UPDATES ON THE FEDERAL TIP CREDIT ISSUE
1. SDRA received the following information from the National Restaurant Association on September 20, 2011:
Tip credit lawsuit: After three extensions, the Justice Department on September 19 finally filed a motion to dismiss the NRA/CSRA/NFIB's June 16 lawsuit challenging the Labor Department's new tip-credit notice rules. The organizations sued over a regulation that the DOL put into effect with only 30 days' notice. The regulation took effect May 5 and changed and expanded the notice employers must give to tipped employees about the tip credit. NRA and its co-plaintiffs' counsel is examining the government's pleading filed on September 19 and intend to file an opposition to the motion shortly.
2. SDRA received the following information from the National Restaurant Association on June 17, 2011:
National Restaurant Association Files Suit Against DOL Over New Tip Credit Regulation
The National Restaurant Association, Council of State Restaurant Associations and National Federation of Independent Business today filed suit against the U.S. Department of Labor over an amended Fair Labor Standards Act regulation. The amended rule affects hundreds of thousands of businesses that employ tipped workers.
The organizations are suing for declaratory and injunctive relief from a new regulation that the DOL issued April 5. The regulation makes substantive changes in the notice employers must provide to tipped employees about the tip credit. Employers had no opportunity to comment on the new regulatory requirements, and DOL gave employers only 30 days to comply.
The tip credit is the portion of tip income that federal law allows employers to apply toward their obligation to pay tipped employees the minimum wage. Employers are not permitted to claim a tip credit unless they meet certain conditions, including informing employees of the employer’s intent to take a tip credit under section 3(m) of the FLSA.
The 2011 Final Rule containing the new tip-credit-notice rules went into effect May 5.
The Final Rule followed a notice of proposed rulemaking (NPRM) that the DOL published in 2008 that would have made only technical and non-substantive changes to the tip credit notice regulation. Nothing in the 2008 NPRM put the public on notice that the DOL was contemplating significant changes to the tip-credit notice requirements.
Restaurants now face an unanticipated, increased and unnecessary regulatory burden and expense in complying with the new tip-credit notice requirements. Failure to follow the new regulation could result in an employer losing the right to apply any tip income toward minimum wage obligations – putting employers in legal jeopardy that could literally bankrupt a restaurant business.
The change affects the notice that restaurants provide to more than 2 million tipped employees in the restaurant industry. “We believe the Department of Labor’s new rules — put into effect with just one month’s notice and without properly considering their impact on the nation’s nearly 1 million restaurants — are confusing and will expose our members to regulatory violations and enforcement actions,” said National Restaurant Association President and CEO Dawn Sweeney.
“The economy is in a fragile recovery, but we continue to see the Administration assail small-business owners and entrepreneurs with costly rules and regulations that increase their burden and put their businesses at risk,” said executive director of NFIB’s Small-Business Legal Center Karen Harned. “This latest rule is especially egregious because employers were given no opportunity to comment on these new requirements and have only a short window in which to comply, making the impact on NFIB members potentially devastating.”
“We are pursuing this legal challenge on behalf of our members because the DOL didn’t give the public any notice to comment on very specific, detailed requirements for employers, as required by federal law. We’re also challenging that those requirements are contrary to law, and arbitrary and capricious,” Sweeney said.
The federal Administrative Procedure Act prohibits agencies from adopting final rules that differ from proposed rules “when the changes are so major that the original notice did not adequately frame the subjects for discussion.”
The groups also said the DOL ignored President Obama’s expressed requirement that federal agencies weigh the effect of new regulations on businesses. The President published Executive Order 13563 this January to require agencies to review existing and proposed regulations to identify whether they may be made more effective or less burdensome.
“The Executive Order very carefully sets forth that if an agency is going to impose new and additional regulations that cost business, the regulations have to be well-justified,” said Sweeney.
“In this case, that order was totally ignored. This new regulation imposes additional, unnecessary burdens and costs on employers while ignoring the President’s guidance on the type of analysis that agencies ought to do before imposing extra costs on business. This is especially difficult in the restaurant business, a business that operates on very narrow profit margins.”
The DOL itself acknowledged that the final rule was a significant change from the 2008 NPRM – but said it determined the final rule won’t result in any extra compliance costs for employers. It is unclear on what basis the DOL came to that conclusion.
NOTE: AT THE TOP OF THIS PAGE IS A LINK TO A SAMPLE NOTICE TO EMPLOYEES, FURNISHED COURTESY OF THE JACKSON LEWIS LAW FIRM.
3. SDRA received the following information from the National Restaurant Association on April 22, 2011:
We would like to update you on the Final Rule (
76 FR 18832 (April 5, 2011)) published by the Wage and Hour Division (WHD) of the U.S. Department of Labor (DOL) on April 5, 2011, regarding tip credit, which could, if our requests are rejected, become effective on May 5, 2011. As background, a related notice of proposed rulemaking (NPRM) was published back in the summer of 2008 (
73 FR 43654 (July 28, 2008)), but the Final Rule makes some significant and major changes to the NPRM without the benefit of the legally required notice-and-comment period.
The National Restaurant Association has been in direct contact with the Administration because of our objection to two sections of the Final Rule. Today (April 22, 2011), we submitted the
attached letter jointly with the Council of State Restaurant Associations, officially asking for a withdrawal of the offending sections.
We will be sending more information next week on how you can get involved in pushing back on the two main issues with the Final Rule of great negative consequence to our industry.
Main issue: Tip Credit Notice
Section 3(m) of the Fair Labor Standards Act (“FLSA”), 29 USC 203(m), states that the tip credit may not be taken unless the "employee has been informed by the employer of the provisions of [the FLSA's tip credit provision]." The NPRM would have changed the regulations with respect to the tip credit notice requirement with the following:
"Pursuant to section 3(m), an employer is not eligible to take the tip credit unless it has informed its employees that it intends to avail itself of the tip wage credit. Such notice shall be provided in advance of the employer's use of the tip credit; the notice need not be in writing, but must communicate to employees that the employer intends to treat tips as satisfying part of the employer's minimum wage obligation."
The NPRM's preamble also made clear that "Although written notice is frequently provided, it is not required to satisfy the employer's notice burden."
The Final Rule, on the other hand, amends the regulations by specifically requiring at least six new notice requirements, not mentioned on the NPRM, that employers must comply with in advance of taking the tip credit. In addition, DOL continues to allow under the Final Rule for the notice to be oral or in written form, although it strongly encourages in the preamble discussion that the employer provide this in writing in order to establish, if challenged, that the proper notice was actually given.
Second issue: Ownership of Tips
DOL’s Final Rule amends the regulations dealing with tip ownership. There is little legal question about the ownership of tips where the employer takes a tip credit to meet its minimum wage obligations, i.e., the tipped employee owns the tips. Rather, the Final Rule has language that directly confronts the US Court of Appeals decision last year in Cumbie v. Woody Woo, Inc., 596 F. 3d 577 (9th Cir. 2010), which rejected DOL’s interpretation about ownership of tips where no tip credit is taken and the employee is paid the full minimum wage in cash. The US Court of Appeals dismissed DOL’s position stated in its amicus brief in the case as “plainly erroneous and unworthy of any deference.” Id. At 582
DOL’s position now stated in the regulation attempts to do an “end-around” with what the court rejected last year. However, employers are now left in a difficult and unsettled legal position if they pay tipped employees the full minimum wage in cash and then, like the Woody Woo case, take control of the tips and distribute them to the back of the house employees (DOL deems invalid any tip pool that includes cooks, dishwashers, etc.).