Now that the election is behind us, employers should consider what they might anticipate in the field of wage-hour law, which is already one of the largest sources of employment-law claims.  While the nature and number of the possible developments are practically unlimited, some of the foreseeable ones include these:

♦   The push to increase the minimum wage under the federal Fair Labor Standards Act, which was at fever-pitch before going dormant as the election season approached, will now re-emerge.  There will be similar efforts under many analogous state and local laws and ordinances.

This will probably include proposals to increase the FLSA's cash-wage requirement for tipped employees for whom employers take that law's tip-credit.  The public-relations approach will be that this increases "the minimum wage for tipped workers", despite the fact that the FLSA minimum wage for tipped employees is already the same as it is for everyone else.

 ♦   Analogous moves might well seek to increase the salary amount required for some of the FLSA's exemptions from minimum-wage and overtime, as well as to impose paid-leave requirements.  Recall the March bill introduced by Iowa Senator Tom Harkin which proposed both, including requiring most employers of at least 15 employees to accrue an hour of paid "sick time" for every 30 hours an employee works, up to at least 56 hours each calendar year.

Another possible measure might involve an attempt to raise the FLSA overtime-pay multiple from its current 1.5 times the regular rate to 2.0 times that rate.  This might be joined with reducing the threshold number of hours for FLSA overtime from 40 hours in a workweek to, say, 35 hours.  Similar FLSA amendments were proposed in the late 70s and early 80s, during another period of high unemployment and persistent economic stagnation.  A further impetus this time around might be the already-burgeoning rates of part-time employment, taken in conjunction with what could be a further trend toward part-time work driven by looming Affordable Care Act requirements.

 ♦   Aggressive government enforcement at federal and state levels is likely to expand.  There will be an even-more-intensified focus upon whether workers treated as independent contractors should instead be viewed as employees.  Employers should expect further national or regional enforcement initiatives undertaken with respect to entire industries.  These initiatives will include (among others) those directed at what the U.S. Labor Department has called "low wage" sectors, such as hospitality businesses and food retailing, retailing in general, some healthcare segments, landscaping, some construction segments, temporary-help agencies, daycare/homecare, agriculture, janitorial services, garment manufacturing, and guard services.

 ♦   Following a noisy notice-and-comment period that ended in March, proposals that would essentially spell the end of the FLSA exemptions for companions and live-in domestic-service workers suddenly dropped from view as the election season commenced.  These provisions will probably be released in their final form in the not-too-distant future.

Another distinct possibility is the revival of the so-called "Right to Know" regulations, which USDOL said would require "notification of workers' status as employees or some other status such as independent contractors, and whether that worker is entitled to the protections of the FLSA."  USDOL further said that the proposal would "also explore requiring employers to provide a wage statement each pay period to their employees," apparently so as to convey to employees "how their pay is computed."  The reach of these provisions would likely be even broader than USDOL has so far disclosed.

 ♦   The "wage theft" movement toward increasingly-draconian penalties and punishments will move forward with renewed energy, especially at the state and local levels.  For proponents of these measures, wage-law violations are unrelated to the multi-jurisdiction, patchwork nature of differing, obscure, sometimes-conflicting, ambiguous and ill-defined, rapidly-changing requirements that are proliferating across the nation.  No, as this publication [Editor's Note:  Link Apparently Taken Down] illustrates, in their eyes employers are instead "dishonest", unscrupulous scofflaws who are "stealing" money from workers.  Employers who remain disengaged on this front and who acquiesce in these pejorative campaigns do so at their peril.

It has never been more important for employers to remain vigilant, informed, and assertive about all of these matters.  It is also essential that each employer ensure right now that it is in compliance with all applicable wage-hour requirements.

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Last week, Rep. Jesse Jackson, Jr. (D-Ill.) introduced a bill to raise the federal Fair Labor Standards Act's minimum wage to $10.00 per hour beginning 60 days after enactment.  Beginning one year after the new minimum took effect, the rate would be subject to annual increases indexed to rises in the Consumer Price Index.

Rep. Jackson's bill also proposes to raise the minimum cash wage for employees for whom an employer takes the FLSA "tip credit".  The hike would be from today's $2.13 per hour (the tips themselves must make up the difference to $7.25) to 70% of the FLSA minimum wage, that is, to $7.00 per hour if the bill becomes law as written.  It is surely not happenstance that this corresponds to one of the policy prescriptions in a report also issued last week by the "Food Chain Workers Alliance", supported in part by Saru Jayaraman of the University of California's "Food Labor Research Center", who has urged similar measures about which we have written previously.

Also, Rep. George Miller (D-CA) is reportedly putting together a bill that would take a less-abrupt approach to a minimum-wage increase.  Whether this will seem moderate only by comparison to Rep. Jackson's proposal remains to be seen.

Meanwhile, over in the Senate sits the still-pending bill introduced by Senator Harkin in late March calling for a 35% spike in the minimum wage, a $590-per-week increase in the salary amount required for exempt "white collar" workers, an immediate 41% rise in the cash wage required for tipped employees, and a new paid-time-off entitlement.

Obviously, these developments are being closely coordinated to take advantage of what proponents judge to be a favorable political environment.  And it is not beyond imagining that an election-year deal might bring about some compromise version of these contending visions.  In the past, for example, substantial minimum-wage increases have been exchanged for measures like a "training wage" and an "opportunity wage".  Readers will have trouble calling these to mind, because neither of them proved to be of any practical or offsetting value to anyone.

Those who are troubled by the direction matters are taking would be well-advised to remain vigilant and to waste no time making their views known to Congress.

Hat tips to The Hill and CNSNews.com.

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If a 35% spike in the minimum wage, a $590-per-week increase in the salary amount required for exempt "white collar" workers, an immediate 41% rise in the cash wage required for tipped employees, and a new paid-time-off requirement are prescriptions for an economic upturn, then help might be on the way.  All are provided for in the voluminous "Rebuild America Act", S. 2252, recently introduced by Senator Tom Harkin (D-Iowa).

The Minimum Wage

Under S. 2252, the federal Fair Labor Standards Act's minimum wage would rise in three steps from the current level of $7.25 per hour to $9.80 per hour about two years after passage.  After that, the rate would be adjusted annually in tandem with the Consumer Price Index.

Experts typically disagree about the negative effects of minimum-wage increases, but many (if not most) acknowledge that at least some jobs and job opportunities are lost to a minimum-wage hike.  Consider this:  The rationales for a minimum wage might suggest that the floor should be, say, $20 per hour, but the hiring cutbacks and layoffs this would provoke are an important reason that few would favor it.

And recent experience counsels even more caution.  We first wrote in 2010 about the larger lessons to be learned from the damaging impact of minimum-wage hikes affecting American Samoa and the Northern Mariana Islands.  Since then, the General Accounting Office has noted the many adverse consequences, and those whose experience with these matters is more than academic continue to seek at least a postponement in further jumps.

Salary Amount For White-Collar Workers

Most workers who otherwise qualify for exemption as executive, administrative, or professional employees (colloquially, the FLSA's "white collar" exemptions) must be paid on a salary basis at a rate of at least $455 per week.  S. 2252 would move this floor to $655, then to $855, and later to $1,045, and would thereafter tie it to the Consumer Price Index.

The U.S. Labor Department developed the salary test decades ago as one way to distinguish those who should be considered exempt from those who should not be.  It was never intended to be a minimum wage for exempt people.  Muddying the test's purpose as S. 2252 proposes would, among other things, risk introducing the same dangers (or worse) presented by raising the hourly minimum wage.

Cash Wage For Tipped Employees

Today, a tipped employee for whom an employer takes the FLSA "tip credit" must be paid a cash wage of at least $2.13 per hour (the tips themselves must make up the difference to $7.25).  S. 2252 would immediately raise this cash minimum to $3.00 per hour and would continue the increases until the level reached 70% of the FLSA minimum wage.

A more-focused bill to similar effect was introduced in the House of Representatives last year.  As we said then, these impulses are driven by flawed or unstated premises, or both.  In any case, good intentions are not guaranteed to produce desirable results.

A Paid-Time-Off Requirement

S. 2252 would also compel most employers of at least 15 employees to accrue an hour of paid "sick time" for every 30 hours an employee works, up to at least 56 hours each calendar year.  Exempt white-collar workers would be presumed to work 40 hours each workweek for these purposes, except for those who worked a "shorter normal workweek".  A host of detailed rights, requirements, permitted uses, limitations, procedures, prohibitions, and other complications would attach to this new paid-leave mandate.

None of this will be enacted in an election year?  Recall that the subject of indexing the FLSA minimum wage has already surfaced in the Republican primary process.

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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.

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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.

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A bill introduced recently by U.S. Representative Donna Edwards (D. Md.) would amend the federal Fair Labor Standards Act to require many employers to boost their direct cash payments to tipped employees by 76% within 90 days after passage, even though these employees are already receiving (by law) at least the FLSA minimum wage in combined tips and cash wages.  A year later, the cash-wage requirement would be $5.00 (135% higher than the current level).  In two years, the figure would increase to $5.50 (158% higher than today) or 70% of the FLSA minimum wage, whichever is more.  H.R. 631 would be known as the WAGES Act ("Working for Adequate Gains for Employment in Services").

The bill's stated purpose, "to establish a base minimum wage for tipped employees," is misleading:  Tipped employees are now, and would continue be, covered by the existing FLSA minimum wage (currently $7.25 per hour).  The bill would not change or expand this obligation.  What the amendment would actually do might be more-accurately stated this way:  "To increase the employer's direct wage costs by mandating an increase in its cash wages paid to tipped employees, who are already guaranteed by law to make at least the same FLSA minimum wage that applies to all other workers."

Currently, the FLSA permits an employer to pay a "tipped employee" a direct cash wage of at least $2.13 per hour and to take a "tip credit" against the employee's tips received which is sufficient to bring the total to at least $7.25 per hour.  If the employee's tips received are too low to produce the combined hourly rate of at least $7.25, the employer must make up the difference by paying additional cash wages.

The first-tier impact of the proposal would be to require employers to boost their minimum cash payment to tipped employees from the current $2.13 per hour to $3.75 per hour.  For example, a tipped employee who this week averages $10 per hour in tips and who is also paid the minimum FLSA cash wage of $2.13 per hour is compensated at an effective average hourly rate of $12.13.  Under the WAGES Act, on those same facts the employee would instead be compensated at an effective hourly rate of $13.75.  This substantial increase in the employer's cash-wage contribution would be required even though under current law the employee already receives an all-in average hourly rate significantly higher than the $7.25 FLSA minimum.

At a teleconference with reporters, Representative Edwards reportedly acknowledged that the bill does not have much of a chance of advancing in the Republican-led House.  Nevertheless, experience suggests that such proposals can get traction as legislative sausage-making proceeds during a session.

At the same teleconference, Saru Jayaraman, Co-Director of Restaurant Opportunities United Centers, reportedly asserted that restaurant workers on average make $8.89 per hour with tips.  Jayaraman reportedly said, "People are making-do on poverty wages."

Even if one assumes for the moment that tipped restaurant workers are indeed averaging $8.89 per hour, this already exceeds the FLSA minimum wage.  Perhaps the unstated aim that Representative Edwards and Co-Director Jayaraman really have in mind is to provoke an increase in the FLSA minimum wage itself.  The present-day unemployment situation would seem to counsel against any such move.

And for the same reasons, mandatory cash-wage increases for tipped employees would likely have unintended, but predictable, negative consequences for the affected industries, for the employees in those industries, and for unemployment generally.  So much for good intentions.

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