On April 5, 2011, the Wage and Hour Division of the U.S. Department of Labor published its final amendments to regulations interpreting the Fair Labor Standards Act of 1938 (FLSA) and the Portal-to-Portal Act of 1947.

The new regulations provide specific guidance pertaining to ownership of employee tips, a description of permissible tip pooling arrangements, and clarification of the required notice to a tipped employee concerning an employer’s intent to utilize the FLSA’s tip credit. The DOL explains the amendments were driven by a need to revise regulations that are out of date as a result of “subsequent legislation.” The final amendments to the regulations, which differ in some significant respects from those the DOL originally proposed in 2008, will be effective May 5, 2011.

The final regulations reflect the DOL’s reaction to comments received during the 2008 proposed rules’ notice period, including comments submitted to the Department by Littler Mendelson. Citing comments it received, the DOL explained its decision not to include some language contained in amendments it originally proposed in 2008 and stated the final amendments update only those sections it determined “required change to reflect statutory enactment or outdated examples contained in the regulations.” The final rules also include changes to regulations concerning tipped employees that the DOL says are designed to bring its tip credit regulations in line with the Wage and Hour Division’s “long-standing and settled policies” concerning tipped employees.

The amendments to the DOL’s tip credit regulations are the regulations’ first changes in more than 44 years. The DOL’s original tip credit regulations were promulgated in 1967, one year after the 1966 FLSA amendment which enacted section 3(m) and created the tip credit provision. Although section 3(m) was amended in 1974 and again in 1996, the tip credit regulations remained unchanged. The DOL attempted to bridge the differences between the 1967 regulations and the amended Act through positions and policy expressed in opinion letters and its Field Operations Handbook. Courts, however, have not consistently adopted these DOL positions and policies, creating considerable uncertainty in this area.

Specifically, the final tip credit regulations clarify that:

• An employer is prohibited from using an employee’s tips for any reason other than as a tip credit to make up the difference between the minimum wage and required tip credit cash wage, or in furtherance of a legitimate tip pool.
• An employer must notify employees of any required tip pool contribution amount, but there is no maximum contribution percentage on valid mandatory tip pools.
• An employer must advise an employee in advance of its use of the tip credit pursuant to the provisions of section 3(m) of the FLSA (i.e., the amount of the cash wage that is to be paid to the tipped employee; the amount by which the wages of the tipped employee are increased on account of the tip credit; that all tips received by the employee must be retained by the employee except for tips contributed to a valid tip pool; and that the tip credit shall not apply to any employee who does not receive the notice).

Notably, the DOL rejected a position urged by many commenters that employers should be required to provide written notice of an employer’s intent to use the tip credit. Instead, the DOL adopted the position advocated by Littler Mendelson in its comment to the 2008 proposed rule that verbal notice was sufficient.

Other changes included in the final amendments to the regulations include:

• Incorporation of the language from the Employee Commuting Flexibility Act of 1996 into the regulations.
• Revising regulations concerning the Youth Opportunity Wage (a temporary sub-minimum wage paid to workers under age 20) to cite provisions of the Small Business Job Protection Act of 1996.
• Modifying regulations concerning agricultural workers on water storage/irrigation projects to be consistent with the 1997 Departments of Labor, Health and Human Services, Education, and Related Agencies Appropriations Act.
• Revising regulations pertaining to volunteers at private non-profit food banks to include exemptions included in the Amy Somers Volunteers at Food Banks Act of 1998.
• Changing the regulatory definition of an “employee . . . in fire protection activities” to be consistent with a 1999 amendment to the FLSA that defines the term.
• Revising overtime regulations concerning calculations of the “regular rate” of pay to include provisions from the Worker Economic Opportunity Act of 2000 that exclude the value of stock options from the regular rate calculation.
• Addition of language to regulations pertaining to the exempt status of salesmen, partsmen, or mechanics of automobiles, trucks, or farm implements that reflects a 1974 amendment to section 13(b)(10) of the FLSA.
• Updating the regulations with “technical amendments” to reflect the increase in the amount of the minimum wage and other outdated threshold amounts, and eliminating outdated references in the regulations to former minimum wage rates.

The final amendments also reflect the DOL’s decision to abandon certain 2008 proposed changes. The DOL elected not to make proposed substantive changes to regulations regarding: compensatory time (continuing to allow public employees to use compensatory time on a date requested absent undue disruption to the employer); the fluctuating workweek (making only editorial revisions to these regulations); and meal credits (determining that further study concerning the impact of dietary or religious restrictions and whether employees had adequate time to eat was warranted before proposed changes were adopted). While the DOL amended language of its regulations pertaining to automobile salesmen, partsmen, or mechanics, it decided not to change its regulations concerning industry service advisors or writers, rejecting a proposed rule change that would have provided these employees with exempt status.

For more information, see Littler's ASAP, Final Amended FLSA Regulations Make Significant Changes to Tip Credit Processes and Proposed Fluctuating Work Week Rules.