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Tipping the Scales: How the 10th Circuit Just Created a Show Down Over Tips

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August 10, 2017

Many companies use tips from customers to meet the company's obligations of paying minimum wage under the Fair Labor Standards Act ("FLSA"). But is there a way that an employer could keep those tips? Or distribute those tips differently?

Well, a recent 10th Circuit Court of Appeals decision is shining a light on a popular topic of tips once again. The question is whether the owners or individuals should take possession of those tips, when the Employer does not use the "tip credit," under the FLSA. Now before you start jumping up and down in disbelief, let's explain the origin of the tip credit and this very issue under the FLSA.

Generally, the FLSA requires that employers pay qualified employees a minimum wage and overtime wage for hours worked over 40 hours in a week. In addition, the FLSA provides employers an opportunity to use a tip credit, which allows the employer to pay $2.13 an hour and then use the customers' tips to meet the minimum wage requirement of $7.25 an hour (federal amount). This allows the employer to meet the minimum wage requirement under the FLSA. But if the employer chooses not to use the tip credit, specifically, they are not going to use the tips to meet the minimum wage requirement under the law, then the employer can distribute those tips or keep those tips as they deem fit.

Now prior to 2011, this was not an issue and employers could use or not use that tip credit as described above. However, in April 2011, the U.S. Department of Labor ("USDOL") amended the FLSA regulations to state that all tips were the property of the employee, regardless of whether an employer took the tip credit or not under the FLSA.

These amended regulations placed employers who use the tip credit into a quandary. The employers could either follow the case law, despite the USDOL's interpretation, with the understanding that if it were challenged, the employer would need to be willing to fight the issue to the U.S. Supreme Court. Well not too many employers want to take that fight on, so they simply complied. And when the 9th Circuit Court of Appeals in Oregon Restaurant and Lodging Ass'n v. Perez, held that the USDOL's amended regulations were correct, the entire restaurant industry went into a wait and see mode. But now the recent 10th Circuit Court of Appeals has held the opposite of the 9th Circuit, which creates a split in the Circuits (and provides the U.S. Supreme Court to make the final decision).

The 10th Circuit Court of Appeals held in Marlow v. The New Food Guy, Inc., No.: 16-1134 (10th Cir. June 30, 2017) that if the employer does not use the tip credit provided by the FLSA, then the employer can distribute the tips in any way they deem fit. In addition, and more importantly, the 10th Circuit held that the USDOL amended regulations stating the tips were the employees' property were implemented without proper authority. The 10th Circuit pointed out that the USDOL only has authority to clarify "ambiguities" or "gaps" in the law. In this situation, the law is not ambiguous nor are there any gaps.

The U.S. Supreme Court currently has a petition to review the 9th Circuit holding in the Oregon Restaurant case and with the 10th Circuit decision creating a split in the circuit, the issue is ripe for a resolution.

Sean Darke, Esq. is a shareholder at Wessels Sherman Joerg Liszka Laverty Seneczko, P.C. a management-side labor and employment law firm in Chicago, Illinois. Mr. Darke successfully defends Businesses in all areas of Employment and Labor laws under both State and Federal laws. Mr. Darke can be contacted at 312-629-9300 or at sedarke@wesselssherman.com

Sean Darke, Senior Attorney and Shareholder
sedarke@wesselssherman.com, (312) 629-9300