NRA Sues Labor Department Over NewTip-Credit Notice Regulation

The National Restaurant Association — joined by the Council of State

Restaurant Associations and the National Federation of Indepen-dent Business — June 16 filed suit against the Department of Labor over the agency’s new tip-credit notice regulation.

The DOL regulation signifi-cantly changes the notice that businesses must give tipped employees about the tip credit. The new rule took effect May 5. The DOL gave restaurants no chance to comment on the new notice requirements — and then gave employers only 30 days to comply.

The National Restaurant Association met with DOL officials in early May to explain the industry’s concern with the new rules and to ask them to withdraw the rule or delay it by 120 days so the restaurant industry could provide additional input. The agency declined that request.

The DOL’s final regulation

followed a notice of proposed rulemaking 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 proposal put the public on notice that the DOL was contemplating significant changes to the tip-credit notice requirements.

Among other grounds, the NRA lawsuit argues that the DOL failed to comply with the federal Administrative Procedure Act, which requires federal agen-cies to solicit public comment on proposed regulations.

New rule puts employers at riskRestaurants now face an unantici-pated, 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 obliga-tions — putting employers in

legal jeopardy that could literally bankrupt a restaurant business. Failure to provide the required notice could also result in the assessment of civil and criminal penalties against a restaurant.

Employers face risks not only through DOL enforcement actions but separate plaintiffs’ lawsuits.

“We believe the Department of Labor’s new rules — put into effect with just one month’s notice and without properly consider-ing 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 Associa-tion President and CEO Dawn Sweeney.

The groups also said the DOL ignored President Obama’s ex-pressed 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 exist-

ing 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, it seems 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 busi-ness that operates on very narrow profit margins.”

The DOL itself acknowledged that the final rule was a significant change from the 2008 proposal — 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.

National Restaurant Association | www.restaurant.org

TIP CREDITFOCUS ON:

June 2011 Washington Report

What is the tip credit? Federal law and most state laws let employers take a “tip credit” against the wages they pay tipped employees. The tip credit allows employers to apply a portion of tip earnings toward the employer’s obligation to pay tipped employees the minimum wage. Federal law authorized the tip credit because it recognized that employees’ tips frequently boost their earnings far above the minimum wage.

An employer must meet very strict conditions in order to take a tip credit:

• The employer may take a tip credit only against the wages of employees who customar-ily and regularly receive at least $30 per month in tips.

• The amount that the employer claims as a tip credit can never be more than what the employee actually received in tips.

• The employer must have records (employ-ee tip reports, etc.) to document that employ-ees earned tips in an amount at least equal to the amount of tip credit claimed.

• The employer must notify tipped employees of the amount of tip credit taken.

What are employers required to pay tipped employees?That varies by state. The cash wage for tipped employees under federal law is $2.13 an hour. This means employers in states that follow federal law can pay tipped employees a cash wage of $2.13 an hour and apply tip earnings toward the balance of the minimum wage obligation. (Thus, under federal law employers

may take a tip credit of up to $5.12 an hour: $7.25 federal minimum wage - $2.13 cash wage = $5.12 tip credit.) In all cases, an employer may take the full tip credit only to the extent that employees actually receive that much in tips.

Not all states follow federal law, however. Some allow a less generous tip credit than federal law, and some prohibit employers from taking any tip credit. In these cases, the law most favorable to the employee prevails.

Can tipped employees ever be paid less than the applicable minimum wage?No, unless one of the narrow exceptions permitted in the Fair Labor Standards Act applies. Tipped employees’ total hourly earnings — a combination of the cash wage that the employer pays to the employee, plus the tip credit allowed under federal or state law — should not be below the federal minimum wage or applicable state minimum wage, unless one of the narrow exceptions permitted in the FLSA applies.

What notice do employers need to give to tipped employees about the tip credit?In the past, federal court decisions had established that, in order to take a tip credit, the employer only had to “inform” employees verbally that their tips would be used as a credit toward the minimum wage.

However, the new Department of Labor amended regulations, issued April 5, 2011, and effective May 5, 2011, include a section on the required notice employers must give to tipped employees in order for the employer to use the

FLSA’s tip credit provisions.The new amended regulations now

specifically require employers to inform employees, in advance of taking the tip credit, of certain information, which includes:

• the amount of the cash wage to be paid by the employer to the tipped employee;

• the amount of tips to be credited as wages toward the minimum wage (a federal maxi-mum tip credit of $5.12 per hour, but lower in some states, not to exceed the value of tips actually received);

• that all tips received by the employee must be retained by the employee except for tips contributed to a valid tip pool limited to employees who customarily and regularly receive tips;

• that the tip credit shall not apply to any employee who has not been informed by the employer of the provisions for a tip credit; and

• for employers that require tip pools, any required tip pool contribution amount or percentage, including notice that the tip credit may be taken only as to the amount the server actually receives, and that the employer may not retain any of the server’s tips for any other purpose.

The DOL continues to allow under its amended regulations that the tip-credit notice may be oral or in written form. However, in the preamble discussion to its final rule the DOL strongly encourages the employer to provide notice in writing in order to establish, if challenged, that the proper notice was actually given.

Tip Credit Notice: Q&A

For More InformationWhile the National Restaurant Association cannot give legal advice, we offer suggested compliance guidelines at www.restaurant.org/tips for our members to share and discuss with their own legal counsel, including sample notices members can use to provide written notice to their tipped employees.

The information is the latest that the National Restaurant Association has on how these new regulations may be interpreted by the DOL.

We recommend immediate attempts to try to comply in good faith with the new requirements, while we await further clarification. Visit www.restaurant.org/tips for ongoing updates.

National Restaurant Association | www.restaurant.org

As the National Restaurant Association pursues the lawsuit against the Department of Labor (see reverse), we continue to educate our members about the new DOL rule regarding the notice that employers are required to provide to tipped employees. We encourage our members to immediately make efforts to comply in good faith with the new notice requirements, and offer suggested compliance guidelines

at www.restaurant.org/tips for operators to discuss with their legal counsel.

June 2011 Washington Report