Section 3(m) of the federal Fair Labor Standards Act allows a portion of the employee's FLSA-required minimum wages to consist of tips.  Unfortunately, it is all-too-common for employers to make expensive mistakes where tips are concerned.

Fundamental Rules

Tipped employees are those engaged in occupations in which they customarily and regularly receive more than $30 a month in tips.  Tips they actually receive may be counted as FLSA wages up to a current maximum of $5.12 per hour; the employer must pay them at least $2.13 an hour in addition to tips.  The FLSA requires an employer to tell each tipped employee about the law's tip-credit provisions in advance.  And, as we reported in May, the U.S. Labor Department now says that other notifications are also required.

The employee's creditable-tips-plus-wages total must come to at least the current minimum wage of $7.25; the employer must make up any shortfall.  Employees must be allowed to keep their tips, except that they can be required to contribute to a tip-pool participated in only by other employees who customarily and regularly receive tips.

Pitfalls and Misconceptions

Among the typical problems are:

♦   Failing to provide the necessary tip-credit notification;

♦   Not ensuring that the total of an employee's hourly wage plus his or her creditable tips equals at least the minimum wage; or

♦   Not being able to document that employees actually received enough in tips to cover the credit taken.

Employers also find themselves facing liability for:

♦   Taking the tip-credit for hours a "dual function" employee spends in non-tipped work (learn more here);

♦   Calculating overtime at 1.5 times only the employee's $2.13-per-hour cash wage;

♦   Taking a larger tip-credit for overtime hours than for non-overtime ones;

♦   Withholding uniform costs, shortages, breakage, "walk-outs", and so on from an employee's tips; or

♦   Maintaining invalid tip-pools.

Trouble can also result from lumping both tips and service charges under the catch-all term "gratuity".  An FLSA tip-credit "tip" is a payment the patron decides whether to make, and as to which the patron decides how much to give and to whom to give it.  No tip credit may be taken for a compulsory service charge imposed by the employer.  What's more, service charges paid to employees must be included when figuring any FLSA overtime pay they are due.

What About Other Laws?

Some states do not permit taking a tip-credit, while others allow one but restrict the amounts in ways which are different from the FLSA's provision.  Also, an increasing number of states and other jurisdictions prescribe what employers may, may not, and must do where sums representing tips and service charges or fees are concerned.

Employers should immediately check to see whether tips and tip-credit matters are being handled in the proper way.  Even if things used to be fine, management is not always aware of changes in the law or in day-to-day procedures that can lead to major problems.

◊   Have a comment or something else to add?  Please use our comment feature below.

Affected employers will no doubt have a variety of wage-hour questions in the aftermath of Hurricane Irene.  The number and scope of the issues raised might well be practically endless.  In this post, we address in very general ways the federal Fair Labor Standards Act topics that experience suggests will be among the most-pressing.

◊   What do we do about lost time records for work already performed but not yet paid?

If the only records of hours worked are lost or unusable, then there is no perfect solution.  Re-create the most accurate accounting you can under the circumstances.  Perhaps the preferred approach is to ask each employee to make the best-possible estimate of his or her hours worked. You should obtain the employee's written acknowledgement of his or her best recollection and should include the employee's authorization allowing later corrections in worktime and pay should more accurate hours-worked information become available.

◊   How do we track employees' worktime without our electronic/computerized time clocks?

Employees may record all hours worked by using handwritten timesheets.  To ensure accuracy, each employee should enter his or her own time and should record the actual times when the employee's work starts and stops each workday.

◊   As we recover, must we keep paying overtime on top of our other burdens?

At this time, there is no FLSA "emergency" exception that relieves the obligation to pay FLSA-required wages.  Employees subject to the FLSA's overtime provision must receive overtime premium at a rate of at least 1.5 times their regular rates of pay for all hours worked over 40 in the designated seven-day workweek.

If employees are covered by a collective bargaining agreement, it might contain additional overtime provisions requiring more than the FLSA does.  Perhaps the terms of the agreement relax those requirements in emergencies.  However, a collective bargaining agreement cannot override the FLSA's requirements.

◊   Can an employee volunteer to perform recovery services for us without pay?

The FLSA does not permit employees to "volunteer" unpaid time to the employer under any but the narrowest of circumstances.  For example, if a manufacturing facility sets up a hotline or makes other arrangements to provide a clearinghouse for information about the status of the workplace and employee reporting times, non-exempt employees volunteering to perform such services are engaged in compensable hours worked for FLSA purposes.  Employers considering any kind of unpaid "volunteer" services by their employees should evaluate the legality of doing this carefully and in advance.

◊   Must we keep paying employees who are not working?

Under the FLSA, for the most part the answer is "no".  FLSA minimum-wage and overtime requirements attach to hours worked, so employees who are not working are typically not entitled to the wages the FLSA requires.

One possible FLSA-related exception is for employees treated as FLSA-exempt whose exempt status requires that they be paid on a "salary basis".  Generally speaking, if such an employee performs at least some work in the designated seven-day workweek, the "salary basis" rules require that he or she be paid the entire salary for that particular workweek.  There can be exceptions here, too, such as might sometimes be the case where the employer is open for business but the employee decides to stay home for the day.

Also, non-exempt employees paid on a "fluctuating-workweek" basis under the FLSA normally must be paid their full fluctuating-workweek salaries for every workweek in which they perform any work.  There are a few exceptions, but these are even more-limited than the ones for exempt "salary basis" employees.

Of course, an employer might have a legal obligation to keep paying employees because of, for instance, an employment contract, a collective bargaining contract, or some policy or practice that is enforceable as a contract or under a state wage law.

◊   What can we do about charging missed time to vacation and leave balances?

The FLSA generally does not regulate the accumulation and use of vacation and leave.  The "salary basis" requirements for certain FLSA-exempt employees can implicate time-off allotments under various circumstances, some guidance on which the U.S. Labor Department has provided in opinion letters accessible here and here.

Again, however, what an employer may, must, or cannot do where paid leave is concerned might be affected by an employment contract, a collective bargaining contract, or some policy or practice that is enforceable as a contract or under a state wage law.

◊   When is travel time "hours worked" for purposes of computing FLSA wages due?

FLSA travel-time "rules" are not seamless, up-to-date, or necessarily logical or consistent with common sense.  The best-known ones are that:

•   Normal commuting between home and work typically is not considered to be hours worked, and

•   Travel between one assignment and another during a workday typically is hours worked.

However, even these principles are subject to exceptions and elaboration.  The best starting point is to consider each scenario an employer faces under the U.S. Labor Department's basic interpretations on travel time.  They are compiled at 29 C.F.R. §§ 785.33-785.41 and may be accessed here.

________________

Remember that other requirements, such as those applying to government contractors or subcontractors and those of states or other jurisdictions, can also be relevant to these questions.

◊   Have a comment or something else to add?  Please use our comment feature below.

Our earlier post about the U.S. Labor Department's position on unauthorized extensions of rest breaks has generated additional comments and questions.   We have responded to one comment at length beneath the post itself.

Another reader took the Labor Department's interpretation to mean that, if an employee impermissibly extends his or her rest break, then the whole rest break could be treated as non-compensable time under the federal Fair Labor Standards Act.  In that reader's view, for example, if an employee stretches a ten-minute rest break to 20 minutes, then the full 20-minute period could be excluded from worktime, rather than only the additional ten minutes.

The Labor Department has said that this is not the case.  In Opinion Letter of Wage-Hour Acting Administrator FLSA2001-16 (May 19, 2001), an employer asked the U.S. Wage and Hour Division whether an employee's unauthorized extension of a rest break under the conditions in Section 31a01(c), Field Operations Handbook (U.S. Labor Department, December 15, 2000), allowed the exclusion of the entire rest break from compensable time.  According to the Acting Administrator, "[o]nly the length of the unauthorized extension of an authorized break will not be considered hours worked when the three conditions are met, not the entire break."  In our illustration, then, the Labor Department would say that only the additional ten minutes could be treated as non-compensable time.

It also appears that some readers were not distinguishing among different kinds of breaks.  For purposes of what is and is not FLSA worktime under Labor Department interpretations, it can be useful to view scheduled breaks as falling into essentially three categories:

◊   Bona fide meal breaks, which are typically noncompensable time (29 C.F.R. § 785.19);

◊   "Short" rest breaks of "about 20 minutes" or less, which the Labor Department says are typically compensable time (29 C.F.R. § 785.18); and

◊   Break periods which are neither meal breaks nor "short" rest breaks, which might or might not be compensable time  (Section 31a01(b), Field Operations Handbook (U.S. Labor Department, December 15, 2000), link to reproduction below).

Employers should evaluate these categories differently in deciding whether and to what extent to treat them as being compensable hours worked under the FLSA.

And once again, employers must also be aware of and comply with whatever are the applicable break obligations of a state or another jurisdiction.

FOH 31a01b 12 15 00.pdf (34.71 kb)

◊   Have a comment or something else to add?  Please use our comment feature below.

Acme Corporation's longstanding policy is to give non-exempt employees two 10-minute rest breaks each workday.  It treats these breaks as paid worktime.  Management recently realized that, over the years, most of the employees have gradually come to be spending 15 to 20 minutes or even a little longer on each break.  Acme sent out a memo reminding everyone that the breaks are limited to 10 minutes, but it had no effect.  Could Acme start considering the over-10-minute extensions to be unpaid time?

The U.S. Labor Department has said that this is permitted under the federal Fair Labor Standards Act, if an employer makes its intentions clear in advance.

The FLSA does not require employers to give rest breaks (which should be distinguished from lactation breaks, which are required).  Many employers do give rest breaks, of course, and the Labor Department's position is that short periods like this (typically running from five to about 20 minutes) count as worktime for employees who are subject to the FLSA's minimum-wage and/or overtime requirements.  In the Labor Department's view, such breaks mainly have the effect of promoting employee efficiency, so they cannot be deducted from or offset against other compensable time.

Consequently, many employers assume that, when an employee stretches a ten-minute break to 20 minutes, the FLSA does not allow the additional ten minutes to be treated as non-compensable time.  On the contrary, the Labor Department's internal enforcement manual takes the position that unauthorized break extensions need not be considered worktime, so long as the employer has expressly and unambiguously told employees that:

◊   Authorized breaks may last only for a specific length of time;

◊   Any extension of those breaks is against the rules; and

◊   Any extension of those breaks will be punished.

Section 31a01(c), Field Operations Handbook (U.S. Labor Department, December 15, 2000)(link to reproduction below).

Any employer looking to rely upon this position in the future would be well-advised to adopt a written break policy that includes these points and makes clear that unauthorized extensions will not be counted as worktime.  It should also be able to show that employees are aware of the policy.

Remember that many states impose rest-break rules of their own.  Employers must also be aware of and comply with whatever the applicable obligations are.  A state need not follow FLSA interpretations with respect to breaks, including as to whether unauthorized extensions of breaks are or are not to be counted as worktime under the state's own break requirements or under its other laws relating to hours worked.

 FOH 31a01 12 15 00.pdf (27.36 kb)

◊   Have a comment or something else to add?  Please use our comment feature below.

In late June, we noted legislation introduced in the Senate and in the House of Representatives that would essentially repeal the federal Fair Labor Standards Act's Section 13(a)(15) "companionship" exemption in any practical sense.  U.S. Labor Department regulations and interpretations elaborate upon how and to whom the exemption may be applied.

Recent correspondence (link below) from the 28-member Eldercare Workforce Alliance to U.S. Secretary of Labor Hilda L. Solis suggests that proponents of such a change are re-directing their focus from legislation to regulatory limitations.  This letter urges DOL to take "timely action" by imposing a "revised interpretation of the exemption that will extend greater federal minimum wage and overtime protection under FLSA to the more than 1,500,000 paid home‐ and community‐based care workers who provide essential services to our nation's older adults and people with disabilities."  It is highly likely that the "revised interpretation" this advocates will amount to gutting the exemption by regulation.  Perhaps this reflects a political calculation that the legislative prospects are unfavorable.

For some time now, DOL's regulatory agenda has included a very general item expressing an intention to revisit the exemption.  A number of questions were raised about this in the U.S. Wage and Hour Division's July 13 short-on-transparency "webchat", but these were met repeatedly with DOL's reply that it is "premature" to discuss whatever the looming "proposal" is.  The sole detail to emerge is that DOL expects to publish a Notice of Proposed Rulemaking in October.

While of course it remains to be seen what actually transpires, one may reasonably suspect that at least some of the forthcoming proposal will consist of concepts that also appear in the pending legislation.  For example, the proposal might well say that the exemption cannot apply to a worker who is employed by the agency supplying his or her services to an elderly person or to the person's family.

It is also probable that the time period for commenting on and registering objections to this proposal will be relatively brief.  Those who oppose cutting-back on the "companionship" exemption must be vigilant and should be prepared to act on short notice.

◊   Have a comment or something else to add?  Please use our comment feature below.

Eldercare Workforce Alliance Letter.pdf (184.20 kb)

Another effort is afoot to limit the federal Fair Labor Standards Act's Section 13(a)(15) "companionship" exemption to the point of non-existence in any practical sense.  Last week, apparently-identical bills (S. 1273 and H.R. 2341 -- see currently available version below) were introduced in the Senate and the House which would have precisely this effect.  Similar measures were proposed last year, but the newer ones would impose even-narrower restrictions.

The FLSA's minimum-wage and overtime requirements do not apply to "any employee employed in domestic service employment to provide companionship services for individuals who (because of age or infirmity) are unable to care for themselves .  .  .."  "Domestic service employment" refers to services of a household nature the worker performs in or about the private home of the person by whom he or she is employed.  The term "companionship services" means providing care, fellowship, and protection to people who cannot care for themselves due either to advanced age or to physical or mental difficulties.  Additional U.S. Labor Department regulations and interpretations explain how and to whom the exemption may be applied.

If the proposed amendment becomes law, only an employee employed "on a casual basis" to provide companionship services could be eligible for exemption under Section 13(a)(15).  In turn, the phrase "on a casual basis" would be defined so as to make the exemption available only if:

♦   The companionship employment is irregular or intermittent;

♦   The work is not performed by someone whose vocation is to provide companionship services;

♦   The worker is employed only by the family or household using his or her services, rather than by another employer or agency (this is almost certainly designed to exclude even joint-employment arrangements involving, for instance, the worker, a home-healthcare agency, and the service recipients);

♦    The worker's employment by the employer is limited to no more than five hours "per week" (whether a calendar week, a workweek, or some other kind of "week" the bills do not say, nor do they clarify whether the five-hour limit is to be viewed as an average or as an each-"week" proposition); and

♦    The worker's employment by the employer may not extend beyond a "time period" of twelve "weeks" in a calendar year.

These last two restrictions are more stringent than was their counterpart in last year's proposed changes.

It is likely that most employees providing companionship services (and apparently all such workers employed by home-healthcare agencies and similar organizations) would no longer fall within the amended exemption.  It is entirely foreseeable that, instead of improving the circumstances of "direct care workers" and "older adults" whom the amendment purports to help, the changes would expose the interests of both groups to the principle of unintended consequences at the worst-possible time.

The bills have been referred to legislative committees at this point, so it does not appear that there will necessarily be immediate action.  Nevertheless, the Service Employees International Union supports the bills, so opponents of these measures should take them seriously and should waste no time in making their views known to their Senators and Representatives.

◊   Have a comment or something else to add?  Please use our comment feature below.

S.1273 H.R. 2341.pdf (49.95 kb)

Our last post raised questions about how to calculate a non-exempt employee's pay under the federal Fair Labor Standards Act for the timeframe during which the employer adopts a different workweek.

When the FLSA workweek is changed, the period in which the conversion occurs typically involves hours worked falling within, or overlapping, both the new and the old workweeks.  As an enforcement policy, the U.S. Labor Department will deem FLSA wages to have been paid properly if the employer uses a particular computation method.  This approach calls for an employer to:

♦   Assume that the overlapping hours were worked in only the "old" workweek, compute FLSA straight-time and overtime pay due for each of the workweeks, and then total the sums;

♦   Perform the same calculation assuming instead that the overlapping hours were worked in the "new" workweek; and

♦   Pay the employee the greater of the two totals.

See 29 C.F.R. § 778.301, 778.302.

For example, assume that an employer is changing its workweek from one beginning on Monday and running through Sunday to one spanning from Friday through Thursday.  Assume also that an employee paid on an hourly basis at the rate of $10.00 works the following hours during the period of the workweek change:

-------------------- Old WW -------------------

M       T         W        Th        F        Sat      Sun      M      T          W        Th
8      8.25     10        9        7.5      8.5       9         1      8.25     8         8

                                           ------------------- New WW -----------------

This employee's wages would be computed as follows:

Pay for 60.25 "old" workweek's hours:

[(40 hrs. × $10.00) + (20.25 OT hrs. × 1.5 × $10.00)] = $703.75

Pay for 25.25 "new" workweek's hours:

($10.00) × (25.25 hrs.) = $252.50

TOTAL DUE FOR ELEVEN-DAY PERIOD:   $956.25

Pay for 50.25 "new" week's hours:

[(40 hrs. × $10.00) + (10.25 OT hrs. × 1.5 × $10.00)] = $553.75

Pay for 35.25 "old" week's hours:

($10.00) × (35.25 hrs.) = $352.50

TOTAL DUE FOR ELEVEN-DAY PERIOD:  $906.25

Because the first computation produces the greater figure, that is, $956.25, the employer would pay this amount.

Once again, this is something employers should also check into under any applicable laws of a state or other jurisdiction.  For instance, some states might require a different approach or might prescribe a minimum period of advance notice before the new workweek may take effect.

◊   Have a comment or something else to add?  Please use our comment feature below.

The federal Fair Labor Standards Act's "tip credit" was among the many topics addressed by the U.S. Labor Department's recent Final Rule.  DOL's tip-related pronouncements are a mixed-bag for employers.
 
The General Principles
 
The FLSA's Section 3(m) allows an employer to credit a portion of a tipped employee's tips toward the FLSA-required minimum wage (currently $7.25 per hour).  Employers taking an FLSA tip credit must pay a cash wage of not less than $2.13 per hour, so at present they are limited to a tip credit of no more than ($7.25 − $2.13) = $5.12 per hour.  The FLSA defines "tipped employees" as those who are engaged in occupations in which they customarily and regularly receive more than $30 a month in tips.  For FLSA tip credit purposes, a "tip" is a payment the patron decides in his or her discretion whether to make, and as to which the patron can decide how much to give and for whom to leave it; not all "gratuities" are "tips".
 
Section 3(m) says that an employer may take a tip credit only if (i) the tipped employee has been "informed" by the employer of Section 3(m)'s provisions; and (ii) the employee has retained all of the tips he or she received, except for amounts pooled among employees who customarily and regularly receive tips.
 
What Does "Informed" Mean?
 
DOL's position is that an employer must tell the employee that it intends to take a tip credit and must also specifically notify the employee in advance:
 
♦   Of the amount of the direct cash wage the employer will pay to the employee;
 
♦   Of the amount the employer is taking as a credit against tips received, which cannot exceed the difference between the FLSA minimum wage and the actual cash wage the employer pays the employee;
 
♦   That the additional amount the employer claims as a tip credit may not exceed the value of the tips the employee actually receives;
 
♦   That the tip credit shall not apply with respect to any tipped employee unless the employee has been informed of Section 3(m)'s tip-credit provisions; and
 
♦   That all tips the employee receives must be retained by the employee, except for the pooling of tips among employees who customarily and regularly receive tips.
 
DOL says that the employer is not required to provide these notifications in writing, but it observes that doing so would provide evidence that the employer has in fact given them.
 
No Limit On Pool Contributions
 
In the past, DOL's enforcement position was that an otherwise-valid tip-pool arrangement could not require employees to contribute a greater percentage of their tips than was "customary and reasonable".  DOL said that it would not question pool contributions of 15% or less of the employee's tips.

DOL now acknowledges that the FLSA "does not impose a maximum contribution percentage on valid mandatory tip pools".  However, DOL takes the position that an employer "must notify its employees of any required tip pool contribution amount .  .  .."
 
Time For A Check-Up
 
As with other areas affected by the Final Rule, employers can expect DOL investigators and plaintiff's lawyers to be scrutinizing tipped-employee pay practices even more than they already were.  Management should take a fresh look at where tipped-employee compensation stands.  This review should include not only DOL's recent changes, but also other potential FLSA tipped-employee issues, as well as any state or local requirements and limitations.

◊   Have a comment or something else to add?  Please use our comment feature below.

The answer to our March 14 Quick Quiz is "$110".  The federal Fair Labor Standards Act does not prohibit the employer from recouping some of the loss in that workweek, but it does restrict the amount.

So What Are The Limits?

The employer may not require or allow Alex to restore the loss to the extent that this would (1) cut into the required minimum-wage rate for his first 40 hours worked in the workweek, or (2) cut into any of the time-and-one-half overtime pay due for his hours worked over 40 in the workweek.  These limitations apply even though the employer published a policy in advance, and even though Alex signed something saying that he would make the payment.  Furthermore, it makes no difference whether he pays in cash, or by check, through payroll deduction, or in some other way.

Therefore, the maximum his employer can recover that workweek under the FLSA is [($10 − $7.25) × 40 hrs.] = $110.  Alex must be paid the full [($10 × 1.5) × 5 OT hrs.] = $75 for his overtime work; none of that amount can be deducted or otherwise directly or indirectly turned over to the employer in that workweek.  The balance of ($150 − $110) = $40 may only be recouped in one or more future workweeks, subject to the same restrictions.

These FLSA rules also apply to many other kinds of deductions, payments, or repayments affecting non-exempt employees.  For example, Alex's employer could neither deduct nor accept payment from Alex for bank fees or charges relating to the dishonored check to the extent that this cuts into his FLSA-required pay.  Other illustrations include cash shortages, damage to or loss of the employer's tools or equipment, the costs of required uniforms, and unreturned employer property.

USDOL Says There Are Additional Requirements

In a June 2000 enforcement policy (link below), and in a February 2001 opinion letter, the U.S. Labor Department sought to impose further conditions and restrictions upon overtime-workweek deductions even to the narrow extent discussed above.  Among them are that:

♦   There must be an advance agreement or understanding (to which the employee affirmatively agrees or assents) specifically covering the items for which deductions will be made and how the amounts will be determined.
  
♦   The deductions must be bona fide and "legitimate" ones, including that they must fall within the agreement or understanding and must not be prohibited by federal, state, or local law.

♦   Permissible deductions may not cut into the highest applicable minimum wage (such as where a state's minimum is greater than the FLSA's).

♦   The deductions may not otherwise evade the FLSA's overtime requirements (such as if the deductions were made only in overtime workweeks, or if the deduction amount was increased in overtime workweeks).

One may question whether DOL is empowered to adopt or enforce a number of the edicts in these detailed advisory materials, but nonetheless its positions are what they are.

Don't Forget About Other Laws

Applicable state or local laws might further limit what an employer is permitted to do, or they might even prohibit these kinds of deductions or payments altogether.  The parameters could also be different under specialized federal or state wage-hour laws that might apply to public construction, to providing services to government entities, to certain government supply contracts, or to other publicly-funded work.

◊   Have a comment or something else to add?  Please use our comment feature below.

 FOH 32j08 06 30 00.pdf (187.19 kb)

Store Associate Alex is paid on an hourly basis at the rate of $10 per hour.  On Monday, he accepts a $150 check in payment for merchandise.  He was so busy that he forgot to get the necessary customer information, and now the check has been returned because the account is closed.  Alex's employer is unable to contact the customer.

A written company policy that is given to all employees when they are hired requires Alex to pay for the loss that workweek through payroll deduction, in cash, or by personal check.  As the policy requires, the Store Manager has Alex sign a memo saying that he agrees to make the payment.  Alex adds a notation that he prefers to pay in cash.  He works exactly 45 hours that workweek.

Under the federal Fair Labor Standards Act, how much can the employer recover from Alex?

Please use the poll buttons to the right to register your answer.