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Employment Law Update: DOL's Final Rule Amends Wage and Hour Regulations
By Teresa R. Tracy
On April 5, 2011, the Department of Labor’s Wage and Hour Division issued a Final Rule that amends the Fair Labor Standards Act. (FLSA) The Final Rule will take effect on May 5, 2011. This update summarizes three substantive areas addressed by the provisions of the Final Rule and, for California employers, gives the actions needed to comply with both the new federal regulations and existing California law.
Some of the significant changes for employers include:
Tip Credit
A. Ability to Use Tip Credit and Maximum Amount of Credit
Federal law allows an employer to credit a tip for a tipped employee against that employee’s federal minimum wage, as long as the wage and the employee’s tips add up to the federal minimum wage. The Final Rule increases the amount of the maximum tip credit from $4.42 to $5.12 per hour. It also insures that employees receive advance notice of the employer’s use of a tip credit and how the employer calculates it.
Unlike federal law, California law does not allow tips to substitute for or be a credit against the minimum wage or overtime.
Bottom line for California employers: The federal revision does not change whether or in what amount a tip may be credited against California’s minimum wage for California tipped employees.
B. Clarification that Tips are the Employee’s Property
The Final Rule makes it clear that tips are the property of the employee, and that the only permitted uses of an employee’s tips – other than giving the employee the entire tip and paying the full federal minimum wage - is through a tip credit or a valid tip pool.
California law has, for some time, stated that all tips belong to the employee. As discussed above, California does not allow a tip credit against its minimum wage. It does, however, allow for tip pools.
Bottom line for California employers: The federal revision does not change the fact that tips belong to the employee.
C. Requirements for Valid Tip Pool
The Final Rule allows mandatory tip pools without a cap on the maximum contribution percentage, but only among employees who “customarily and regularly receive tips” and only when the employer (1) notifies the affected employees of any required tip pool contribution amount, (2) takes a tip credit only for the amount of tips each employee ultimately receives, and (3) does not retain any of the employees’ tips for any other purpose. The Final Rule provides further information regarding the requirements for establishing and implementing a valid tip pool, including the elements of the required employee notice. There is no maximum cap on the required contribution to the tip pool.
Under the Final Rule, the required employee notice does not have to be in writing (although to do so is highly recommended). It must provide notice of (a) the amount of the cash wage that is to be paid to the tipped employee by the employer; (b) the additional amount by which the wages of the tipped employee are increased on account of the tip credit claimed by the employer, which amount may not exceed the value of the tips actually received by the employee; (c) that all tips received by the tipped employee must be retained by the employee except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips; and that the tip credit shall not apply to any employee who has not been informed of these requirements in this section.
California law also allows mandatory tip pools, but under guidelines that can be complicated and confusing to interpret and apply. Here is a summary of those guidelines:
1. No employer or employer agent – anyone who has the direct or indirect authority to hire or discharge any employee or supervise, direct, or control the acts of employees – can share in or keep any portion of a gratuity. Thus, owners, managers, and supervisors cannot participate in a tip pool even if they are engaged in providing direct service to customers.
2. Only employees who contribute in the “chain of service” to the patron pursuant to industry custom can participate in the tip pool. According to the DLSE, employees who contribute to the service provided to a patron might “conceivably” include persons such as those who
(a) vacuum, wash, polish and/or dry a car in the car wash industry, but not the cashier who collects payment since cleaning the car is the service which was bargained for, rather than cashiering;
(b) towel or locker attendants, hair washers, stylists, manicurists and masseuses in the salon or spa industry;
(c) parking attendants and valet or shuttle drivers in the car parking industry;
(d) porters, dealers and runners in the gaming industry; and
(e) waitpersons, buspersons, bartenders, hostesses, wine stewards and “front room” chefs in the restaurant industry. An early DLSE opinion had included hostesses and maitre d’s in the eligible participants, although hostesses and maitre d’s can be in the “gray zone” depending upon the organization and operation of the business.
3. The tip pool must also be fair. One tip pool arrangement that the DLSE approved in the restaurant industry required the employee receiving the tip to contribute 15% of the actual tips to the tip pool, and then distributing the tip pool to the other employees in the “chain of service” based on the number of hours the employee worked.
Under California law, mandatory “service charges” are not subject to the tip pooling rules since they are not left voluntarily by the customer. Thus, an employer can include employer agents and “indirect” service employees in a mandatory distribution of such charges. If the employer distributes all or part of a mandatory service charge, it is considered akin to a “bonus” and included in the calculation of overtime payments. (Since tips are voluntary, they are not included when calculating overtime.)
Bottom line for California employers: An employer must comply with the federal employee notice requirements; in all other respects, the employer must continue to comply with California law, particularly the limitation on who can participate in a mandatory tip pool, and the fairness requirement.
Youth Opportunity Wages
The Final Rule allows an employer to pay below the federal minimum wage, but not less than $4.25 per hour, to an employee under the age of 20 for the first 90 calendar days of employment. This brings the federal regulations into conformity with an earlier FLSA amendment.
California does not have such a provision.
Bottom line for California employers: California employers must continue to comply with California state law on this issue.
Employees in Fire Protection Agencies
The Final Rule clarifies overtime exemptions for employees of fire protection agencies engaged in fire protection activities with a new definition of an “employee in fire protection activities”.
The new definition is “An employee, including a firefighter, paramedic, emergency medical technician, rescue worker, ambulance personnel, or hazardous material worker, who—(1) is trained in fire suppression, has the legal authority and responsibility to engage in fire suppression, and is employed by a fire department of a municipality, county, fire district, or State; and (2) is engaged in the prevention, control, and extinguishment of fires or response to emergency situations where life, property, or the environment is at risk.”
In addition, an employee who meets this new definition is no longer included among exempt employees who may spend only up to 20 percent of the employee’s working time in non-exempt work; the 20% limit now affects law enforcement personnel only.
California wage and hour laws do not cover employees directly employed by the State of California, or any political subdivision of the State, including any city, county or special district, insofar as those laws would otherwise require the payment of minimum wages or overtime.
Bottom line for California employers: California public agencies with employees engaged in fire protection activities can take advantage of the newly-expanded exemption for these employees.
Many Other Proposed Changes Not Adopted
The DOL elected not to make proposed changes to regulations regarding: the fluctuating workweek method of calculating overtime, compensatory time off, meal credits, and pay for commuting in an employer-provided car. In some instances this results in a continued dispute among the various circuit courts regarding federal wage and hour laws. Employers, who had generally seen the proposed revisions as a positive step, have already begun to express disappointment at this missed opportunity.
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