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.

by Jordan Schwartz 

Recently, a client informed me that an employee who had been terminated several months prior had failed to cash his final paycheck, resulting in it becoming expired. 

This client was well aware of its obligations under federal and state law to pay its employees their full wages upon completion of their employment. Thus, the client asked whether, by issuing the check and providing a reasonable time frame for it to be cashed or deposited, it had satisfied its wage payment obligations under applicable law.

As an initial matter, the answer to this question depends on state law, as this issue is not specifically covered by the federal Fair Labor Standards Act. While different state laws contain various nuances, the general law in most states is that the employee is ultimately responsible for converting his paycheck into readily usable funds. If, however, an employee fails to cash or deposit his paycheck after a certain amount of time, the state’s statute of limitation on unclaimed funds may expire, which would result in the employer possessing “unclaimed property.” 

While an employer may initially be excited over this “good fortune,” possessing unclaimed property in the form of unclaimed wages is not as glamorous as it sounds. Indeed, despite the former employee’s delinquency in failing to cash or deposit the paycheck, the employer cannot simply pocket the unclaimed funds. 

Rather, an employer who possesses such unclaimed property typically would be subject to both a number of reporting requirements (including sending written notice to the supposed owner of the unclaimed property) and the obligation to turn over such property to the state. Significant penalties would apply to employers who fail to comply with these requirements.

Thus, if, as an employer, you find yourself in the possession of a former employee’s unclaimed paycheck, it would be prudent to make a reasonable effort to track down and/or locate that employee and reissue the check to make him whole. In so doing, you would avoid any unnecessary involvement with the state treasury department involving the unclaimed funds. 

Moreover, by ensuring payment of a former employee (despite his failure to cash or deposit the prior check that was already issued), you would reduce the risk of legal exposure for failure to pay wages under applicable law. 

By William J. Milani, Dean L. Silverberg, Jeffrey M. Landes, Susan Gross Sholinsky, Anna A. Cohen, and Jennifer A. Goldman

The New York State Department of Labor (“DOL”) has adopted wage deduction regulations (“Final Regulations”) pertaining to the expanded categories of permissible wage deductions in the New York Labor Law, effective October 9, 2013. 

As we previously reported (see the Act Now Advisory entitled “New York State Releases Proposed Wage Deduction Regulations”), among other things, the Final Regulations (i) set forth information concerning the subset of permissible wage deductions referred to as “similar payments for the benefit of the employee,” (ii) provide information regarding prohibited deductions and requirements relating to an employee’s authorization, and (iii) specify procedures and notice requirements concerning the recovery of overpayments and wage advances to employees.

The Final Regulations are codified at 12 New York Code of Rules and Regulations Part 195.

The Final Regulations are substantially similar to the proposed regulations issued during the summer.  Of note, the Final Regulations clarify the following:

  • A single written authorization containing more than one deduction is permissible as long as all the required information is provided.
  • For the purpose of calculating time frames, any reference to “days” means calendar days, not business days. Any reference to a “week” means seven consecutive days.
  • Dispute resolution provisions contained in collective bargaining agreements existing at the time the Final Regulations are issued will be deemed compliant so long as they provide at least as much protection to the employee as the Final Regulations.  In this regard, the employee must be permitted to provide written notice of his or her objections to the deduction, the employer must provide a written reply containing its position with regard to the deduction and a reason why the employer agrees or disagrees, and the employer must cease deductions until the reply has been provided and any appropriate adjustments have been made.
  • Dispute resolution provisions in collective bargaining agreements executed after the issuance of the Final Regulations must provide at least as much protection to the employee, as described above, AND must specifically reference the applicable dispute resolution section of the Final Regulations.

During the Public Comment period, which ended on July 6, 2013, commenters requested, among other things, that the regulations permit employers to charge employees for the reasonable replacement value of items provided by the employer that had been lost, stolen, or destroyed while in the employee’s possession. The DOL responded that “[n]either the statute nor the regulations allow this to take place through deductions.”  Accordingly, it is important that employers do not make any deductions from wages for lost, stolen, or destroyed property.

In response to commenters, the DOL also clarified that the Final Regulations expressly repeal the “10 percent rule,” which capped deductions relating to “similar payments for the benefit of the employee” at 10 percent of the employee’s gross pay for the particular pay period.  Employers should keep in mind, however, that certain deductions may not reduce an employee’s hourly wage below the statutory minimum wage. 

What Employers Should Do Now

  • Review employee handbooks and other policies and procedures to reflect the rules set forth in the Final Regulations (including updating lists of permissible deductions).
  • Ensure that payroll systems (including any third-party vendors used for this purpose) have the capability to make any newly implemented deductions.
  • Inform payroll, human resources, and any other applicable departments responsible for implementing wage deductions of the specific deadlines and dispute procedures set forth in the Final Regulations.
  • Update wage deduction authorization forms so that such forms comply with the rules set forth in the Final Regulations.
  • Ensure all new loan or repayment arrangements comply with the new rules.
  • Implement procedures that allow employees to contest deductions for overpayments and wage advances in compliance with the procedures set forth in the Final Regulations.
  • Prepare notices in connection with deductions relating to overpayments.