By: Mark A. Wagner
July 5th, 2017
Employers of tipped employees should take notice of a case decided last week by the Tenth Circuit Court of Appeals (the federal appeals court over Utah and several nearby states). That case, Marlow v. The New Food Guy, Inc., struck down a Department of Labor (DOL) regulation stating that tips are always the property of tipped employees—regardless of whether or not their employers take a “tip credit” against their hourly wages. After Marlow, employers who do not take this credit to satisfy the minimum wage requirements of the federal Fair Labor Standards Act (FLSA) may choose to retain tips received by their workers.
The FLSA’s Tips Credit
The FLSA requires employers to pay non-exempt employees at least a specified minimum wage (currently $7.25 per hour) for the first 40 hours and one and one-half times that wage for every additional hour worked in a workweek. The FLSA has a special provision that allows employers of tipped workers (those who work in a job in which they customarily and regular receive at least $30 per week in tips), to partially satisfy this requirement by taking a credit for tips actually received by tipped workers.
Such employers may take the tip credit if they pay their tipped workers at least $2.13 per hour in wages and the tipped workers receive at least the difference between their hourly wage and the federal minimum wage in tips. Such employers must also satisfy two additional conditions: (1) they must inform their tipped workers about the tip credit and (2) they must allow the tipped workers to retain all the tips they receive (subject to employee tip pooling arrangements).
The DOL Regulation
The DOL is charged with enforcing (and within limits, interpreting and implementing) the FLSA. As part of this charge, DOL has issued regulations on virtually every aspect of the FLSA, including the tip credit provision. The DOL regulation on the tip credit provision states, in part, that, “[t]ips are the property of the employee whether or not the employer has taken a tip credit . . . .” (Italics added by me).
The DOL regulation clearly makes sense for employers who take the tip credit and pay their tipped workers less than the federal minimum wage as a result. After all, the very basis of allowing them to do so is the fact that the tipped workers are actually receiving the difference (or more) in tips.
But what about employers who do not take the tip credit and instead directly pay their employees an hourly rate in excess of the federal minimum wage? Why should such employers be legally prohibited from employing persons on such terms on the condition that the employees pay any tips received over to their employers?
The Marlow case
The Tenth Circuit asked just this question in the Marlow case, and answered it in favor of the employer.
The plaintiff, Ms. Marlow had worked a catering company, the New Food Guy, Inc., which did business under the name “Relish.” Ms. Marlow claimed Relish had violated the minimum-wage requirements of the FLSA. Relish denied this claim, and pointed out that it had always paid Ms. Marlow a base wage of $12 per hour (and an overtime wage of $18 per hour). The trial court agreed with Relish and dismissed Ms. Marlow’s complaint. Ms. Marlow appealed.
Observing that Relish had paid Ms. Marlow an amount in excess of the federally specified minimum wage, plus overtime, the Tenth Circuit asked, “So what is the problem?”
The problem, according to Ms. Marlow, was that Relish retained tips instead of paying them over to her. Ms. Marlow pointed to the DOL regulation stating that tips are always the property of tipped employees, regardless of whether an employer takes the tip credit.
The Tenth Circuit rejected Ms. Marlow’s argument and the DOL regulation along with it.
The court explained that the FLSA “gives employers of ‘tipped employees’—like hotels and restaurants—the option of paying a reduced hourly wage of $2.13 so long as their workers receive enough tips to bring them to the $7.25 minimum.” When an employer exercises that option, it is prohibited from using the tips of a tipped employee for any purpose other than satisfying a percentage of the FLSA’s minimum hourly wage requirement. The court further explained, however, that the clear language of the FLSA makes this prohibition applicable only to such situations; that is, to situations in which an employer has actually exercised that option.
It does not apply when an employer has not exercised that option, but instead has elected to pay its tipped workers the federal minimum wage or above. Thus, the DOL’s regulation, which extended the requirement that an employer allow a tipped employee to retain all tips received to situations where an employer did not claim a tip credit, imposed a requirement beyond that imposed by the clear language of the statute. Accordingly, the court held, the DOL exceeded its authority in issuing the regulation.
At least in states in the Tenth Circuit, tips are not automatically the property of a tipped worker unless an employer takes the tip credit. An employer may choose either to take the tip credit and pay over all tips to its tipped workers or to pay its tipped workers at least minimum wage and retain tips.
In deciding which choice to make, employers should consider a number of practical matters. For example, the employer in the Marlow case was a caterer. It is unclear from the court’s decision whether individual workers or the company received the tips. Where tips are received directly by workers, however, it is unclear how an employer would enforce a policy requiring employees to surrender cash tips. Even if it could enforce such a policy, the employer should consider whether such a policy might upset customers who believe, or desire, that their tips go directly to the employee.
It is also worth noting that the Ninth Circuit had previously upheld the DOL regulation rejected by the Tenth Circuit in Marlow, so it is possible that the question might ultimately be presented to the U.S. Supreme Court. Separately, additional state law considerations might come into play. Thus, before taking action based on this case, you should consult a qualified employment law attorney.
Mark A. Wagner concentrates his practice in employment law, homeowners association law, and health care law, and serves as Chair of the firm’s Employment and Labor Practice Group.