FLSA Compliance Shifts Abound in Tip Retention, Overtime Exemption

Wage-and-hour changes come from each government branch

Congress included in the spending bill new language that bans employers from keeping tips their employees earn. / ANDREW VAN NUSS

Between the end of March and the beginning of April, all three branches of government generated significant developments in wage-and-hour compliance. A new amendment to the Fair Labor Standards Act, a major Supreme Court decision and a pilot program from the Labor Department could give employers plenty of reasons to review their worker classification practices under federal law.

Congressional Amendment

Couched in the new 2,232-page spending bill are two-and-a-half pages that contain a major wage-and-hour law change for the hospitality industry.

The omnibus spending bill that President Donald Trump signed March 23 drew attention over immigration issues. But the bill also included an amendment to the FLSA that bans employers from retaining any tips their employees earn. The amendment would seem to settle an ongoing tip-retention issue in the courts and at the DOL, but employer-side attorneys say it might give rise to more compliance confusion among companies with tipped workers.

Under what’s become known as the FLSA’s tip-credit provision, employers can pay tipped employees a lower minimum wage of $2.13 an hour provided those employees still earn enough in tips to clear the federal minimum wage. Some restaurants and hospitality employers forgo the tip credit and pay tipped workers at least minimum wage, and the issue has been whether that gives them the right to retain the tips those workers earn.

More common, but also at issue, is when employers set up an arrangement where servers must share tips with other employees, sometimes including line cooks and other “back-of-house” restaurant personnel.

Title XII in the March omnibus amends the FLSA to say “an employer may not keep tips received by its employees for any purposes, including allowing managers or supervisors to keep any portion of employees’ tips, regardless of whether or not the employer takes a tip credit.’’

Before this FLSA amendment, the tip retention issue seemed primed to go before the U.S. Supreme Court. The Obama-era DOL issued a 2011 rule saying that the tips an employee earns become the property of that employee under the FLSA. But last summer, the 10th Circuit Court of Appeals ruled that a Lakewood-based catering company could keep the tips a server earned because it was paying her above minimum wage and wasn’t taking the FSLA tip credit. The June 30 decision in Marlow v. New Food Guy also held that the DOL lacked the authority to promulgate the 2011 rule.

Marlow, however, contrasted with the 9th Circuit’s ruling in Oregon Restaurant and Lodging Association v. Perez, which held that the DOL did have the authority to issue the rule. A petition asking the Supreme Court to hear the case was filed in January 2017.

Congress appears to have settled the issue over the embattled DOL rule, but the amendment itself could become a lawsuit hotbed.

“I think it’s the proverbial solving of one problem while potentially creating others,” said Roger Trim, a Denver-based shareholder at Ogletree Deakins Nash Smoak & Stewart who counsels employers on employment matters.

The main problem, Trim said, is that the amendment introduced ambiguity by expressly excluding managers and supervisors from sharing in tips other employees earn. Without a clear definition of those position categories under the FLSA, “it becomes extremely difficult for restaurants to draw a bright line” on who those employees are, he said. For example, many workplaces have “lead servers” or “lead bartenders.” Are they just higher-level servers with some supervisory duties, or do they have real managerial authority that would prohibit them from the tip pool under the new amendment?

Martine Tariot Wells, a shareholder at Brownstein Hyatt Farber Schreck who focuses on wage-and-hour matters, said this issue could give rise to more wage-and-hour suits. While the amendment clarifies the tip retention issue to an extent, she said, it does so “with the usual caveat of what does ‘manager’ or ‘supervisor’ mean, which has been a whole breeding ground for litigation.” Starbucks’ $1.6 million settlement with a class of store managers in 2011 is an example of that type of overtime dispute.

Trim noted that the DOL could theoretically nip this litigation in the bud by clarifying the supervisor/manager issue in the form of additional regulations or opinion letters.

In the meantime, employers could adopt a conservative approach in light of the tip retention amendment, Trim said. If there’s any question whether someone is a manager or supervisor, employers are taking a risk when excluding them from the tip pool. Courts might see those employers as playing fast and loose with the new “manager/supervisor” distinction to keep them out of the pool, he said.

Supreme Court Opinion

While the Supreme Court’s latest ruling on the FLSA might seem limited to whether auto dealerships should pay “service advisors” overtime, it has a farther reach when it comes to whether courts will narrowly construe FLSA exemptions for workers of all kinds.

“This is actually one of the most significant FLSA opinions that’s been issued in many years,” Tariot Wells said of Encino Motorcars, LLC v. Navarro.

In Encino Motorcars, the court held in a 5-4 opinion that someone who is a service advisor is a “salesman” exempt from the FLSA’s overtime pay requirements. The court reversed the 9th Circuit, which reasoned that FLSA exemptions should be construed narrowly. Justice Clarence Thomas, writing for the majority, said the statute gives no “textual indications” that they should have narrow construction, citing the late Justice Antonin Scalia’s “Reading Law.”

The Supreme Court has essentially reversed 50 years of jurisprudence in which courts tended to narrowly construe which types of employees the FLSA exempts from overtime and therefore stretched overtime protections over wider swaths of workers, Tariot Wells said. Employers will want to watch the courts to see how they apply the Encino Motorcars opinion and if they should revisit their employee classifications based on its “fair and plain” reading of FLSA exemption, she added.

Trim expects the Supreme Court’s reading to get a lot of mileage in future FLSA cases. “You can expect district court and appellate court decisions will be citing this case up and down for interpretation of the applicability of FLSA exemptions.”

DOL Pilot Program

Last but not least, the Wage and Hour Division rolled out a pilot program April 3 in which the WHD works with employers to audit and correct their FLSA payment practices without the threat of litigation. If FLSA violations are discovered during an audit in the new Payroll Audit Independent Determination program, the employer pays all backpay owed but isn’t on the hook for penalties.

“Under this program, the Wage and Hour Division will oversee resolution of the potential violations by assessing the amount of wages due and supervising their payment to employees,” the WHD explained in a March 6 press release.

Employers aren’t eligible for the PAID program if they are in litigation or under investigation for potential overtime or minimum wage violations.

“It’s an interesting concept,” Tariot Wells said, adding that it remains to be seen how the WHD works with employers during this six-month pilot run. 

—Doug Chartier

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