The U.S. Department of Labor Clarifies The FLSA’s Tip Credit Provision


By Brad Adler
Many employers, particularly restaurants, routinely utilize “tipped employees” in operating their business and have followed the same protocols for years in managing such employees.  A recent development, however, will call for employers to reevaluate their tip credit policies.  Specifically, in April, 2011, the United States Department of Labor (DOL) issued final regulations that provided clarification on the notice required to utilize the tip credit, permissible tip-pooling contributions and the proper owner of employee tips under the Fair Labor Standards Act (FLSA).

By way of background, many employers use tips to partially compensate their employees under the FLSA’s “tip credit” exemption.  29 U.S.C. 203(m).  This exemption provides that employers can pay “tipped employees” $2.13 per hour for all hours worked, and allows the remainder up to minimum wage to be made up by tips.  For instance, applying the federal minimum wage of $7.25 per hour, an employer simply can pay a tipped employee $2.13 per hour as a cash wage and rely upon tips to make up the $5.12 difference.  Of course, in the event that their tips and hourly rate do not add up to the minimum wage, the employer must make up the difference.
The tip credit exemption has many intricacies, including rules as to who qualifies as a “tipped employee,” when employees may be required to share their tips with other tipped employees and the type of notice that must be provided by an employer if it is using the tip credit for any employees.
For instance, under the FLSA, an employer is required to notify its employees that it utilizes the tip credit for tipped employees.  Previously, it was not clear what type of notice was required.  The DOL now has announced its position that the notice must include the following information:

  1. the amount of the cash wage that will be paid to the tipped employee;
  2. the amount of tips which will be counted towards minimum wage (max of $5.12 per hour);
  3. the tips received must be retained by the employee (except for a valid tip pool);
  4. any required contributions to a tip pool; and
  5. notice that the tip credit will not apply to any employees unless they received this notice.

Although there is no requirement that this notice be made in writing, we strongly advise employers to put the above information in writing, whether in an employee handbook or through a separate acknowledgment form, to avoid any future dispute over whether such notice was provided.
Several other changes were made that also can affect an employer’s treatment of tipped employees.  First, in the new regulations, the DOL has stated that tips are the sole property of an employee, regardless of whether the employee operates under the tip credit exemption.  In other words, according to the DOL, an employer is never allowed to keep any percentage of an employee’s tips, even if the employer pays the employee $7.25 per hour or higher.  It should be noted that, although this is the DOL’s interpretation, it is not clear whether federal courts will adopt it as at least one circuit court of appeals rejected such an interpretation prior to the time these new regulations were issued.
Finally, the DOL removed limits on contributions to tip pools.  Prior to these recent regulations, the DOL had taken the view that an employer could not force an employee to contribute more than 15% of tips received (or 2% of daily gross sales) to a tip pool.  The DOL, however, has changed course and rejected that position.  The DOL now makes clear that there are no limitations on the amount that an employer can force an employee to contribute, so long as the employee still retains enough tips to make minimum wage.
Given these changes, it is important for employers to promptly review their tip credit procedures under the FLSA.  While some of these changes may appear technical in nature, they can unnecessarily open up an employer to liability and substantial damages.  Of course, in addition to the FLSA, employers also should ensure that state law allows an employer to use a tip credit and does not impose any additional restrictions on the manner in which the credit is employed.
For more information, contact Brad Adler at 770.818.1413 or