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eLABORate: Interpretation of FLSA 'Tip Credit' Provision Continues to Unfold

August 23, 2016

A federal district court in the Southern District of Florida joined a growing number of district courts in holding that the Department of Labor’s interpretation of the “tip credit” provision of the Fair Labor Standards Act, 29 U.S.C. § 203(m), is invalid. See Aguila v. Corporate Caterers II, Inc., No. 1:15-cv-24350-KMM, 2016 WL 4196656, *1 (S.D. Fla. Aug. 9, 2016).

The FLSA requires employers to pay tipped employees minimum wage, but employers can use a combination of a lower cash wage and employees’ tips pursuant to a “tip credit” provision (if tips are insufficient to meet the minimum wage, the employer must make up the difference). Employers may only use the tip credit provision subject to certain conditions set forth in § 203(m). Beginning with the Ninth Circuit’s decision in Cumbie v. Woody Woo, Inc., courts have interpreted the tip credit provision as not applying to employers who pay wages at or above the federal minimum. 

In 2011, however, the DOL promulgated revised rules including 29 C.F.R. § 531.52, which provides in pertinent part:

[t]ips are the property of the employee whether or not the employer has taken a tip credit under [§ 203(m)]. … The employer is prohibited from using an employee’s tips, whether or not it has taken a tip credit, for any reason other than that which is statutorily permitted in [§ 203(m)]: As a credit against its minimum wage obligations to the employee, or in furtherance of a valid tip pool.

Subsequently, in Oregon Rest. & Lodging Ass’n v. Perez, the Ninth Circuit found — notwithstanding Cumbie — that 29 C.F.R. § 531.52, was valid and entitled to deference because of § 203(m)’s silence regarding employers who did not take a tip credit.

With the Perez decision in hand, the Aguila plaintiffs, who were delivery drivers for a catering company, sued their employer seeking unpaid tips and liquidated damages on grounds that “[a]s part of their delivery duties, [they] were to receive tips from each delivery[,]” but their employer “retained some or all of these tips, in violation of the FLSA.” The plaintiffs did not allege either a minimum wage or overtime violation, and the employer thus moved to dismiss the complaint. Relying on Perez, the plaintiffs argued that the tip credit provision afforded them a private right of action for lost tips.

The district court began its analysis by pointing out the FLSA was “designed to protect workers from … excessive work hours and substandard wages.” The court added that § 203(m) “does not state freestanding requirements pertaining to all tipped employees, but rather creates rights and obligations for employers attempting to use tips as a credit against minimum wage.” The court declined to follow Perez because § 203(m) does not apply to an employer who pays the minimum wage, and this position “is based on a plain language reading of § 203(m), not a gap in the statute.”

“Contrary to Perez and [29 C.F.R. § 531.52], § 203(m)’s silence as to employers who do not take a tip credit is not a gap in the statute left to be filled, so much as an area of workplace conduct unaddressed by a statute concerned with a different problem entirely: assuring payment of minimum compensation to employees.”

The court concluded “the DOL was without authority to address this issue[,]” and dismissed the plaintiffs’ FLSA claim.

In so holding, the Aguila Court joined district courts in the Northern District of Georgia, the District of Maryland, the Southern District of New York and the District of Utah in finding 29 C.F.R. § 531.52 invalid. Notably, in Malivuk v. Ameripark, LLC, a district court in the Northern District of Georgia declined to follow Perez, reasoning that “[i]f Congress wanted to articulate a general principle that tips are the property of the employee absent a ‘valid’ tip pool, it could have done so without reference to the tip credit.” The Malivuk Court also observed that 29 C.F.R. § 531.52 “exceeds the scope of the FLSA by attempting to extend workers’ rights in tips beyond their right to a minimum wage and overtime.”

Key Takeaway
These decisions are significant for employers in the restaurant business and other employers of tipped employees, particularly those paying wages at or above the minimum wage. While it is clear that an employer using part of its employees’ tips to satisfy the minimum wage is susceptible to a claim based on § 203(m), the waters have become murky for employers that pay their tipped employees at or above the minimum wage. Decisions such as Aguila and Malivuk are at odds with the DOL’s interpretation of § 203(m) and Perez. As a consequence, developments in this area remain ongoing, and it is critical for employers of tipped employees to remain cognizant of the positions taken by courts in their respective jurisdictions.