When an employer pays the minimum wage (or more) instead of taking the tip credit, who owns any tips – the employer or the employee? In Marlow v. The New Food Guy, Inc., No. 16-1134 (10th Cir. June 30, 2017), the United States Court of Appeals for the Tenth Circuit held they belong to the employer, who presumably can then either keep them or distribute them in whole or part to employees as it sees fit. This directly conflicts with the Ninth Circuit’s decision last year in Oregon Restaurant and Lodging Ass’n v. Perez, 816 F.3d 1080, 1086-89 (9th Cir. 2016), pet for cert. filed, No. 16-920 (Jan. 19, 2017) and likely sets up a showdown this fall in the U.S. Supreme Court.

The plaintiff in Marlow, who was paid $12 per hour, alleged her employer was obligated to turn over to her a share of all tips paid by catering customers. The Tenth Circuit first held that the statutory language of 29 U.S.C. §203(m), which allows employers the option of paying a reduced hourly wage of $2.13 so long as employees receive enough tips to bring them to the current federal minimum of $7.25, does not apply when the employer pays the full minimum wage, and thus the plaintiff had no claim to any tips. In this regard the Court followed the 2010 decision in Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9th Cir. 2010), as well as a number of cited district court cases.

Crucially, the Court went on to hold that the U.S. Department of Labor (DOL) had no authority to promulgate its post-Woody Woo regulation, 76 Fed. Reg. 18,855 (April 5, 2011), amending 29 C.F.R. §531.52, which, contrary to Woody Woo, states that tips are the property of the employee whether or not the employer takes the tip credit under section 2013(m). In so doing, it held that although agencies may promulgate rules to fill “ambiguities” or “gaps” in statutes, they cannot regulate when there is no ambiguity or gap that the agency was authorized to fill. It then found (1) there were no “ambiguities” in the statute that needed to be filled, as the statute clearly only applied when an employer sought to use the tip credit; (2) there were no undefined terms in the statute; and (3) there was no statutory directive to regulate the ownership of tips when the employer is not taking the tip credit. In so doing, the Tenth Circuit expressly rejected the Ninth Circuit’s decision last year in Oregon Restaurant, which held that the DOL had the discretion to issue the regulation precisely because the statute was silent on the subject.

Notably, the Supreme Court has four times extended the time for DOL to file its opposition to the petition for certiorari in Oregon Restaurant, most recently on June 30 granting an extension until September 8, 2017. It appears the current DOL may not yet be not sure what position to take as to the validity of its Obama-era regulation. Marlow’s direct conflict with Oregon Restaurant increases the likelihood that either DOL may choose not to defend the regulation or that the Supreme Court will grant review to resolve the conflict when it returns in October.

Tips Do Not Count Towards the Minimum Wage Unless a Worker Qualified as a “Tipped Employe"In Romero v. Top-Tier Colorado LLC, the Tenth Circuit Court of Appeals ruled that tips received by a restaurant server for hours in which she did not qualify as a tipped employee were not “wages” under the FLSA, and therefore should not be considered in determining whether she was paid the minimum wage.

Tipped Employees & the FLSA

The FLSA provides that employers may take a “tip credit” and pay employees as little as $2.13 per hour if: (i) the tip credit is applied to employees who customarily and regularly receive tips; (ii) the employee’s wages and tips are at least equal to the minimum wage, and (iii) all tips received by a tipped employee are retained by the employee or pooled with the tips of other tipped employees.

In Romero, the Tenth Circuit noted that an employee may hold both tipped and non-tipped jobs for the same employer.  In those cases, the employee is entitled to the full minimum wage while performing the job that does not generate tips.

Moreover, the Circuit Court cited to the directive in the Wage Hour Division’s Field Operations Handbook stating that, if a tipped employee spends more than 20% of his or her time performing related-but-nontipped work, then the employer may not take the tip credit for the amount of time the employee spends performing those duties.

The Plaintiff’s Claims

The plaintiff in Romero worked as a server at the defendants’ restaurant.  The defendants paid her a cash wage of $4.98 an hour, and took a tip credit to cover the gap between the cash wage rate and the federal minimum wage.

The plaintiff contended that she also worked in nontipped jobs for the defendants, and that she spent more than 20% of her workweek performing related-but-nontipped work. Therefore, she concluded she was entitled to a cash wage of at least $7.25 per hour during certain hours, and filed a lawsuit in the U.S. District Court for the District of Colorado claiming violations of the federal minimum wage.

The defendants’ moved to dismiss the complaint because plaintiff did not allege that her total weekly earnings, when divided by the number of hours worked, ever fell below the federal minimum wage rate. The District Court reasoned that a minimum wage violation is determined by dividing an employee’s total pay in a workweek by the total number of hours worked that week.  Because the plaintiff did not allege facts that would establish such a violation, the District Court granted the defendants’ motion and dismissed the complaint.

In light of that reasoning, the District Court never considered whether the plaintiff was properly considered a tipped employee.

When are Tips Considered “Wages” Paid by the Employer?

The Tenth Circuit Court of Appeals reversed the judgment of the District Court. The Tenth Circuit “assumed” that the district court correctly stated that an employer satisfies the FLSA’s minimum wage requirements so long as, after the total wage paid to each employee during any given week is divided by the total time that employee worked that week, the resulting average hourly wage is $7.25 per hour or more.

But the Tenth Circuit held that the existence of a minimum wage violation depends on the “wages” paid by an employer to an employee. The Court stated that tips are “wages” paid by an employer only when the tips are received by a worker who qualifies as a tipped employee under the FLSA.

Accordingly, the Tenth Circuit reversed the District Court’s dismissal of the plaintiff’s complaint. The Tenth Circuit directed the District Court to reconsider its ruling by examining the threshold question of whether the tips received by the plaintiff were “wages” for purposes of the minimum wage requirements of the FLSA.

What is the Impact of an Improper Tip Credit?

Assume, for example, that the plaintiff worked 40 hours in a given week, was paid cash wages of $199.20 (or $4.98 per hour) and received tips of $90.80.

If the evidence demonstrates that the plaintiff was a tipped employee at all times, she was paid wages of $290.00 (or $7.25 per hour) and the defendants did not violate the federal minimum wage.

However, the evidence could demonstrate that the plaintiff performed so much related-but-nontipped work that she did not qualify as a tipped employee at any time. As explained by the Tenth Circuit, the plaintiff’s tips would not count as wages and therefore she was paid $90.80 below the minimum wage.  The defendants could then be liable to her for that amount (as well as potential liquidated damages and attorneys’ fees).

The Tenth Circuit’s decision is consistent with the rulings of other circuit courts. Therefore, employers who are taking tip credits therefore must pay close attention to the specific requirements of the FLSA, and should not consider themselves insulated from liability merely by the fact that their tipped employees are earning more than the minimum wage.

Over the past year, there has been an increased discussion of Fair Labor Standards Act (“FLSA”) requirements for tipped employees. The courts have focused on a number of issues related to tipped employees, including addressing who can participate in tip pools and whether certain deductions may be made from tips. While the FLSA requires employers to pay a minimum wage of $7.25 per hour in most cases, Section 203(m) of the FLSA provides that employers may take a “tip credit” and pay as little as $2.13 per hour to employees who customarily and regularly receive tips, so long as two criteria are satisfied:

  • the employee’s wages and tips are at least equal to the minimum wage, and
  • all tips “received” by a tipped employee are actually retained by the employee or added into a tip pool that aggregates the tips of a group of tipped employees.

Notably, 29 CFR § 531.55 states that a “compulsory charge for service . . . imposed on a customer by an employer’s establishment, is not a tip . . . .” However, some states (such as New York) have their own requirements for determining whether a service charge will be considered a “tip.”

Who Can Be Treated as a Tipped Employee?

When a tip pool is covered by Section 203(m) of the FLSA, an employer may not divert tips from tipped employees by including “non-customarily tipped employees” in the tip pools. But whether an employee customarily (and regularly) receives tips may be unclear.

In Montano v. Montrose Restaurant, the U.S. Court of Appeals for the Fifth Circuit considered a tip pool in which the employer included a “coffeeman,” and the parties submitted conflicting evidence regarding the coffeeman’s duties. The Fifth Circuit concluded that an employee can be part of a tip pool if it can be expected that the customer intended the employee to receive a portion of the tip. Satisfying that requirement depends on such factors as whether the employee had more than a de minimis interaction with the customers who leave the undesignated tips and whether the employee is engaging in customer service functions.

In Schaefer v. Walker Bros. Enterprises, the Seventh Circuit evaluated a plaintiff’s contention that he and other employees at his restaurant (who primarily worked in a tipped capacity) had to be paid the full minimum wage during any time spent performing non-tipped work. The Seventh Circuit noted that the DOL’s Field Operations Handbook states that an employer may pay the tip-credit rate for time that tipped employees spend on non-tipped duties “related to” their tipped work. According to the Seventh Circuit, making coffee, cleaning tables, and “ensuring that hot cocoa is ready to serve” and that “strawberries are spread on the waffles” are activities related to a tipped server’s work. The Seventh Circuit characterized other duties, however, such as wiping down burners and woodwork and dusting picture frames, as “problematic” because they did not seem to be “closely related to tipped duties.” But the time spent on those duties was “negligible” and therefore did not require the restaurants to pay the normal minimum wage rather than the tip-credit rate for those minutes.

Can Credit Card Fees Be Deducted from “All Tips”?

In Steele v. Leasing Enterprises, Ltd., the Fifth Circuit considered whether an employee is receiving “all tips” when an employer deducts the costs and fees associated with collecting tips that are paid through a customer’s credit card.

To offset costs associated with credit card tips, the defendant retained 3.25 percent of any tips paid by credit card. According to the defendant, the costs included not only fees charged by the card issuer, but also the cost of cash deliveries made by an armored vehicle three times per week to ensure that the employees could be paid their tips on a daily basis (as the employees had requested).

Based on prior authority from the Sixth Circuit and a DOL opinion letter, the Fifth Circuit agreed that the defendant could offset credit card tips by the amount of the credit card issuer fees and still satisfy the requirements of Section 203(m). One week later, the Southern District of Ohio reached a similar conclusion in Craig v. Landry’s, Inc., ruling that “controlling precedent specifically permits” the deduction of credit card processing fees as long as the amount of the deduction “reasonably approximates the charge incurred by the employer.”

What Other Fees or Costs Can Be Deducted from “All Tips”?

After approving the deduction of credit card issuer fees from the gross tips in Steele, the Fifth Circuit turned to the question of whether an employer violates Section 203(m)’s requirements if the employer deducts costs other than direct fees charged by the credit card issuers. The defendant argued that employers could deduct the additional expenditures associated with paying credit card tips and still maintain the tip credit. Specifically, the defendant argued that the additional costs that it was incurring in arranging for the payment of tips paid via credit card, such as the cost of the armored car deliveries to its restaurants, could be deducted from the gross tips.

The Fifth Circuit concluded that “an employer only has a legal right to deduct those costs that are required to make such a collection.” While the defendant had no choice but to pay to credit card issuer fees, the costs relating to its thrice-weekly armored car deliveries were discretionary costs resulting from internal business decisions by the defendant. Therefore, deducting those amounts from employees’ tips was a violation of Section 203(m).

It is worth noting the Eastern District of New York added an interesting twist to this principle in Widjaja v. Kang Yue USA Corp. The court had previously ruled that the defendant violated the minimum wage as a result of, among other things, improperly withholding 11.5 percent of credit card tips. In a late-2015 ruling on damages, the court found that the defendant was liable for the difference between the minimum wage and the hourly wage that it actually paid its tipped employees. Moreover, the court in Widjaja held that the wage deficiency could not be offset by the tips actually received by the tipped employees because those tips were not an hourly wage. Consequently, because it improperly applied the tip-credit rule, the employer received no credit against the minimum wage for the tips actually received by its tipped employees.

Is There a Cause of Action for Withheld Tips If the Employer Does Not Take a Tip Credit?

Several years ago, the DOL revised 29 C.F.R. § 531.52 to provide that all tips are the property of the employee and, thus, must be passed along to the tipped employee or a pool of tipped employees regardless of whether the employer has taken a tip credit under Section 203(m). Because the FLSA, on its face, does not specifically prohibit or address wage deductions that do not result in minimum-wage violations, there has been substantial controversy regarding the DOL’s authority to issue this regulation.

Earlier this year, in Oregon Rest. & Lodging Ass’n v. Perez, the Ninth Circuit noted that Section 203(m) of the FLSA is silent as to employers that do not take a tip credit. Therefore, the Ninth Circuit concluded that the DOL has the authority to regulate “tip pooling” practices even if employers do not take tip credits. Conversely, this past summer, federal courts in Florida and Georgia arguably joined with the position taken by the Fourth Circuit and courts in Maryland, New York, and Utah that Section 203(m) of the FLSA does not create a cause of action for improperly withheld tips unless the employer is taking a tip credit.

A version of this article originally appeared in the Take 5 newsletter Five Critical Wage and Hour Issues Impacting Employers.”

Julie Badel
Julie Badel

Addressing an unusual set of facts, the U.S. District Court for the Northern District of Georgia has dismissed a suit challenging an employer’s practice of retaining tips that customers give to valets. The plaintiff in Malivuk v. Ameripark, No. 1:15:cv-2570 WSD (N.D. Ga. 2016), alleged that she was promised an hourly wage plus tips but that her employer, who provided valet parking services, retained a portion of the tips.

The defendant moved to dismiss the case because the plaintiff did not allege that the company took a tip credit against the minimum wage or in any other way did not pay the minimum wage. The court agreed and dismissed the case, relying on section 203(m) of the FLSA, which provides that an employer must pay a cash wage but if that wage is less than the federal minimum wage, it can make up the difference with the employee’s tips.  If the cash wages plus the tips are not sufficient to amount to the minimum wage, the employer must increase the cash wages so the employee is paid the minimum.

In its ruling, the court declined to follow a recent Ninth Circuit case, Oregon Restaurant and Lodging Ass’n v. Perez, 816 F.23d 1080 (9th Cir. 2016), that upheld a DOL regulation that most courts have rejected.  This regulation, 29 C.F.R. §531.52, provides that tips are the property of the employee, whether or not the employer takes a tip credit.  The Ameripark court reasoned that if Congress wanted to articulate the principal that tips are the property of the employee, absent a valid tip pool, it could have done so without reference to the tip credit, and it concluded that the DOL regulation violates the plain language of section 203(m).

Conclusion

Although it would seem that employers in industries where employees customarily receive tips normally take a tip credit unless otherwise prohibited by state or local laws, Ameripark suggests that if an employer does not take a tip credit, it may retain a portion of the employees’ tips—at least in the jurisdiction of this federal court.  Of course, other courts may hold to the contrary.  Employers considering adopting such an approach would be wise to review whether the courts in their jurisdictions have weighed in on this subject, or whether such a practice could give rise to other types of claims.  And while the practice might be attractive to employers in some industries where employees receive significant tips, restaurant employers in particular might find it hard to recruit and retain servers to work once they are told that the restaurant will be keeping a portion of the tips.

Michael Kun, co-editor of this blog, has a post on the Hospitality Labor and Employment Law Blog that will be of interest to many of our readers: “Ninth Circuit Approves DOL Rule Prohibiting ‘Tip Pooling’ for Kitchen Employees Even Where No ‘Tip Credit’ Is Taken.”

Following is an excerpt:

The Fair Labor Standards Act (“FLSA”) permits employers to use “tip credits” to satisfy minimum wage obligations to tipped employees.  Some employers use those “tip credits” to satisfy the minimum wage obligations; some do not.  (And in some states, like California, they cannot do so without running afoul of state minimum wage laws.) …

On February 23, 2016, in Oregon Restaurant & Lodging Assoc. v. Perez, No. 13-25765 (9th Cir. Feb. 23, 2016), a divided Ninth Circuit Court of Appeals … [held] that the DOL in fact has the authority to regulate the “tip pooling” practices of employers even when they do not take tip credits — including prohibiting employers from including kitchen employees in “tip pools.” While confirming that the FLSA permits the use of “tip credits” to fulfill minimum wage requirements, the Court concluded that the DOL was acting within its authority in concluding that employers that establish “tip pools” may only do so when the persons who are included are persons who normally receive tips – and that, as kitchen staff do not normally receive tips, they cannot be included in “tip pools.”

The decision not only appears to be inconsistent with the Ninth Circuit’s own Cumbie decision, but with other courts that have reviewed this same issue. …

Read the full post here.

By Jeffrey Ruzal

President Obama has spent much of his second term zealously pursuing an increase to the current $7.25 federal minimum hourly wage. While it is not clear whether a federal wage hike is in the offing, many states have recently taken measures to increase their own minimum wage rates. Effective January 1, 2014, Arizona, Colorado, Connecticut, Florida, Missouri, Montana, New Jersey, New York, Ohio, Oregon, Rhode Island, Vermont and Washington have all increased their minimum wage rates. There are also five additional states, California, Delaware, Michigan, Minnesota, West Virginia, plus the District of Columbia, which have passed legislation for future minimum wage increases that will take effect in 2014.

Employers, especially ones which operate in multiple states, must be vigilant in monitoring and planning for future state minimum wages increases. What is more, employers in specific industries, such as hospitality, must consider additional compliance measures, including changes in the maximum tip credit an employer may take against its tipped employees’ hourly wages.

The chart below provides each state’s previous and current minimum wage and maximum tip credit rates, as well as scheduled future increases through the end of 2014.

State

Previous Minimum Wage

Current Minimum Wage

Future Minimum Wage Increases in 2014

Previous Tip Credit

Current Tip Credit

Arizona

$7.80

$7.90

(effective 1/1/14)

$4.80

$4.90

(eff. 1/1/14)

California

$8.00

$9.00

(eff. 7/1/14)

No tip credit permitted

Colorado

$7.78

$8.00

(eff. 1/1/14)

$4.76

$4.98

(eff. 1/1/14)

Connecticut

$8.25

$8.70

(eff. 1/1/14)

$7.34 for bartenders; $5.69 all other tipped employees

Delaware

$7.25

$7.75

(eff. 6/1/14)

$2.23

D.C.

$8.25

$9.50

(eff. 7/1/14)

$2.77

Florida

$7.79

$7.93

(eff. 1/1/14)

$4.77

$4.91

(eff. 1/1/14)

Michigan

$7.40

$8.15

(eff. 9/1/14)

$2.65

Minnesota

$6.15 for employers w/ annual sales >$625,000; $5.25 for employers w/ < $625,000

$8.00 for employers w/ annual sales >$500,000; $6.50 for employers w/ < $500,000

(eff. 8/1/14)

$6.15 for employers w/ annual sales >$625,000; $5.25 for employers w/ < $625,000

Missouri

$7.35

$7.50

(eff. 1/1/14)

$3.68

$3.75

(eff. 1/1/14)

Montana

$7.80

$7.90

(eff. 1/1/14)

No tip credit permitted

New Jersey

$7.25

$8.25

(eff. 1/1/14)

$2.13

No change in tip credit

New York

$7.25

$8.00

(eff.12/31/13)

$8.75

(eff.12/31/14)

$5.00 for food service employees; $5.65 for service employees (delivery and coat check)

No change in tip credit

Ohio

$7.85

$7.95

(eff. 1/1/14)

$3.93

$3.98

(eff. 1/1/14)

Oregon

$8.95

$9.10

(eff. 1/1/14)

No tip credit permitted

Rhode Island

$7.75

$8.00

(eff. 1/1/14)

$2.89

No change in tip credit

Vermont

$8.60

$8.73

(eff. 1/1/14)

$4.17

$4.23

(eff. 1/1/14)

Washington

$9.19

$9.32

(eff. 1/1/14)

No tip credit permitted

West Virginia

$7.25

$8.00

(eff.12/31/14)

$5.80

By Kara Maciel

Our national hospitality practice frequently advises restaurant owners and operators on whether it is legal for employers to pass credit card swipe fees onto employees or even to guests, and the short answer is, yes, in most states.  But whether an employer wants to actually pass along this charge and risk alienating their staff or their customers is another question.

With respect to consumers, in the majority of states, passing credit card swipe fees along in a customer surcharge became lawful in 2013.  Only ten states prohibit it:  California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, Oklahoma, Texas and Utah.  If a restaurant decides to add a surcharge to the bill to recoup the credit card swipe fee, it is important the that the fee not exceed the percentage charged by the credit card company, the fee is posted clearly on the guest check prior to paying the bill, and it cannot be used for debit card purchases.

With respect to employees, the credit card swipe fee may only be passed along to servers and applied to the tipped portion of the bill.  For example, if a bill is $100 plus a $20 tip, the swipe fee on the $100 (e.g., 3 percent or $3) must be paid by the restaurant.  However, when paying out the server, you can allocate $19.40 since you can charge the server 3 percent or 60 cents to recover the swipe fee on the gratuity.  As with guests, an employer may not charge the server more than credit card swipe fee, and the reduced amount in tips cannot cause the employee to earn less than the minimum wage.  And again, you must always check state and local law as some states prohibit deductions from credit card tips for processing fees, such as California, Colorado, Nevada, New Mexico, Oregon, and Washington, among others.

But even if legal, is it practical or good business sense to pass along processing fees to employees and customers?  Is it industry practice in your market to pass along these fees, or do you risk angering an important stakeholder in your profit margin – your employees and customers?  Surcharges could be perceived as owners taking more money out of the pockets of employees and customers and companies could risk losing the business to another restaurant down the street.  Unless the practice becomes an industry standard, it is likely that adding a surcharge or deducting the swipe fee from tips could do more harm than good.

Our colleagues Kara Maciel and Jordan Schwartz, both of Epstein Becker Green, recently cowrote an article for PLC titled “Tipped Employees Under the FLSA.”

Following is an excerpt:

Wage and hour lawsuits certainly are not new phenomena, but in recent years, service industry employees have increasingly made claims regarding tips and service charges. In particular, employers in states such as Massachusetts, New York and California have seen a surge in class actions involving compulsory tip pools and distributions of service charges to employees. Commonly targeted employers include large restaurant and coffee chains, as well as upscale eateries, many of which feature celebrity chefs.

The US Department of Labor (DOL) Wage and Hour Division (WHD) under the Obama Administration has taken an aggressive stance against wage and hour violations, leading to strict rules regarding proper tip pooling and service charge practices. As a result, many businesses with tipped employees, most notably in the food service and hospitality industry, face significant legal exposure arising from improper practices relating to the retention and distribution of tips and service charges.

To help employers comply with this complex and developing area of the law, this Note discusses and explains:

  • Federal law on tips and service charges and the interaction with state laws.
  • Who are considered tipped employees.
  • Disbursement of tips and service charges.
  • Tip pooling requirements.
  • States experiencing a high volume of class action litigation on this topic.
  • Best practices for compliance.

Download the full article, here, in PDF format.

By: Kara M. Maciel

The following is a selection from the Firm’s October Take 5 Views You Can Use which discusses recent developments in wage hour law.

  1. IRS Will Begin Taxing a Restaurant’s Automatic Gratuities as Service Charges

Many restaurants include automatic gratuities on the checks of guests with large parties to ensure that servers get fair tips. This method allows the restaurant to calculate an amount into the total bill, but it takes away a customer’s discretion in choosing whether and/or how much to tip the server. As a result of this removal of a customer’s voluntary act, the Internal Revenue Service (“IRS”) will begin classifying automatic gratuities as service charges, taxed like regular wages, beginning in January 2014.

This change is expected to be problematic for restaurants because the new treatment of automatic gratuities will complicate payroll accounting. Each restaurant will be required to factor automatic gratuities into the hourly wage of the employee, meaning the employee’s regular rate of pay could vary from day to day, thus adding a potential complication to overtime payments. Furthermore, because restaurants pay Social Security and Medicaid taxes on the amount that its employees claim in tips, restaurants are eligible for an income-tax credit for some or all of these payments. Classifying automatic gratuities as service charges, however, would lower that possible income-tax credit.

Considering that the IRS’s ruling could disadvantage servers as well, restaurants may now want to consider eliminating the use of automatic gratuities. Otherwise, employees could come under greater scrutiny in reporting their tips as a result of this ruling. Furthermore, these tips would be treated as wages, meaning upfront withholding of federal taxes and delayed access to tip earnings until payday.

Some restaurants, including several in New York City, have begun doing away with tips all together. These restaurants have replaced the practice of tipping with either a surcharge or increased food prices that include the cost of service. They can then afford to pay their servers a higher wage per hour in lieu of receiving tips. This is another way for restaurants to ensure that employees receive a sufficient wage, while simultaneously removing the regulatory burdens that a tip-system may impose.

  1. The New DOL Secretary, Tom Perez, Spells Out the WHD’s Enforcement Agenda

On September 4, 2013, the new U.S. Secretary of Labor, Tom Perez, was sworn in. During his remarks, Secretary Perez outlined several priorities for the U.S. Department of Labor (“DOL”), including addressing pay equity for women, individuals with disabilities, and veterans; raising the minimum wage; and fixing the “broken” immigration system.

Most notably, and unsurprisingly, Secretary Perez emphasized the enforcement work of the Wage and Hour Division (“WHD”). Just last year, the WHD again obtained a record amount—$280 million—in back-pay for workers. Employers can expect to see continued aggressive enforcement efforts from the WHD in 2013 and 2014 on areas such as worker misclassification, overtime pay, and off-the-clock work. In fact, Secretary Perez stated in his swearing-in speech that “when we protect workers with sensible safety regulations, or when we address the fraud of worker misclassification, employers who play by the rules come out ahead.” By increasing its investigative workforce by over 40 percent since 2008, the WHD has had more time and resources to undertake targeted investigation initiatives in addition to investigations resulting from complaints, and that trend should continue.

  1. DOL Investigates Health Care Provider and Obtains $4 Million Settlement for Overtime Payments

On September 16, 2013, the DOL announced that Harris Health System (“Harris”), a Houston health care provider of emergency, outpatient, and inpatient medical services, had agreed to pay more than $4 million in back wages and damages to approximately 4,500 current and former employees for violations of the overtime and recordkeeping provisions of the Fair Labor Standards Act (“FLSA”). The DOL made this announcement after the WHD completed a more than two-year investigation into the company’s payment system, prompted by claims that employees were not being fully compensated.

Under the FLSA, employers typically must pay their non-exempt employees an overtime premium of time-and-one-half their regular rate of pay for all hours worked in excess of 40 hours in a workweek. Employers within the health care industry have special overtime rules. Notably, for all employers, an employee’s “regular rate of pay” is not necessarily the same as his or her hourly rate of pay. Rather, an employee’s “regular rate of pay” includes an employee’s “total remuneration” for that week, which consists of both the employee’s hourly rate as well as any non-discretionary forms of payment, such as commissions, bonuses, and incentive pay. The FLSA dictates that an employee’s “regular rate” of pay is then determined by dividing the employee’s total remuneration for the week by the number of hours worked that week.

The DOL’s investigation concluded that Harris had failed to: (i) include incentive pay when determining its employees’ regular rate of pay for overtime purposes, and (ii) maintain proper overtime records. As a result, Harris owed its employees a total of $2.06 million in back wages and another $2.06 million in liquidated damages.

Because an employee’s “total remuneration” for a workweek may consist of various forms of compensation, employers must consistently evaluate and assess their payment structures and payroll systems to determine the payments that must be included in an employee’s overtime calculations beyond just the hourly wage. Additionally, employers should conduct periodic audits to ensure that they are maintaining full and accurate records of all hours worked by every employee.

  1. Federal Court Strikes Down DOL Tip Pooling Rule

In 2011, the WHD enacted a strict final rule related to proper tip pooling and service charge practices. This final rule was met with swift legal challenges, and, this summer, the U.S. District Court for the District of Oregon (“District Court”) concluded that the DOL had exceeded its authority when implementing its final rule. See Oregon Rest. and Lodging Assn. v. Solis, No. 3:12-cv-01261 (D. Or. June 7, 2013).

Inconsistent interpretations of the FLSA among various appellate courts have created confusion for both employers and courts regarding the applicability of valid tip pools. One of the most controversial interpretations of the FLSA occurred in early 2010, when the U.S. Court of Appeals for the Ninth Circuit held that an employer could require servers to pool their tips with non-tipped kitchen and other “back of the house staff,” so long as a tip credit was not taken and the servers were paid minimum wage. See Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9th Cir. 2010). According to the Ninth Circuit, nothing in the text of the FLSA restricted tip pooling arrangements when no tip credit was taken; therefore, because the employer did not take a tip credit, the tip pooling arrangement did not violate the FLSA.

In 2011, the DOL issued regulations that directly conflicted with the holding in Woody Woo. As a result, employers could no longer require mandatory tip pooling with back-of-the-house employees. In conjunction with this announcement, the DOL issued an advisory memo directing its field offices nationwide, including those within the Ninth Circuit, to enforce its final rule prohibiting mandatory tip pools that include such employees who do not customarily and regularly receive tips.

Shortly after the issuance of the DOL’s final rule, hospitality groups filed a lawsuit against the DOL challenging the agency’s regulations that exclude back-of-the-house restaurant workers from employer-mandated tip pools. The lawsuit sought to declare the DOL regulations unlawful and inapplicable to restaurants that pay employees who share the tips at least the federal or applicable state minimum wage with no tip credit. On June 10, 2013, the District Court granted the plaintiffs’ summary judgment motion, holding that the DOL exceeded its authority by issuing regulations on tip pooling in restaurants. The District Court stated that the language of Section 203(m) of the FLSA is clear and unambiguous; it only imposes conditions on employers that take a tip credit.

The District Court’s decision may have a large impact on the tip pool discussion currently before courts across the country, especially if employers in the restaurant and hospitality industries begin to challenge the DOL’s regulations. Given the District Court’s implicit message encouraging legal challenges against the DOL, the status of the law regarding tip pooling is more uncertain than ever. Although the decision is a victory for employers in the restaurant and hospitality industry, given the aggressive nature of the DOL, employers in all circuits should still be extremely careful when instituting mandatory tip pool arrangements, regardless of whether a tip credit is being taken.

  1. Take Preventative Steps When Facing WHD Audits

In response to a WHD audit or inspection, here are several preventative and proactive measures that an employer can take to prepare itself prior to, during, and after the audit:

  • Prior to any notice of a WHD inspection, employers should develop and implement a comprehensive wage and hour program designed to prevent and resolve wage hour issues at an early stage. For example, employers should closely examine job descriptions to ensure that they reflect the work performed, review time-keeping systems, develop a formal employee grievance program for reporting and resolving wage and hour concerns, and confirm that all written time-keeping policies and procedures are current, accurate, and obeyed. Employers should also conduct regular self-audits with in-house or outside legal counsel (to protect the audit findings under the attorney-client privilege) and ensure that they address all recommendations immediately.
  • During a DOL investigation, employers should feel comfortable to assert their rights, including requesting 72 hours to comply with any investigative demand, requesting that interviews and on-site inspection take place at reasonable times, participating in the opening and closing conferences, protecting trade secrets and confidential business information, and escorting the investigator while he or she is at the workplace.
  • If an investigator wants to conduct a tour of an employer’s facility, an employer representative should escort the investigator at all times while on-site. While an investigator may speak with hourly employees, the employer may object to any impromptu, on-site interview that lasts more than five minutes on the grounds that it disrupts normal business operations.
  • If the DOL issues a finding of back wages following an investigation, employers should consider several options. First, an employer can pay the amount without question and accept the DOL’s findings. Second, an employer can resolve disputed findings and negotiate reduced amounts at an informal settlement conference with the investigator or his or her supervisor. Third, an employer can contest the findings and negotiate a formal settlement with the DOL’s counsel. Finally, an employer may contest the findings, prepare a defense, and proceed to trial in court.

In addition, employers should review our WHD Investigation Checklist, which can help them ensure that they have thought through all essential wage and hour issues prior to becoming the target of a DOL investigation or private lawsuit.

Following these simple measures could significantly reduce an employer’s exposure under the FLSA and similar state wage and hour laws.

By: Kara M. Maciel

Earlier this month, we released our Wage and Hour Division Investigation Checklist for employers and have received a lot of great feedback with additional questions. Following up on that feedback, we will be regularly posting FAQs as a regular feature of our Wage & Hour Defense Blog.

In this post, we address a common issue that many employers are facing in light of increased government enforcement at the state and federal level from the Department of Labor.

QUESTION: “I am aware that my industry is being targeted by the DOL for audits and several of my competitors in the area are facing wage and hour investigations.  What should I be doing now to proactively prepare my company in the event we are next for an audit?”

ANSWER:  Even though your company may not be in the midst of an investigation, there are still several action items that you can implement to place your company is the best possible position to defend against any DOL investigation.  For example:

  • Check current 1099’s as well as all 1099’s going back several years and review the actual job duties of those persons paid as independent contractors to verify that they were not, in fact, employees.
  •  Examine all written job descriptions to ensure that they: (i) accurately reflect the work done, (ii) have been updated where necessary, and (iii) indeed justify the applicable exemptions.
  • Review time keeping systems to ensure that non-exempt employees are being paid for all work performed, including work pre- or post-shift and during meal breaks
  • Ensure that required payroll records and written policies and procedures are current, accurate, and compliant.

Training staff is another key component of protecting your company from costly wage and hour claims. Not only could all managers be familiar with the FLSA and state wage and hour laws, but all employees should understand their role in proper record keeping and overtime. Key managers and personnel should be aware of the DOL’s inspection rights and what the DOL can and cannot do while on your property.

Finally, developing a response team with legal counsel is critical to being prepared if an inspection official knocks on your door unannounced. The response team should be armed with information and protocols so they know how to address the DOL’s subpoenas, questions, document requests, and other investigative demands.

In subsequent FAQs, we will discuss in more detail who should participate in a response team and what information they need to have in the event of an unscheduled DOL audit. But, in the meantime, regular internal reviews and audits of your wage and hour practices and documentation is key to protecting against costly exposure from a government investigation.

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Be sure to check out our Wage and Hour Division Investigation Checklist for more helpful tips and advice about preparing for and managing a Wage Hour Inspection.