notice to tipped employees of the requirements of the FLSA's tip credit provision.
Generally, all employers covered by the FLSA are required to pay non-exempt employees at least the federal minimum wage, currently $7.25 per hour. Many employers in the hospitality industry, however, take advantage of the FLSA's tip credit provisions. Under these provisions, an employer is allowed to pay tipped employees a cash wage of $2.13 and offset the remaining amount of the minimum wage by taking a "tip credit." In other words, an employer taking the maximum tip credit must pay a tipped employee a cash wage of $2.13, but it can use up to $5.12 of the employee's tips as a credit toward the rest of the minimum wage payment. However, an employer may only take the tip credit if (1) the employee has been informed by the employer of the provisions of the FLSA's tip credit subsection, and (2) the employee retains all tips received (except amounts paid into a valid "tip pool" to be shared among employees that regularly receive tips). In the past, courts have disagreed about how much information was required in order to satisfy the requirement of "informing" employees of the tip credit.
Among other things, in the April 2011 regulations the DOL clarified its position on the information employers are required to provide to employees regarding the tip credit. The tip credit regulation requires employers who take the tip credit to inform employees:
The regulation does not require employers to provide this information in writing; however, it is a good practice to do so to ensure that the employer can establish that employees were given the proper notice.
Court Upholds Regulation
In upholding the regulation, the court held that the DOL complied with the APA's notice and comment procedure. The court rejected the plaintiffs' argument that the proposed rule the DOL issued in 2008 differed so greatly from the final rule that the agency was required to issue a second notice of proposed rulemaking. The court held that the 2008 Notice of Proposed Rulemaking (NPRM) gave the public adequate notice that the DOL intended to issue a rule that complies with the language of the FLSA requiring employers to provide notice to employees concerning the tip credit. Further, the court held that the final rule was a logical outgrowth and/or reasonable development of the proposed rule. The court held that the DOL revised the proposed rule to more closely track the language of the FLSA; thus the final rule followed logically from and reasonably developed the proposed rule. The court also held that the final rule was not arbitrary or capricious. The court found that the final rule was consistent with the language of the FLSA and was based on comments submitted in response to the NPRM.
Employers' Bottom Line:
The court's decision serves as a reminder that employers using the tip credit must provide notice (preferably in writing) to tipped employees, including each element required by the DOL regulation, or risk a determination that the tip credit does not apply to an employee or group of employees.
If you have any questions about the notice requirement or other provisions of the tip credit subsection or the FLSA in general, please contact the Ford & Harrison attorney with whom you usually work or Delaine Smith, email@example.com, or Jeff Mokotoff, firstname.lastname@example.org, both of whom are members of Ford & Harrison's Hospitality Industry Practice Group.
 For more information on this regulation, please see our April 13, 2011 Legal Alert, "Department of Labor Clarifies "Tip Credit" Regulations," available at: http://www.fordharrison.com/shownews.aspx?show=7126.