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National Restaurant Association - Process for changing tip-credit-notice rules was valid, federal court rules

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Process for changing tip-credit-notice rules was valid, federal court rules

A federal district court ruled May 29 that the Department of Labor followed the correct procedures in amending regulations concerning the notice employers must provide to tipped employees about the federal tip credit.

The court's ruling leaves in place tip-credit-notice rules that have been in effect since May 5, 2011, for restaurateurs and other employers of tipped workers.

The court rejected arguments by the National Restaurant Association, the Council of State Restaurant Associations, and the National Federation of Independent Business that the DOL failed to comply with a federal law that requires federal agencies to follow a specific process in soliciting public comment on proposed regulations. The NRA and its co-plaintiffs are examining the Court's decision and will determine next steps.

The NRA and its co-plaintiffs did not take issue with the substance of the changes, but challenged the DOL's process for putting the rules in place and then giving employers only 30 days to comply. DOL had published a "notice of proposed rulemaking" in 2008 that did not hint at the broad changes the agency eventually published on April 5, 2011, with an effective date 30 days after that.

The final DOL regulation significantly changed the notice employers must provide to tipped employees about the tip credit.

"We pursued an administrative legal challenge because we felt that neither our members nor the industry had been provided sufficient notice in the U.S. DOL's 2008 proposed rule of the many new notice obligations contained in the May 5, 2011, final rule, and that the many new notice requirements issued under the 2011 final rule may have an impact on employers," said Scott DeFife, the Association's executive vice president for policy and government affairs.

"We did not dispute the authority of DOL to issue the new rule, only that the proposed rule failed to give the industry notice or chance to comment on these many new elements, as required as part of the regulatory process under the federal Administrative Procedures Act. Tip credit notification issues are unfortunately complex and administrative, but critical for large parts of the industry. It is important to get as much clarity as possible so that small businesses can operate without fear of tripping into class-action lawsuits on otherwise technical grounds.

"We will continue to work with DOL to clarify for employers what precise notice will now satisfy the new regulatory requirements so that the industry can accurately implement the new notice requirements," DeFife said.

The law

The federal Fair Labor Standards Act and most state laws let employers take a tip credit against the wages they pay tipped employees. Under strict conditions, the FLSA allows employers who follow federal law to apply a portion of tip earnings toward the employer's obligation to pay tipped employees the minimum wage.

One condition for taking a tip credit is that the employer must notify tipped employees about the tip credit.

Prior to May 5, 2011, employers simply had to inform employees verbally that their tips could be used as a credit toward the minimum wage. The amended DOL regulations require a series of specific and detailed information that must be provided to employees in advance of taking the tip credit, including:

• 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, and that the amount of tips taken as a tip credit cannot exceed the value of tips actually received by the employee;
• 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 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.

As before May 5, 2011, the DOL regulations allow employers to provide the tip-credit notice verbally or in writing. However, the DOL strongly encourages employers to provide notice in writing so that if they are challenged they can establish that the proper notice was actually given.

Sample notice

The National Restaurant Association offers a sample notice for members' use that may satisfy the DOL's regulatory requirements. However, before using this notice (or any other form of notice, for that matter), the NRA recommends that operators have their legal counsel approve whatever form of notice you use. The NRA does not purport or guarantee that its sample notice complies with the DOL's updated requirements.

Why it matters

Employers who fail to provide appropriate advance notice place themselves at significant financial risk. Employers who follow federal law and who provide no notice to employees of the tip credit, who provide a defective notice, or who fail to provide a new notice when the tip credit taken changes are denied the ability to take a tip credit. This means the business is liable to each affected employee for the difference between the cash wage paid to the tipped employee and the full minimum wage, for every hour worked. Back wages can be collected for up to three years. Employers could face civil penalties of $1,100 for each violation, and potential criminal penalties if a violation is considered willful.

The law is enforced by the DOL, but employees can also file lawsuits against employers, either as individuals or as a class.

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