Department of Labor’s “Tip Credit” Regulation Upheld by Federal Court

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Department of Labor’s “Tip Credit” Regulation Upheld by Federal Court

A challenge to the United States Department of Labor’s final rule on “tip credit” for restaurant employees has been rejected by a federal court. In National Restaurant Association v. Solis, Judge Amy Berman Jackson’s May 29, 2012 Decision held that the Department of Labor’s “tip credit” rule was properly enacted.

The Fair Labor Standards Act (FLSA) requires employers covered by the statute to pay hourly employees a minimum wage. But Section 3(m) of the statute also permits employers to pay employees who collect tips less than the minimum wage under certain circumstances. Referred to as the “tip credit,” Section 3(m) allows employers to use tips received by tipped employees to partially satisfy the hourly minimum wage requirement if an employee “has been informed by the employer of the provisions of this subsection.” In other words, if a restaurant fails to inform its tipped employees of the provisions of section 3(m), then no tip credit can be taken, and the employer is liable for the full minimum wage.

The final rule of the Department of Labor, which was codified as 29 C.F.R. §531.59(b), provides as follows:

Pursuant to Section 3(m), an employer is not eligible to take the tip credit unless it has informed its tipped employees in advance of the employer’s use of the tip credit of the provisions of section 3(m) of the Act, i.e.: The amount of the cash wage that is to be paid to the tipped employee by the employer; 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; 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.

For a United States Department of Labor Fact Sheet on “Tipped Employees Under the Fair Labor Standards Act,” click U.S. DOL Tipped Employees Fact Sheet.

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