August 8, 2017
There is a common misconception that an employee that works for tips – e.g., restaurant and hotel workers - are always entitled to the tips they earn. However, this is not true if the employer pays you at least minimum wage.
The Fair Labor Standards Act (FLSA) is the federal law that applies to the payment of workers – most notably minimum wage ($7.25 per hour) and overtime (time and a half over 40 hours in a week). Importantly, however, the FLSA does not require an employer to pay its employees their tips in every situation.
In 1974, Congress established an exception to the minimum wage for workers that receive at least $30.00 per month in tips. The exception (or special minimum wage) is that an employer is permitted to pay the tip-employee an hourly rate of $2.13, so long as the employee receives all of his/her tips. (29 U.S.C. § 203(m)) This is often referred to as the “tip-credit provision.” However, the “tip-credit provision” makes no reference to employees that are compensated at the full minimum wage.
In 2011, the Department of Labor (DOL) issued a regulation that declared that tips are the property of the employee regardless of whether the employer pays the employee the special or full minimum wage. (29 C.F.R. § 531.52) However, this regulation has been invalidated by a number of Federal Circuit courts, most recently by the Tenth Circuit, on the basis that the DOL did not have the authority to issue the regulation. See Marlow v. The New Food Guy, Inc., __ F.3d __, 2017 WL 2818874 (10th Cir. June 30, 2017). More specifically, a federal agency may issue a regulation only if the statute is silent or vague with respect to an issue and the vast majority of Federal courts believe that “tip-credit provision” is not vague or silent regarding the ownership of tips.
What It Means
Most Federal courts that have reviewed the DOL regulation have determined that the regulation is not enforceable and I don’t anticipate that the Trump administration will continue to attempt to enforce the regulation.
With that said, if an employer pays an employee the full minimum wage, the employer is legally entitled to keep all of the tips. From a practical standpoint, however, such a policy will negatively effect employee morale. What is legally permissible is not always best.
For those employers that use the special minimum wage, all tips must be passed on to the employee.
The information above is general: we recommend that you consult an attorney regarding your specific circumstances. The content of this information is not meant to be considered as legal advice or a substitute for legal representation.