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Judge rules DOL rule invalid in tip credit case

The Fair Labor Standards Act established the federal minimum wage and rules for overtime pay, but the landmark 1938 legislation allows employers in New York and around the country to pay a lower hourly wage to workers who earn tips. What is known as the tip credit has been at the center of a number of contentious labor disputes, and the Department of Labor made its position on the issue clear in 2011 by adopting a controversial rule. The rule declares that tips are a worker’s personal property and prohibits employers from using them if they did not claim the credit.

The DOL rule was cited by attorneys representing a woman who claimed in a lawsuit that her employer had violated the terms of the FLSA by not sharing the tips paid by its catering customers. Her arguments failed to convince a federal judge because she was paid an hourly rate of $12 and an overtime rate of $18, which are significantly higher than the federal minimum wage and the federal minimum overtime wage. In affirming the decision, the U.S. Court of Appeals for the 10th Circuit made clear that employers meeting FLSA wage and hour provisions are not required to share tips.

The court also ruled that the DOL lacked the authority to adopt its tip credit rule. The ruling came despite attorneys from the Department of Justice arguing that the rule was designed to fill a regulatory gap and protect tipped workers. However, the panel of appellate judges concluded that no such gap exists because tips that are not claimed as a credit are not subject to DOL oversight.

This case reveals how evolving regulations and newly adopted rules can prompt litigation from employees and cause uncertainty for employers. Attorneys with experience in this area could help employers to avoid legal entanglements by reviewing compensation policies whenever federal or state wage and hour laws are modified. Attorneys may also urge employers in compliance with these laws to keep detailed records.

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