82 FR 57395 - Tip Regulations Under the Fair Labor Standards Act (FLSA)
DEPARTMENT OF LABOR
Wage and Hour Division Federal Register Volume 82, Issue 232 (December 5, 2017)
Wage and Hour Division
Federal Register Volume 82, Issue 232 (December 5, 2017)
| Page Range | 57395-57413 | |
| FR Document | 2017-25802 |
[Federal Register Volume 82, Number 232 (Tuesday, December 5, 2017)] [Proposed Rules] [Pages 57395-57413] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-25802] ======================================================================= ----------------------------------------------------------------------- DEPARTMENT OF LABOR Wage and Hour Division 29 CFR Part 531 RIN 1235-AA21 Tip Regulations Under the Fair Labor Standards Act (FLSA) AGENCY: Wage and Hour Division, Department of Labor. ACTION: Notice of proposed rulemaking; request for comments. ----------------------------------------------------------------------- SUMMARY: The Department of Labor (Department) is proposing to rescind portions of its tip regulations issued pursuant to the Fair Labor Standards Act that impose restrictions on employers that pay a direct cash wage of at least the full federal minimum wage and do not seek to use a portion of tips as a credit toward their minimum wage obligations. This Notice of Proposed Rulemaking (NPRM) seeks the views of the public on the Department's proposed rescission of those portions of the regulations. DATES: Comments must be received on or before January 4, 2018. ADDRESSES: To facilitate the receipt and processing of written comments on this NPRM, the Department encourages interested persons to submit their comments electronically. You may submit comments, identified by Regulatory Information Number (RIN) 1235-AA21, by either of the following methods: Electronic Comments: Follow the instructions for submitting comments on the Federal eRulemaking Portal http://www.regulations.gov. Mail: Address written submissions to Melissa Smith, Director of the Division of Regulations, Legislation, and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S-3502, 200 Constitution Avenue NW., Washington, DC 20210. Instructions: This NPRM is available through the Federal Register and the http://www.regulations.gov Web site. You may also access this document via the Wage and Hour Division's (WHD) Web site at http://www.dol.gov/whd/. All comment submissions must include the agency name and Regulatory Information Number (RIN 1235-AA21) for this NPRM. Response to this NPRM is voluntary. The Department requests that no business proprietary information, copyrighted information, or personally identifiable information be submitted in response to this NPRM. Submit only one copy of your comment by only one method (e.g., persons submitting comments electronically are encouraged not to submit paper copies). Please be advised that comments received will become a matter of public record and will be posted without change to http://www.regulations.gov, including any personal information provided. All comments must be received by 11:59 p.m. on the date indicated for consideration in this NPRM; comments received after the comment period closes will not be considered. Commenters should transmit comments early to ensure timely receipt prior to the close of the comment period. Electronic submission via http://www.regulations.gov enables prompt receipt of comments submitted as DOL continues to experience delays in the receipt of mail in our area. For access to the docket to read background documents or comments, go to the Federal eRulemaking Portal at http://www.regulations.gov. FOR FURTHER INFORMATION CONTACT: Melissa Smith, Director of the Division of Regulations, Legislation, and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S-3502, 200 Constitution Avenue NW., Washington, DC 20210, telephone: (202) 693-0406 (this is not a toll-free number). Copies of this NPRM may be obtained in alternative formats (Large Print, Braille, Audio Tape or Disc), upon request, by calling (202) 693-0675 (this is not a toll-free number). TTY/TDD callers may dial toll-free 1 (877) 889-5627 to obtain information or request materials in alternative formats. Questions of interpretation and/or enforcement of the agency's regulations may be directed to the nearest WHD district office. Locate the nearest office by calling the WHD's toll-free help line at (866) 4US-WAGE ((866) 487-9243) between 8 a.m. and 5 p.m. in your local time zone, or log onto WHD's Web site at http://www.dol.gov/whd/america2.htm for a nationwide listing of WHD district and area offices. SUPPLEMENTARY INFORMATION: I. Executive Summary The Fair Labor Standards Act of 1938 (FLSA) generally requires covered employers to pay employees at least a Federal minimum wage, which is currently $7.25 per hour. See 29 U.S.C. 206(a)(1). Under section 3(m) of the FLSA, which defines the term ``wage,'' an employer of tipped employees can satisfy its obligation to pay those employees the Federal minimum wage by paying a lower direct cash wage and counting a limited amount of the tips received by its employees as a partial credit to satisfy the difference between the direct cash wage paid and the Federal minimum wage (known as a ``tip credit''), if it follows certain statutory requirements. See 29 U.S.C. 203(m). In 1966, Congress created a tip credit provision within the definition of a ``wage'' in section 3(m) of the statute that permitted an employer to utilize tips received by its employees to subsidize up to 50 percent of its minimum wage obligations. See Public Law 89-601, 101(a), 80 Stat. 830 (1966); 76 FR 18,832, 18,838.\1\ In 1974, Congress again amended section 3(m) by providing that an employer could not utilize tips received by its employees toward its Federal minimum wage obligation unless, among other things: --------------------------------------------------------------------------- \1\ As discussed further below, Congress changed the amount of tips received by employees that an employer can credit against its minimum wage obligation in subsequent amendments to the FLSA. See, infra, Sec. III. (1) [its] employee has been informed by the employer of the provisions of this subsection and (2) all tips received by such employee have been retained by the employee, except that this subsection shall not be construed to prohibit the pooling of tips --------------------------------------------------------------------------- among employees who customarily and regularly receive tips. Public Law 93-259, 13(e), 88 Stat. 55 (1974). Thus, section 3(m) permits an employer to take a partial credit against its minimum wage obligations on account of tips received by its employees but only if, among other things, its tipped employees retain all of their tips. Section 3(m), however, does not preclude an employer that takes a tip credit from implementing a tip pool in which tips are shared only among those employees who ``customarily and regularly receive tips.'' Id. The Department first promulgated regulations implementing the section 3(m) tip credit in 1967. See 32 FR 13,575 (Sept. 28, 1967). In 2011, the Department updated those regulations to reflect its then- existing view that the statutory conditions in section 3(m) of the FLSA require that tipped employees retain all of their tips, except for those tips distributed through a tip pool limited to customarily and regularly tipped employees, regardless whether such employees work for an employer that takes a tip credit. See, e.g., Sec. 531.52. [[Page 57396]] As discussed below, since 2011 there has been a significant amount of private litigation involving the tip pooling and tip retention practices of employers that pay a direct cash wage of at least the Federal minimum wage and do not take a tip credit. There has also been litigation directly challenging the Department's authority to promulgate the 2011 Final Rule as it applies to employers that pay a direct cash wage of at least the Federal minimum wage. At the same time, there have been changes in state laws that require employers to pay their tipped employees a direct cash wage of at least the Federal minimum wage, which have resulted in more employers being unable to claim a tip credit. In part because of these developments, the Department is concerned about the scope of its current tip regulations as applied to employers that pay the full Federal minimum wage to their tipped employees. The Department is also seriously concerned that it incorrectly construed the statute in promulgating the tip credit regulations that apply to such employers. Additionally, the Department seeks to consider whether it is unnecessary to prohibit the sharing of tips with employees who do not customarily receive tips, including restaurant cooks, dishwashers, and other traditionally lower-wage job classifications, when their employer does not take a tip credit under FLSA section 3(m) and its employees are paid at least the full Federal minimum wage. The Department is therefore proposing to rescind the parts of its tip regulations that bar tip-sharing arrangements in establishments where the employers pay full Federal minimum wage and do not take a tip credit against their minimum wage obligations. This proposed rule applies only to employers that pay direct cash wages of at least the Federal minimum wage and do not take a tip credit. It does not apply to employers who pay less than the Federal minimum wage and take a tip credit. The proposed removal of the regulatory limitation on an employer's ability to utilize tips if it pays a direct wage of at least the full FLSA minimum wage will allow for employers to provide in their agreements \2\ with employees for tip sharing among a larger tip pool of employees. This change could result, for example, in tips being shared with employees who are not customarily and regularly tipped, such as back-of-the-house employees in restaurants. This type of tip sharing was at issue in Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9th Cir. 2010) (employer paid its tipped employees a direct wage payment that exceeded the Federal minimum wage and instituted a tip pool that included back-of-the-house employees who did not customarily and regularly receive tips, such as dishwashers and cooks). If the Department's rule were adopted as proposed herein, it would expressly allow such tip sharing. Employers in other industries could also adopt similarly varied tip pooling arrangements among tipped and non-tipped employees. E.g., Cesarz v. Wynn Las Vegas, 2014 WL 117579 (D. Nev. 2014), rev'd and remanded by Oregon Rest. & Lodging Ass'n v. Perez, 816 F.3d 1080 (9th Cir. 2016), reh'g and reh'g en banc denied, 843 F.3d 355 (9th Cir. 2016), pet. for cert. filed (Aug. 1 2016) (employer instituted a tip pool through which dealers' tips were shared with other casino employees in jobs that have not traditionally been customarily and regularly tipped). Promulgation of the regulation would also make clear that where an employer does not claim the tip credit under section 3(m) and pays a direct wage that satisfies the FLSA's minimum wage requirements, the treatment and disposition of tips is a matter of agreement between the employer and employees or of state law. --------------------------------------------------------------------------- \2\ Similar references to agreements in this notice refer to agreements, whether written or otherwise, between an employer and its employees regarding the treatment and disposition of tips received by such employees. Cf. Williams v. Jacksonville Terminal Co., 315 U.S. 386, 397 (1942) (determining that, ``[i]n businesses where tipping is customary, the tips, in the absence of an explicit contrary understanding, belong to the recipient,'' but that ``an arrangement [may be] made by which the employee agrees'' to a different disposition of such tips). --------------------------------------------------------------------------- To estimate the impact of the proposed rule, the Department looked at two occupations that constitute a large percentage of tipped workers (waiters, waitresses, and bartenders) and focused on two industries (drinking places and full-service restaurants). Based on the data used in the regulatory impact analysis below, the Department estimated that there are up to 1,298,231 tipped workers in the selected occupations, and 206,770 full-service restaurants, and 40,095 drinking places. There are labor market forces that will affect decisions concerning employer use or reallocation of tips. For example, there are certain market factors that may discourage any changes in tip-sharing practices, such as employee resistance and heightened turnover among the customarily tipped employees. The Department is unable to quantify how customers will respond to proposed regulatory changes, which in turn would affect total tipped income and employer behavior. The Department currently lacks data to quantify possible reallocations of tips through newly expanded tip pools to employees who do not customarily and regularly receive tips. The Department presents a primarily qualitative approach to assessing the benefits and transfers of the new rule. The Department estimated the regulatory familiarization costs associated with this proposed rule on an establishment basis and calculated the first year cost to be $3.431 million. The Department discussed other impacts and benefits of the proposed rule qualitatively. For the purposes of E.O. 13771, it is expected that this proposed rule would, if finalized as proposed, qualify as an ``E.O. 13771 deregulatory action.'' II. Recent Developments in Tip Pooling Regulations and Litigation; Proposed Changes to Regulations; and Nonenforcement Policy As noted above, the FLSA's tip credit provision was enacted in 1966. WHD promulgated regulations implementing the FLSA's tip credit provision in 1967. See 29 U.S.C. 203(m), Public Law 89-601, 101(a), 80 Stat. 830 (1966); 32 FR 13,575 (Sept. 28, 1967). Among other things, the 1967 regulations acknowledged that employers and employees could agree that tips received would belong to the employer, which might then use the tips to satisfy the entirety of its minimum wage obligations, thus exceeding the then-50 percent limitation on an employer's crediting of tips received by its employees against its minimum wage obligations. See, e.g., Sec. 531.55(b) (1967) (``[I]f pursuant to an employment agreement the tips received by an employee must be credited or turned over to the employer, such sums may, after receipt by the employer, be used by the employer to satisfy the monetary requirements of the Act. In such instances there is no applicability of the 50- percent limitation on tip credits provided by section 3(m).''). The 1967 regulations were consistent with Williams v. Jacksonville Terminal Co., 315 U.S. 386 (1942), and the legislative history of the 1966 amendments. In Jacksonville Terminal, the Supreme Court held that an employer had complied with the FLSA's minimum-wage requirements by paying its employees only those tips that the employees received from customers and, if tips received by any employee did not satisfy the minimum wage, by paying the difference to that employee. [[Page 57397]] Id. at 388-389, 397-398, 403-408. The Court reasoned that such tips ``belong to the recipient'' employee ``in the absence of an explicit contrary understanding,'' but that an employer and its employees could agree that the employer would ``take the compensation paid by [customers] for the service [provided by the employees], whether paid as a fixed charge or as a tip.'' Id. at 397-398. The Court ultimately concluded that the parties in the case had entered, and the FLSA did not prohibit, such an agreement to ``transfer the tips [collected by the employees] . . . to the credit of the [employer].'' Id. at 403; see id. at 403-408. The 1966 legislative history similarly reflected that the new statutory ``tip provisions [we]re sufficiently flexible to permit the continuance of existing practices with respect to tips,'' including practices under which ``an employer and his tipped employees . . . agree that all tips are to be turned over or accounted for to the employer to be treated by him as part of his gross receipts.'' S. Rep. 1487, 89th Cong., 2d Sess. 12 (1966). In that circumstance, however, ``the employer must pay the employee the full minimum hourly wage, since for all practical purposes the employee is not receiving tip income.'' Id. When it amended section 3(m) in 1974, Congress added the requirement that an employer taking a tip credit must permit its tipped employees to retain all of their tips, except for those tips distributed through a mandatory tip pool that includes only employees who customarily and regularly receive tips. See Public Law 93-259, 13(e). Immediately after the 1974 amendments, WHD stated that its existing regulations were superseded by the amendments to the extent that they were in conflict with those amendments, in particular, those provisions that permitted an employer to use tips received by its employees toward its minimum wage obligations to a greater extent than permitted by section 3(m). See Wage and Hour Opinion Letter FLSA-626, 1974 WL 422051 (June 21, 1974), at *2; Wage and Hour Opinion Letter WH- 310, 1975 WL 40934, at *1 (Feb. 18, 1975); Wage and Hour Opinion Letter WH-321, 1975 WL 40945, at *1-2 (Apr. 30, 1975). However, although the statutory tip credit provision was significantly amended in 1974 and thereafter, WHD did not revise its 1967 tip credit regulations until 2011. See 76 FR 18,832, 18,854-56 (Apr. 5, 2011). In 2008, the Department published a Notice of Proposed Rulemaking that proposed, among other things, to amend WHD's tip credit regulations to reflect the 1974 amendments to the FLSA. See 73 FR 43,654, 43,659 (July 28, 2008). Before it had finalized that rulemaking, the Department participated as amicus curiae in support of a tipped employee challenging her employer's tip pooling arrangement in Cumbie v. Woody Woo, a case before the Ninth Circuit. 596 F.3d 577. Woody Woo involved an employer that paid its tipped employees a direct wage payment that exceeded the Federal minimum wage and instituted a mandatory tip pool that included back-of-the-house employees who do not customarily and regularly receive tips, such as dishwashers and cooks. Id. at 578-79. The district court in Woody Woo had concluded that section 3(m)'s restrictions on tip pooling apply only when an employer takes a tip credit against its minimum wage obligations. See Cumbie v. Woody Woo, Inc., 2008 WL 2884484, at *3 (D. Or. July 25, 2008). The Department argued before the Ninth Circuit that the district court's interpretation would permit an employer to use tips received by its employees to a greater extent than that permitted in section 3(m), since it would permit an employer to use tips to meet its entire minimum wage obligation or to subsidize the wages of non-tipped employees. See Br. of the Sec'y of Labor as Amicus Curiae, Apr. 29, 2009, at 8, 2009 WL 2609879, Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9th Cir. 2010). On February 23, 2010, the Ninth Circuit issued an opinion in Cumbie v. Woody Woo, which held in the context of an employer that did not use tips to pay its employees the minimum wage, that section 3(m)'s tip retention requirements apply only to employers that avail themselves of the tip credit provision. 596 F.3d 577, 581 (9th Cir. 2010). The Department finalized its revisions to the tip regulations in 2011. See 76 FR 18,832, 18,854-56 (revising, among other provisions, Sec. Sec. 531.52, 531.54, and 531.59). Those regulations, among other things, bar all employers from sharing tips with employees who do not customarily and regularly receive tips--regardless whether the employers take a tip credit. See, e.g., Sec. 531.52. The Department's regulations thus provide that an employer is prohibited from using tips received by employees, whether or not it has taken a tip credit, except as a credit against its minimum wage obligations to the employee to the extent permitted by that section, or in furtherance of a tip pool that is permissible under that section. Id. On July 12, 2012, the Oregon Restaurant and Lodging Association (ORLA), along with the National Restaurant Association, Washington Restaurant Association, Alaska Cabaret, Hotel, Restaurant & Retailers Association, and others (the ORLA Plaintiffs), challenged the Department's authority to promulgate the 2011 Final Rule as it applies to employers that do not take a tip credit and that pay a direct cash wage of at least the Federal minimum wage. See Compl., July 12, 2012, Oregon Rest. & Lodging Ass'n v. Solis, 948 F.Supp.2d 1217 (D. Or. 2013). The ORLA Plaintiffs sought to have those parts of the Department's 2011 tip regulations that apply to employers that do not take a tip credit against their minimum wage obligations declared invalid and vacated. See id. at 33-34 (identifying Sec. Sec. 531.52, 531.54, and 531.59). The plaintiffs alleged, inter alia, that such tip regulations are contrary to the FLSA's clear statutory language in section 3(m), which places restrictions on an employer's use of tips only when the employer takes a tip credit. See id. at 18-21. The Department responded by arguing that the FLSA does not address an employer's use of tips when the employer does not take a tip credit, and that the Department appropriately used its rulemaking authority to address that statutory gap through the 2011 tip regulations. See Reply Br. of the Sec'y of Labor, Dec. 7, 2012, at 5-8, Oregon Rest. & Lodging Ass'n v. Solis, 948 F.Supp.2d 1217 (D. Or. 2013). On June 7, 2013, the district court granted the plaintiffs' motion for summary judgment, ruling that the 2011 tip regulations were invalid. Oregon Rest. & Lodging Ass'n v. Solis, 948 F.Supp.2d 1217, 1227 (D. Or. 2013). The court concluded that the regulations were contrary to the clear intent of Congress to limit the use or pooling of tips only to employers that elect to take a tip credit. See id. at 1226. On August 21, 2013, the Department appealed the district court's decision to the Ninth Circuit. See Br. of the Sec'y of Labor, Dec. 27, 2013, at 8, Oregon Rest. & Lodging Ass'n v. Perez, 816 F.3d 1080 (9th Cir. 2016) (ORLA). In its brief, the Department argued that the 1974 amendments to the FLSA expressly delegated broad authority to the Department to implement the terms of the amendments and that the Department properly used this authority to promulgate the 2011 tip regulations, which address a gap in the statutory scheme: Whether an employer that does not take a tip credit is subject to section 3(m)'s restrictions. See id. at 24-28. The Department further argued that the regulations were necessary to prevent a circumvention of section 3(m)'s limitations on an employer's ability to [[Page 57398]] use or require the pooling of tips. See id. at 32-33. The Ninth Circuit consolidated the case with Cesarz v. Wynn Las Vegas--a private FLSA action in which the plaintiffs-employees, relying on the Department's 2011 regulations, alleged that the employer violated the FLSA when it required its tipped employees to share their tips with non-tipped employees, see 2014 WL 117579, at *1 (D. Nev. 2014)-- for purposes of oral argument and disposition. See 816 F.3d 1080 n.* (9th Cir. 2016).\3\ --------------------------------------------------------------------------- \3\ While ORLA was pending before the Ninth Circuit, the Fourth Circuit heard Trejo v. Ryman Hospitality Properties, Inc., an appeal from a district court's dismissal of a private FLSA action in which plaintiffs--whose employer did not claim the tip credit--sought to recoup tips that their employer required them to pay into an allegedly invalid tip pool. 795 F.3d 442 (4th Cir. 2015). The Department submitted a brief as amicus curiae arguing that the 2011 tip-pooling regulation was valid and entitled to deference, but also pointing out that the FLSA provides a cause of action only to recover unpaid minimum wages or overtime compensation under sections 6 and 7 of the FLSA, rather than to recover tips in and of themselves under section 3(m), and that plaintiffs had expressly disclaimed any minimum wage violation. See Br. of the United States as Amicus Curiae, Jan. 2015, at *12, *13, 2015 WL 191535, Trejo, 795 F.3d 442 (4th Cir. 2015). In other words, and as explained further in footnote 10, infra, Plaintiffs did not argue that the effect of the invalid tip pool was to reduce their wages below the minimum wage, which would present a valid cause of action under the FLSA. See id. at *12 (citing 29 U.S.C. 216(b) (private right of action limited to enforcing the FLSA's minimum wage and overtime compensation provisions); see also 29 U.S.C. 216(c) (imposing similar limitations on the Secretary's ability to enforce the FLSA)). The Fourth Circuit concluded that section 3(m) ``simply does not contemplate a claim for wages other than minimum wage or overtime wages.'' Trejo, 795 F.3d at 448 (internal quotation marks omitted). See also Malivuk v. Ameripark, 2016 WL 3999878, aff'd on other grounds,--F. App'x --, 2007 WL 2491498, (11th Cir. June 9, 2017). --------------------------------------------------------------------------- On February 23, 2016, the Ninth Circuit, reversing the district court, upheld the validity of the 2011 tip regulations in ORLA v. Perez, 816 F.3d 1080, 1090 (9th Cir. 2016). In deciding ORLA, the Ninth Circuit concluded that Woody Woo held only that section 3(m) does not prohibit employers that do not take a tip credit from instituting an invalid tip pool. See id. at 1088. Having found that the FLSA is silent with respect to employers that do not take a tip credit, the Ninth Circuit concluded that the 2011 tip regulations were a reasonable application of the agency's authority to fill gaps left by the text of the FLSA, because the ``purpose of the Act does not support the view that Congress intended permanently to allow employers that do not take a tip credit to do whatever they wish with their employees' tips.'' See id. at 1089-1090. On April 6, 2016, the ORLA Plaintiffs filed a petition for panel rehearing and rehearing en banc. See Pet. for Panel Reh'g and Reh'g En Banc, Apr. 6, 2016, ORLA v. Perez, 816 F.3d 1080 (9th Cir. 2016). The ORLA Plaintiffs argued that the Ninth Circuit's decision in ORLA cannot be reconciled with Woody Woo and reiterated their contention that the 2011 tip pooling regulation is an impermissible interpretation of the FLSA. See id. at 11, 13. On September 6, 2016, the ORLA panel denied the plaintiffs' request for panel rehearing, and a majority of the non-recused active judges voted to decline en banc review. See ORLA v. Perez, 816 F.3d 1080, reh'g and reh'g en banc denied, 843 F.3d 355, 356 (9th Cir. 2016). Judge O'Scannlain, joined by nine other judges, dissented. See id. (O'Scannlain, J., dissenting). Judge O'Scannlain concluded that the Department's tip pooling regulation is precluded because the Ninth Circuit previously held in Woody Woo that the FLSA ``clearly and unambiguously permits employers who forgo a tip credit to arrange their tip-pooling affairs however they see fit.'' See id. at 358 (citing Cumbie v. Woody Woo, 596 F.3d at 579 n.6, 581, 581 n.11, 582, 583; Nat'l Cable & Telecomms. Ass'n v. Brand X Internet Servs., 545 U.S. 967, 984 (2005)). Based on this statutory construction, Judge O'Scannlain wrote, ``[T]he Department has not been delegated authority to ban tip pooling by employers who forgo the tip credit, and [as such] the Department's assertion of regulatory jurisdiction is manifestly contrary to the statute and exceeds [its] statutory authority.'' Id. at 363-64 (internal quotation marks omitted). The National Restaurant Association (and other plaintiffs in the OLRA litigation) filed a petition for certiorari with the Supreme Court, asking for review of the Ninth Circuit's decision in ORLA, and that petition is pending. See Sup. Ct. No. 16-920 (certiorari petition filed Jan. 19, 2017). The Wynn Defendants filed their own petition for certiorari with the Supreme Court on August 1, 2016, which is also still pending. Sup. Ct. No. 16-163 (certiorari petition filed (Aug. 1 2016)). As explained further in Part IV, below, more employers are unable to claim a tip credit in 2017 than when the Department's regulations were promulgated in 2011 due to the increased number of states that require employers to pay their tipped employees a direct cash wage of at least the Federal minimum wage. Perhaps because of these changes to state law, there has been a significant amount of private litigation in recent years involving the tip pooling and tip retention practices of employers that pay a direct cash wage of at least the Federal minimum wage. Much of that litigation involves the application of the Department's 2011 tip credit regulations that bar employers from retaining and from sharing tips with employees who do not customarily and regularly receive tips, even when the employers have not taken a tip credit. For example, in Trejo v. Ryman Hospitality Properties, the employees alleged that their employer, which had paid its tipped employees a direct cash wage of at least the Federal minimum wage, improperly required its tipped employees to contribute to a tip pool including employees who were not customarily and regularly tipped. Sazzad v. Ryman Hosp. Properties, No. 8:13-cv-02911 (D. Md., April 21, 2014), aff'd sub nom, Trejo, 795 F.3d 442 (4th Cir. 2015); see also Malivuk, 2016 WL 3999878, aff'd on other grounds,--F. App'x --, 2017 WL 2491498 (11th Cir. June 9, 2017); see also Brueningsen v. Resort Express Inc., 2015 WL 339671 (D. Utah Jan. 26, 2015), recons. denied, 2016 WL 1181683 (D. Utah Mar. 25, 2016), appeal filed (10th Cir., Nov. 16, 2016). Wynn, 2014 WL 117579 (D. Nev. 2014) (employees alleged that the employer improperly required them to contribute to a tip pool that included their supervisors), rev'd and remanded by ORLA, 816 F.3d 1080 (9th Cir. 2016), reh'g and reh'g en banc denied, 843 F.3d 355 (9th Cir. 2016), pet. for cert. filed (Aug. 1 2016). Therefore, the application of the Department's regulations to employers who do not take a tip credit has gained increasing importance in recent years. Additionally, the Tenth Circuit recently ruled in Marlow v. The New Food Guy, a private FLSA case in which the United States participated as amicus curiae, that the Department's 2011 tip regulations are invalid to the extent that they bar an employer from using or sharing tips with employees who do not customarily and regularly receive tips when the employer pays a direct cash wage of at least the Federal minimum wage and does not claim a section 3(m) tip credit. See Marlow v. New Food Guy, Inc., 861 F.3d 1157 (10th Cir. 2017). In Marlow, the plaintiff alleged that the employer, which paid the plaintiff a direct wage of at least the Federal minimum wage and did not claim a section 3(m) tip credit, violated section 3(m) and the Department's 2011 regulations by retaining the tips employees received from customers. Id. at 1158-59. The district court dismissed the plaintiff's claim, concluding that the employer satisfied its obligations under the FLSA and that section 3(m) does not [[Page 57399]] provide a cause of action for lost tips. Marlow v. New Food Guy, Inc., No. 15-CV-01327, 2016 WL 4920980, at *1 (D. Colo. Feb. 17, 2016).\4\ On appeal, the United States, while also defending the validity of the Department of Labor's 2011 tip regulations, argued as a threshold matter that the plaintiff failed to plead a claim under the FLSA because she did not allege that her employer's retention of her tips resulted in a minimum wage or overtime violation. See Br. of the United States as Amicus Curiae, Oct. 2016, 2016 WL 6566326, at *10. The Tenth Circuit affirmed the district court's dismissal of the plaintiff's claim, holding that the text of the FLSA limits an employer's use of tips only when the employer takes a tip credit, ``leaving [the Department] without authority to regulate to the contrary.'' See Marlow, 861 F.3d at 1163-64.\5\ --------------------------------------------------------------------------- \4\ Following the Ninth Circuit's decision in ORLA, the plaintiff moved for reconsideration of the district court's decision. See Marlow, 861 F.3d at 1159. The district court denied the plaintiff's motion, expressing its agreement with the ORLA dissent. See id.; Order on Plaintiff's Motion for Reconsideration, Marlow, No. 15-CV-01327 (D. Co. Apr. 4, 2016). \5\ The plaintiff in Marlow petitioned for panel rehearing of the Tenth Circuit's decision, which the Court denied on July 20, 2017. See Order on Appellant's Petition for Panel Rehearing, Marlow, No. 16-1134 (10th Cir. July 20, 2017). --------------------------------------------------------------------------- The Department has taken into account the changed landscape and extensive litigation since promulgating its 2011 Final Rule. In that regard, the dissent to the denial of the petition for rehearing en banc in ORLA is notable, not only because of the force of that opinion but also because it drew the support of nine other judges in the Ninth Circuit. After considering the ORLA rehearing dissent and the Tenth Circuit's decision in Marlow, both of which state that the Department's 2011 Final Rule exceeded the agency's authority under section 3(m), the Department is reconsidering its regulations to the extent that they apply to employers that pay a direct wage of at least the Federal minimum wage and do not claim a credit based on tips to satisfy their minimum wage obligation. The Department has serious concerns that it incorrectly construed the statute in promulgating its current regulations, the scope of which extends to employers that have paid the full Federal minimum wage to their tipped employees, particularly insofar as those employers, rather than taking the tips for their own purposes, provide for such tips to be shared with other employees through a tip pool. The Department also has independent and serious concerns about those regulations as a policy matter. In particular, the Department seeks to remove prohibitions on sharing tips with employees who do not customarily and regularly receive tips--including restaurant cooks, dishwashers, and other traditionally lower-wage job classifications--when their employer does not take a tip credit under FLSA section 3(m) and all employees are paid at least the full Federal minimum wage. In light of all of these factors, the Department is proposing to rescind the parts of its tip regulations that apply to employers that pay a direct cash wage of at least the full Federal minimum wage and do not take a tip credit against their minimum wage obligations. The Department also issued a nonenforcement policy on July 20, 2017, whereby WHD will not enforce the Department's regulations on the retention of tips received by employees with respect to any employee who is paid a cash wage of not less than the full FLSA minimum wage ($7.25) and for whom their employer does not take an FLSA section 3(m) tip credit either for 18 months or until the completion of this rulemaking, whichever comes first.\6\ This nonenforcement policy provides nationwide consistency while the Department moves forward with rulemaking. --------------------------------------------------------------------------- \6\ This nonenforcement policy extends the agency's partial nonenforcement policy already in effect. In Oregon Restaurant and Lodging Ass'n v. Solis, 948 F. Supp. 2d 1217 (D. Or. 2013), the U.S. District Court for the District of Oregon declared the Department's 2011 regulations that limit an employer's use of tips received by its employees when the employer has not taken a tip credit against its minimum wage obligations to be invalid, and imposed injunctive relief, as described below. Notwithstanding the Ninth Circuit's decision in ORLA reversing that decision, the Department continues to be constrained by the injunctive relief entered by the district court until the Ninth Circuit issues its mandate, which formally notifies the district court of the court of appeals' decision; issuance of that mandate has been stayed ``until final disposition [of this litigation] by the Supreme Court.'' ORLA v. Perez, No. 13- 35765 (9th Cir. Sept. 13, 2016). For these reasons, the Department is currently prohibited from enforcing its tip retention requirements against the Oregon Restaurant and Lodging Association plaintiffs (which include several associations, one restaurant, and one individual) and members of the plaintiff associations that can demonstrate that they were a member on June 24, 2013. The plaintiff associations in the Oregon litigation were the National Restaurant Association, Washington Restaurant Association, Oregon Restaurant and Lodging Association, and Alaska Cabaret, Hotel, Restaurant, and Retailer Association. As a matter of enforcement policy, the Department decided that while the injunction is in place it will not enforce its tip retention requirements against any employer that has not taken a tip credit in jurisdictions within the Ninth Circuit. The Ninth Circuit has appellate jurisdiction over the states of California, Nevada, Washington, Oregon, Alaska, Idaho, Montana, Hawaii, and Arizona; Guam; and the Northern Mariana Islands. See WHD, Fact Sheet #15: Tipped Employees Under the Fair Labor Standards Act (FLSA), https://www.dol.gov/whd/regs/compliance/whdfs15.pdf (last accessed June 12, 2017). --------------------------------------------------------------------------- III. Legislative and Regulatory History of the Section 3(m) Tip Credit As discussed above, Congress amended the FLSA's tip credit provision in 1974 to require an employer that elects to take a tip credit against its minimum wage obligations to permit its tipped employees to retain all tips they receive, except for those distributed through a tip pool limited to customarily and regularly tipped employees. See Public Law 93-259, Sec. 13(e). The legislative history emphasizes that the employee-tip-retention requirement was not ``intended to discourage the practice of pooling, splitting, or sharing tips with employees who customarily and regularly receive tips--e.g., waiters, bellhops, waitresses, countermen, busboys, [and] service bartenders, etc.'' S. Rep. No. 93-690, at 43 (1974). ``On the other hand,'' the Report explains, ``the employer will lose the benefit'' of the tip credit if tipped employees are required to share their tips with employees who do not customarily and regularly receive tips--e.g., janitors, dishwashers, chefs, laundry room attendants, etc.'' Id. \7\ --------------------------------------------------------------------------- \7\ The Department has concluded that employer-mandated tip pools described in section 3(m) may also include employees in occupations with duties analogous to those of the Senate's list of ``employees who customarily and regularly receive tips'' (``waiters, bellhops, waitresses, countermen, busboys, service bartenders''), such as barbacks. See Field Operations Handbook 30d04(b). Likewise, the Department has concluded that employees who do not customarily and regularly receive tips, and therefore may not be included in an employer-mandated tip pool described in Sec. 3(m), include employees in occupations with duties analogous to the Senate's list of non-customarily tipped occupations (``janitors, chefs or cooks, dishwashers, laundry room attendants''), such as salad preparers and prep cooks. See Field Operations Handbook 30d04(f). --------------------------------------------------------------------------- The language from the 1974 amendments to section 3(m) is essentially the same as the current version of the law. See 29 U.S.C. 203(m). Although section 3(m)'s tip credit provision has been amended three times since 1974--in 1977, 1989, and 1996--these amendments changed only the applicable amount of tips received by employees that could be used as a credit against an employer's minimum wage obligations. See Public Law 95-151, Sec. 3(b), 91 Stat. 1245 (1977); Public Law 101-157, Sec. 5, 103 Stat. 938 (1989); and Public Law 104- 188, Sec. 2105(b), 110 Stat. 1755 (1996).\8\ In [[Page 57400]] amendments to the FLSA in 2007, Congress increased the minimum wage in three steps to $7.25 per hour beginning July 2009, but did not change the definition of ``wage'' in section 3(m) for purposes of applying the tip credit formula. Public Law 110-28, Sec. 8102(a), 121 Stat. 112 (2007). Thus, the maximum tip credit that an employer is permitted to claim under section 3(m) today is $5.12 per hour--the current Federal minimum wage, $7.25 per hour, 29 U.S.C. 206(a)(1), minus $2.13--or 71 percent of the current Federal minimum wage. See 76 FR 18,832, 18,839. --------------------------------------------------------------------------- \8\ The 1977 amendments to the FLSA decreased the section 3(m) tip credit to a maximum of 40 percent of the Federal minimum wage, while the 1989 amendments returned it to a maximum of 50 percent of the Federal minimum wage. See Public Law 95-151, Sec. Sec. 2(a), 3(b), 91 Stat. 1245 (1977); Public Law 101-157, Sec. Sec. 2, 5, 103 Stat. 938 (1989). The 1996 amendments ``froze'' the direct cash wage that an employer must pay its tipped employees under section 3(m) at a minimum of 50 percent of the minimum wage in effect on the date of their enactment, or $2.13 per hour. See Public Law 104-188, Sec. Sec. 2104(b), Sec. 2105(b), 110 Stat. 1755 (1996). This change shifted the amount of the maximum tip credit from a fixed percentage of the current Federal minimum wage to the difference between the current Federal minimum wage and the frozen minimum direct cash payment, thus allowing the percentage of the Federal minimum wage covered by the tip credit to increase as the minimum wage rose. --------------------------------------------------------------------------- As explained above, the Department promulgated its initial tip regulations in 1967, one year after Congress created the tip credit in section 3(m), and several years before the 1974 amendments to section 3(m)'s tip provisions. 32 FR 13,575 (Sept. 28, 1967). Consistent with the Department's understanding of the 1966 amendments, the 1967 tip regulations permitted agreements under which tips received by employees would be turned over to the employer, which could then use the tips to pay the Federal minimum wage. Cf. S. Rep. 1487, 89th Cong., 2d Sess. 12 (1966) (explaining that such practices could continue under the 1966 amendments). Shortly after the 1974 statutory amendments, however, the Department addressed the impact of the amendments on its tip regulations and stated that its then-existing regulations were superseded by the amendments to the extent tha they were in conflict. Specifically, when asked about the legality of an agreement under which ``the employer would retain all monies generated by tips'' and directly pay its employees at the minimum wage rate, the Department stated that ``[t]he amendments to section 3(m) of the Act,'' which specified that an employer's wage credit for tips (up to 50% of the minimum wage) could not exceed the amount of tips actually received by the employee, ``would have no meaning or effect unless they prohibit agreements under which tips are credited or turned over to the employer for use by the employer in satisfying the monetary requirements of the Act.'' See Wage and Hour Opinion Letter FLSA-626, 1974 WL 422051, at *2 (June 21, 1974). The Department opined shortly after the 1974 amendments that ``an employer may not take advantage of Section 3(m) by using any part of his employee's tips as a credit to meet his monetary obligation unless the employee is permitted to keep all tips'' and, if an employer takes tips received by an employee, ``then, in order to come into compliance, such employer must return the tips and pay the full statutory minimum wage.'' Wage and Hour Opinion Letter WH-310, 1975 WL 40934, at *1 (Feb. 18, 1975); see Wage and Hour Opinion Letter WH-386, 1976 WL 41739, at *3 (July 12, 1976) (``[E]mployers must pay tipped employees at least half of the applicable minimum wage (from their own pockets) for each hour worked, and may take a tip credit of no more than 50 percent of the required minimum wage.''). To conclude otherwise, the Department reasoned, would enable an employer to circumvent section 3(m)'s restriction that employers use no more than a limited portion of tips received by employees to satisfy their Federal minimum wage obligations. Cf. Woody Woo, 596 F.3d at 579 n.7. The opinion letters issued shortly after the 1974 amendments were primarily focused on whether it would constitute an impermissible circumvention of section 3(m) of the Act for an employer to utilize tips received by its employees to satisfy its minimum wage obligations to a greater extent than Congress expressly permitted in the Act's tip credit provision. In a 1989 opinion letter, however, the Department opined that merely requiring tipped employees to participate in a tip pool that is not limited to employees in customarily and regularly tipped occupations--i.e., a tip pool in a form not expressly authorized by section 3(m)--may also violate the FLSA, even when an employer has paid all of the tipped and non-tipped employees in the pool a direct cash wage equal to or greater than the Federal minimum wage. See Wage and Hour Opinion Letter WH-536, 1989 WL 610348, at *3 (Oct. 26, 1989). In that letter, the Department stated that tips are an employee's property even when an employer pays a direct cash wage of at least the full Federal minimum wage and does not claim a tip credit against its minimum wage obligations based on erroneous reasoning \9\ and, on that premise, concluded that a tipped employee who is required to participate in a tip pool that does not satisfy the criteria in section 3(m) is effectively required to ``contribute part of his or her property to the employer or to other persons for the benefit of the employer.'' Id. at *2. Thus, under the erroneous reasoning reflected in that letter, even when an employer does not claim a tip credit to reduce the direct cash wage it pays and does not use tips to fulfill any part of its minimum wage obligation to its tipped employees, mandating that a tipped employee contribute to a pool that includes employees in occupations that do not customarily and regularly receive tips ``would become an issue under the minimum wage provisions of the Act,'' if the ``employer does not pay a sufficiently high cash wage to reimburse such employee for such loss, plus at least the minimum wage.'' Id.\10\ --------------------------------------------------------------------------- \9\ The opinion letter, in the context of an employer that did not take a 3(m) tip credit, stated that ``[t]he courts have made clear that tips are the property of the employee to whom they are given.'' 1989 WL 610348, at *2 (citing Barcellona v. Tiffany English Pub, Inc., 597 F.2d 464, 466-467 (5th Cir. 1979)). The Department acknowledges that that statement is incorrect. Barcellona concluded that ``[i]f there was no agreement as to ownership, then the tips were the property of the recipient,'' and that the trial evidence in that particular case supported the factual finding that no such agreement existed. 597 F.2d at 467 (emphasis added) (citing Williams v. Jacksonville Terminal Co., 315 U.S. 386, 397 (1940)); cf. Richard v. Marriott Corp., 549 F.2d 303, 304-305 (4th Cir. 1977) (concluding that ``tips belong to the employee to whom they are left'' in circumstances in which no contrary agreement existed and the employer simply undertook to pay ``the difference between the tips and the [minimum] hourly wage''). \10\ The Department similarly stated in the preamble to the 2011 Final Rule that, if, by requiring tipped employees to participate in a tip pool that does not satisfy the standards in section 3(m) or by claiming and using the tips itself, such an employer deducts sufficient tips to ``reduce the employer's direct wage payment to an amount below the minimum wage,'' the employer would violate section 6 of the FLSA and be subject to suit under section 16 or 17. 76 FR 18,832, 18,842; see also Notice of Proposed Rulemaking, 73 FR 43,654, 43,659 (July 28, 2008) (explaining that if an ``employer paid the employee a direct wage in excess of the minimum wage'' it ``would be able to make deductions [from the employee's tips] so long as they did not reduce the direct wage payment below the minimum wage''); Br. of the United States as Amicus Curiae, Jan. 2015, at 2, 2015 WL 191535, Trejo v. Ryman Hospitality Indus., 795 F.3d 442 (4th Cir. Jan. 2015) (pointing out that private plaintiffs who did not allege that the effect of their employers' tip pool was to reduce their wages below the minimum wage in violation of section 6 failed to plead a cause of action under the FLSA because section 3(m) of the Act does not provide a freestanding right to recover tips). --------------------------------------------------------------------------- In 2011, the Department issued a Final Rule addressing tip pooling and other uses of tips. See 76 FR 18,832, 18,842. Revised Sec. 531.52 provides in relevant part that: [[Page 57401]] Tips are the property of the employee whether or not the employer has taken a tip credit under section 3(m) of the FLSA. The employer is prohibited from using an employee's tips, whether or not it has taken a tip credit, for any reason other than that which is statutorily permitted in section 3(m): As a credit against its minimum wage obligations to the employee, or in furtherance of a valid tip pool. Id. at 18,855 (emphasis added). Under the current regulations an employer that pays a direct cash wage equal to or greater than the Federal minimum wage--just like an employer that claims a tip credit to reduce the direct cash wage it pays--may require tipped employees to participate in a tip pool that is limited to employees in customarily and regularly tipped occupations, but it may not require tipped employees to participate in a tip pool that includes employees who are not in customarily and regularly tipped occupations. Nor may an employer that pays a direct cash wage equal to or greater than the Federal minimum wage use its tips received by its employees for any other purpose. IV. Recent Changes in State Tip Pooling Laws As a result of market forces and changes in state wage laws, the number of employers paying tipped employees a direct cash wage that is equal to or greater than the Federal minimum wage (and thus not claiming a section 3(m) tip credit) has increased since the Department promulgated the 2011 Final Rule. The Department believes that these changes also merit reconsideration of the tip pooling restrictions imposed on employers that do not claim a tip credit under section 3(m). Historically, six western states (Alaska, California, Montana, Nevada, Oregon, and Washington) have prohibited employers from using tips received by employees as a credit against their state minimum wages--all of which today equal or exceed the Federal minimum wage-- thereby preventing employers in these states from claiming a section 3(m) tip credit to reduce the direct cash wage they pay without incurring liability under state law. See Alaska Stat. Sec. 23.10.065(a); Cal. Lab. Code Sec. 351 (amended 1975); Mont. Code Ann. Sec. Sec. 39-3-402, 39-2-404 (originally enacted Sec. 2, Ch. 417 (1971)), Mont. Admin. R. 24.16.1508(1); Nev. Rev. Stat. Sec. 608.160(1)(b); Or. Rev. Stat. Sec. 653.035; Rev. Code Wash. 49.46.020, Wash. Admin. Code 296-126-022 (effective 1974); see also Alaska School Bus Safety Act, 1990 Alaska Laws Ch. 12, Sec. 23.10.065 (1990); Henning v. Industrial Welfare Commission, 46 Cal. 3d 1262, 1275-76 (Cal. 1988) (holding that Labor Code section 351, as amended in 1975, ``bar[s] the establishment of a minimum wage for tipped employees lower than the generally applicable minimum wage.''); Moen v. Las Vegas Int'l Hotel, Inc., 402 F. Supp. 157, 158 (D. Nev. 1975) (outlining requirements of Nev. Rev. Stat. Sec. 608.160); Wash. Att'y Gen. Op. 1974 No. 18, 1974 WL 168752 (concluding that hotels and restaurants must pay the full Washington minimum wage to their tipped employees, and may not take advantage of the section 3(m) tip credit, since, ``as it has long been administratively construed by the department of labor and industries, tips are . . . not included as a part of an employee's wages for the purposes of the Washington law.''); WHD, Minimum Wages for Tipped Employees, January 1, 2003, https://www.dol.gov/whd/state/tipped2003.htm.\11\ --------------------------------------------------------------------------- \11\ Additionally, Connecticut has required employers to pay bartenders a direct cash wage of at least the Federal minimum wage since 2001. See Conn. Gen. Stat. Ann. 31-58, 31-60; Conn. Pub. Act. No. 00-144 (May 26, 2000). Connecticut currently requires bartenders to be paid a direct cash wage of at least $8.23 per hour. See Conn. Gen. Stat. Ann. 31-58, 31-60. It permits employers to pay other tipped employees a minimum direct cash wage of $6.38. See id. --------------------------------------------------------------------------- Since the Department promulgated the 2011 Final Rule, a number of additional states have increased the direct cash wage an employer must pay some or all tipped employees under state law. In August 2014, Minnesota--which prohibits employers from taking a tip credit against the state minimum wage--increased its minimum wage for large employers from $6.15 per hour to $8.00 per hour (it was increased on August 1, 2016 to $9.50 per hour) and increased its minimum wage for small employers from $5.25 per hour to $7.25 per hour beginning in August 2015 (it is currently $7.75 per hour). See Minn. Stat. Ann. Sec. 177.24, subd. 1, 2; 2014 Minn. Sess. Law Serv. Ch. 166. As a result, employers in Minnesota now must pay tipped employees a direct cash wage that is greater than the Federal minimum wage. In January 2015, Hawaii--which permits employers to take a tip credit but requires that the combined cash wage and tips must equal at least $7.00 more than the state minimum wage--increased the direct cash wage employers must pay tipped employees to $7.25 per hour (the current Federal minimum wage). Haw. Rev. Stat. Ann. Sec. 387-2. The minimum direct cash wage an employer must pay a tipped employee in Hawaii is currently $8.50 per hour and is scheduled to increase to $9.35 in January 2018. Haw. Rev. Stat. Ann. Sec. 387-2. In December 2015, New York increased the direct cash wage employers that take a tip credit must pay tipped food service employees and other service employees to at least $7.50 per hour. See 12 NY ADC 146-1.3 (Dec. 4, 2015).\12\ And in November 2016, Arizona and Colorado enacted ballot measures that will increase the direct cash wage employers that take a tip credit must pay tipped employees to at least the current Federal minimum wage by January 2020. See Ariz. Proposition 206, approved Nov. 8, 2016 (amending Ariz. Rev. Stat. Ann. Sec. 23-363(C)); 2016 Colo. Legis. Serv. Init. Pet. 101 (amending Colo. Const. art. XVIII, Sec. 15). --------------------------------------------------------------------------- \12\ Effective December 31, 2016, New York has four schedules of direct cash wages that employers must pay tipped service workers and food service workers based on employer size and geographic location. See N.Y. Comp. Codes R. & Regs. tit. 12, Sec. 146-1.3. Currently, the lowest direct cash wage an employer can pay to a tipped food service worker in any part of the state is $7.50 per hour and the lowest direct cash wage an employer can pay a tipped service employee in any part of the state is $8.10 per hour. See id. --------------------------------------------------------------------------- Due to these changes, the share of servers, bellhops and porters, counter attendants, bartenders, and dining room attendants and bartender helpers \13\ with employers that are or will be required under state law to pay a direct cash wage of at least the Federal minimum wage to all or a portion of their tipped employees has almost doubled, from approximately 17 percent in 2011 to approximately 31 percent today. See Table A: WHD Analysis of BLS Data Regarding States that Require Employers to Pay Tipped Employees a Direct Cash Wage At Least Equal to the Federal Minimum Wage. --------------------------------------------------------------------------- \13\ The BLS occupational categories of ``Waiters and Waitresses,'' ``Baggage Porters and Bellhops,'' ``Counter Attendants, Cafeteria, Food Concession, and Coffee Shop,'' ``Bartenders,'' and ``Dining Room and Cafeteria Attendants and Bartender Helpers'' most closely correspond to the illustrative list of ``customarily and regularly tipped'' occupations in the Senate Report accompanying the 1974 amendments to the FLSA: ``waiters, bellhops, waitresses, countermen, busboys, [and] service bartenders.'' See S. Rep. No. 93-690, at 43 (1974). --------------------------------------------------------------------------- V. The Department Is Proposing To Rescind Portions of Its Tip Regulations The Department seeks public comments, which should include supporting data whenever possible, on the proposed rescission of those portions of its 2011 tip regulations that apply to employers that pay tipped employees a direct cash wage that is equal to or greater than the Federal minimum wage and that do not claim a tip credit. The Department's current regulations require that tipped employees retain all tips they receive regardless whether the employer takes a [[Page 57402]] tip credit under section 3(m). Employers can only require tipped employees to participate in a mandatory tip pool if the tip pool is limited to employees in customarily and regularly tipped occupations, such as servers, bartenders, and bussers. As discussed above, this regulatory restriction limiting tip pools to only customarily and regularly tipped employees applies even when an employer pays a direct cash wage of at least the full Federal minimum wage and does not claim a credit pursuant to section 3(m). The purpose of section 3(m)'s tip credit provision is to allow an employer to subsidize a portion of its Federal minimum wage obligation by crediting the tips customers give to employees. If an employer takes a tip credit against its wage obligations, section 3(m) applies, along with its attendant protections that restrict the employer's use of tips received by its employees. Where an employer has paid a direct cash wage of at least the full Federal minimum wage and does not take the employee tips directly, a strong argument exists that the statutory protections of section 3(m) do not apply.\14\ But if an employer pays the full Federal minimum wage and does not take a tip credit, the proposed rule would allow tip sharing in a manner currently prohibited by regulation, including by sharing tips with employees who are not customarily and regularly tipped (e.g., restaurant cooks and dishwashers) through a tip pool. The proposed rule, therefore, provides such employers and employees greater flexibility in determining the pay policies for tipped and non-tipped workers. It additionally allows them to reduce wage disparities among employees who all contribute to the customers' experience and to incentivize all employees to improve that experience regardless of their position. In sum, due to the Department's serious concerns that it incorrectly construed the statute in promulgating its current tip regulations to cover employers who pay a direct cash wage of at least the full Federal minimum wage, as well as the various other reasons described in this NPRM, the Department is proposing to rescind the portions of the current regulations that apply to employers that pay a direct cash wage of at least the Federal minimum wage and do not claim a tip credit against their minimum wage obligations. --------------------------------------------------------------------------- \14\ If an employer pays its tipped employees a direct cash wage of at least the full Federal minimum wage but takes its employees' tips to satisfy the entirety of its minimum wage obligation, there is a question as to whether the employer is circumventing the protections of section 3(m) because it is utilizing its employees' tips towards its minimum wage obligations to a greater extent than permitted under the statute for employers that take the tip credit. The Department will consider whether additional guidance on this circumvention issue should be issued in the future. --------------------------------------------------------------------------- This NPRM uses the term ``tip pooling'' to describe any scenario in which a tip provided by a customer to an employee or group of employees is shared, in whole or in part, with other employees. The Department recognizes that in some workplaces or under State laws, the term ``tip pooling'' may refer to a narrower set of practices, and that employers and workers may use other terms--for example ``tip out,'' ``tip sharing,'' or ``tip jar''--to describe certain practices regarding tips. Accordingly, the Department asks commenters to define in their comments any terms they use to describe practices regarding tips. The Department will consider information provided by the public in response to this NPRM in finalizing its proposal to amend 29 CFR part 531, subpart D, as it applies to situations where an employer pays tipped employees a direct cash wage that is at least the Federal minimum wage. Table A--WHD Analysis of BLS Data Regarding States That Require Employers To Pay Tipped Employees a Direct Cash Wage at Least Equal to the Federal Minimum Wage -------------------------------------------------------------------------------------------------------------------------------------------------------- Servers; bartenders; Counter Dining room and counter attendants, cafeteria attendants; Servers (waiters Bartenders SOC cafeteria, food attendants and Baggage porters dining room & State & waitresses) Code 353011 concession, and bartender & bellhops SOC cafeteria SOC Code 353031 coffee shop SOC helpers SOC Code Code 396011 attendants & Code 353022 359011 bartenders helpers; porters & bellhops -------------------------------------------------------------------------------------------------------------------------------------------------------- Direct cash wage for tipped employees at least equal to the Federal minimum wage, 2011 -------------------------------------------------------------------------------------------------------------------------------------------------------- Alaska................................ 3690 1930 1550 1020 190 8380 California............................ 233330 45280 61040 61380 4800 405830 Montana............................... 8780 4550 690 1060 90 15170 Nevada................................ 37380 13420 3960 11050 3080 68890 Oregon................................ 26530 9340 5100 3320 340 44630 Washington............................ 41160 12530 19080 8430 920 82120 ----------------------------------------------------------------------------------------------------------------- Subtotal.......................... 350870 86450 91420 86260 9420 624420 ----------------------------------------------------------------------------------------------------------------- Total, U.S.................... 2289010 512230 441830 391290 44130 3678490 -------------------------------------------------------------------------------------------------------------------------------------------------------- % U.S. total.......................... 15.33% 16.88% 20.69% 22.05% 21.35% 16.97% -------------------------------------------------------------------------------------------------------------------------------------------------------- Direct cash wage for tipped employees equal to or scheduled to reach at least Federal minimum wage, present -------------------------------------------------------------------------------------------------------------------------------------------------------- Alaska................................ 4260 1740 2540 920 90 9550 Arizona............................... 53580 11150 8340 9610 740 83420 California............................ 280100 57340 47970 71460 5660 462530 Colorado.............................. 52540 12560 4530 7490 640 77760 Connecticut........................... 28430 7740 5480 3430 180 45260 [[Page 57403]] Hawaii................................ 16110 3200 5470 5130 1380 31290 Minnesota............................. 50230 17270 15060 4040 330 86930 Montana............................... 8540 5340 870 1040 70 15860 Nevada................................ 39450 14870 4670 13070 2710 74770 New York.............................. 155540 43670 31470 33390 4250 268320 Oregon................................ 33100 9040 9950 4270 270 56630 Washington............................ 48380 13520 13380 8240 520 84040 ----------------------------------------------------------------------------------------------------------------- Subtotal.......................... 770260 197440 149730 162090 16840 1296360 ----------------------------------------------------------------------------------------------------------------- Total, U.S.................... 2564610 603320 499550 423080 44750 4135310 -------------------------------------------------------------------------------------------------------------------------------------------------------- % U.S. total.......................... 30.03% 32.73% 29.97% 38.31% 37.63% 31.35% -------------------------------------------------------------------------------------------------------------------------------------------------------- VI. Paperwork Reduction Act The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq., and its attendant regulations, 5 CFR part 1320, require the Department to consider the agency's need for its information collections, their practical utility, as well as the impact of paperwork and other information collection burdens imposed on the public, and how to minimize those burdens. The PRA typically requires an agency to provide notice and seek public comments on any proposed collection of information contained in a proposed rule. See 44 U.S.C. 3506(c)(2)(B); 5 CFR 1320.8. --------------------------------------------------------------------------- \15\ These employment figures are from the May 2011 BLS Occupational Employment Statistics (OES) Survey. \16\ These employment figures are from the May 2016 BLS OES Survey. --------------------------------------------------------------------------- This NPRM does not contain a collection of information subject to OMB approval under the Paperwork Reduction Act. The Department welcomes comments on this determination. VII. Analysis Conducted in Accordance With Executive Order 12866, Regulatory Planning and Review, Executive Order 13563, Improved Regulation and Regulatory Review, and Executive Order 13771, Reducing Regulation and Controlling Regulatory Costs Under Executive Order 12866, the Office of Management and Budget's (OMB's) Office of Information and Regulatory Affairs determines whether a regulatory action is significant and, therefore, subject to the requirements of the Executive Order and review by OMB. 58 FR 51735. Section 3(f) of Executive Order 12866 defines a ``significant regulatory action'' as an action that is likely to result in a rule that: (1) Has an annual effect on the economy of $100 million or more, or adversely affects in a material way a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local or tribal governments or communities (also referred to as economically significant); (2) creates serious inconsistency or otherwise interferes with an action taken or planned by another agency; (3) materially alters the budgetary impacts of entitlement grants, user fees, or loan programs, or the rights and obligations of recipients thereof; or (4) raises novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in the Executive Order. Id. OMB has determined that this proposed rule is a ``significant regulatory action'' under section 3(f) of Executive Order 12866. Executive Order 13563 directs agencies to propose or adopt a regulation only upon a reasoned determination that its benefits justify its costs; it is tailored to impose the least burden on society, consistent with achieving the regulatory objectives; and in choosing among alternative regulatory approaches, the agency has selected those approaches that maximize net benefits. Executive Order 13563 recognizes that some benefits are difficult to quantify and provides that, where appropriate and permitted by law, agencies may consider and discuss qualitatively values that are difficult or impossible to quantify, including equity, human dignity, fairness, and distributive impacts. Executive Order 13771 (``E.O. 13771'') directs agencies to reduce regulation and control regulatory costs by eliminating at least two existing regulations for each new regulation, and by controlling the cost of planned regulations through the budgeting process. See 82 FR 9339. In relevant part, OMB defines an ``E.O. 13771 regulatory action'' as ``a significant regulatory action as defined in section 3(f) of E.O. 12866 that has been finalized and that imposes total costs greater than zero.'' \17\ By contrast, an ``E.O. 13771 deregulatory action'' is defined as ``an action that has been finalized and has total costs less than zero.'' \18\ For the purposes of E.O. 13771, it is expected that this proposed rule would, if finalized as proposed, qualify as an ``E.O. 13771 deregulatory action.'' --------------------------------------------------------------------------- \17\ OIRA Memo M-17-21, Guidance Implementing Executive Order 13771 (April 5, 2017). \18\ Id. --------------------------------------------------------------------------- A. The Need for Rulemaking As explained earlier in Part IV of this notice, more employers are unable to claim a tip credit in 2017 than when the Department's regulations were promulgated in 2011 due to the increased number of states that require employers to pay their tipped [[Page 57404]] employees a direct cash wage of at least the current $7.25 per hour Federal minimum wage. Perhaps because of these changes to state law, there has been a significant amount of private litigation in recent years involving the tip pooling and tip retention practices of employers that pay a direct cash wage of at least the Federal minimum wage. See, e.g., Trejo v. Ryman Hosp. Properties, 795 F.3d 442 (4th Cir. 2015); Aguila v. Corp. Caterers IV, 199 F. Supp. 3d 1358 (S.D. Fla. 2016), aff'd sub nom. 2017 WL 1101081 (11th Cir. Mar. 24, 2017); Marlow v. The New Food Guy, Inc., 861 F.3d 1157 (10th Cir. 2017). In part because of these developments, the Department has serious concerns that it incorrectly construed the statute in promulgating its current tip regulations as applied to employers that have paid the full Federal minimum wage to their tipped employees, and serious concerns about the regulations as a policy matter, especially under changed circumstances. Additionally, the Department seeks to remove prohibitions on sharing tips with non-customarily tipped employees-- including restaurant cooks, dishwashers, and other traditionally lower- wage job classifications--when their employer does not take a tip credit under FLSA section 3(m) and all employees are paid at least the full Federal minimum wage. The Department is therefore proposing to rescind the portions of its tip regulations at 29 CFR part 531, subpart D that limit employee arrangements to share tips by imposing restrictions on employers that pay a direct cash wage of at least the full Federal minimum wage and do not claim a tip credit against their minimum wage obligation. The Department also issued a nonenforcement policy on July 20, 2017, whereby WHD will not enforce the Department's regulations on the retention of employees' tips with respect to any employee who is paid a cash wage of not less than the full FLSA minimum wage ($7.25) and for whom their employer does not take an FLSA section 3(m) tip credit, either for 18 months or until the completion of this rulemaking, whichever comes first. B. Economic Analysis i. Introduction This economic analysis provides a quantitative analysis of the rule familiarization costs of the proposed rule, and a qualitative discussion of the benefits and transfers that may result from the proposed rule.\19\ The potential benefits and transfers have not been quantified in this NPRM. --------------------------------------------------------------------------- \19\ The Department focused on two industries, which are classified under the North American Industry Classification System (NAICS) as 722410 (Drinking Places (Alcoholic Beverages)) and 722511 (Full-service Restaurants, the focus is on tipped employees who are classified under two Bureau of Labor Statistics (BLS) Standard Occupational Classification (SOC) codes: SOC 35-3031 (Waiters and Waitresses) and SOC 35-3011 (Bartenders). --------------------------------------------------------------------------- There are labor market forces that will affect employers' decisions on tips that employees receive. For example, there are certain market factors that may cause employers not to change their practices with respect to tips, such as employee resistance and a decline in employee morale, as well as the costs of employee turnover. The Department is unable to quantify how customers will respond to proposed regulatory changes, which in turn would affect total tipped income and employer behavior. The Department welcomes comments that provide data or information regarding the potential benefits and transfers of this proposed rule, and has asked some specific questions that may help the Department quantify benefits and transfers in the Final Rule analysis. See Section VII.B.iv. ii. Estimated Number of Affected Workers and Firms This section explains the methodology used to estimate the number of workers who are defined as a tipped employee, i.e., where a tipped employee means any employee engaged in an occupation in which he or she customarily and regularly receives more than $30 a month in tips. See 29 U.S.C. 203(t). In the absence of data to specifically categorize employees by the definition above, the Department relied on a broader definition as allowed by the available data, where the minimum tip amount received is relaxed (that is, this analysis does not consider the $30-a-month threshold), and where the focus is on tipped employees who are classified under two Bureau of Labor Statistics (BLS) Standard Occupational Classification (SOC) codes: SOC 35-3031 (Waiters and Waitresses) and SOC 35-3011 (Bartenders). For the present analysis, the Department considered these two occupations as they constitute a large percentage of tipped workers.\20\ The Department understands that there are other occupations with tipped workers such as SOC 35-9011 (Dining room and Cafeteria Attendants and Bartender Helpers) and SOC 35-9031 (Hosts and Hostesses, Restaurant, Lounge, and Coffee Shop), and others; thus, the Department welcomes comments and suggestions on whether this analysis should extend to additional tipped occupations. The Department focused on employees in those two occupations in the two industries in which they are primarily concentrated. The two industries are classified under the North American Industry Classification System (NAICS) as 722410 (Drinking Places (Alcoholic Beverages)) and 722511 (Full-service Restaurants). The Department understands that there are other industries with tipped workers, and welcomes comments and suggestions on whether this analysis should extend to those additional industries, and if so, which industries and why. --------------------------------------------------------------------------- \20\ Source: Bureau of Labor Statistics, Current Population Survey, Table 11b. Employed Persons by Detailed Occupation and Age, 2016 (https://www.bls.gov/cps/cpsaat11b.pdf). The number of bartenders and wait staff were calculated as a percentage of total employment in 11 occupations in which compensation depends heavily on tips. The 11 occupations are based on a 2014 Congressional Budget Office report, ``The Effects of a Minimum-Wage Increase on Employment and Family Income'' (https://www.cbo.gov/sites/default/files/113th-congress-2013-2014/reports/44995-MinimumWage.pdf). --------------------------------------------------------------------------- The Department used the Current Population Survey (CPS), a large, nationally representative sample of the labor force, for data on the number of workers employed in the two occupations mentioned above, the wages for these workers, and their usual hours worked. The CPS, which is sponsored jointly by the U.S. Census Bureau and BLS, is a monthly survey of about 60,000 households. In any given month, one adult household member reports employment and other information for each member of the household.\21\ Households are surveyed for four months, excluded from the survey for eight months, surveyed for an additional four months, then permanently dropped from the sample. During the last month of each rotation in the sample (month 4 and month 16), employed respondents complete a supplementary questionnaire in addition to the regular survey. These households and questions form the CPS Merged Outgoing Rotation Group (CPS-MORG) and provide more detailed information about those surveyed. --------------------------------------------------------------------------- \21\ See Current Population Survey, U.S. Census Bureau, https://www.census.gov/programs-surveys/cps.html (last visited July 17, 2017); CPS Merged Outgoing Rotation Groups, NBER, http://www.nber.org/data/morg.html (last visited July 17, 2017). --------------------------------------------------------------------------- The CPS asks respondents whether they usually receive overtime pay, tips, and commissions, which allows the Department to estimate the number of bartenders and wait staff in restaurants [[Page 57405]] and drinking places who receive tips. CPS data, however, are not available separately for overtime pay, tips, and commissions, but the Department assumes very few bartenders and wait staff at restaurants and drinking places receive commissions, and the number who receive overtime pay but not tips is also assumed to be minimal. Therefore, where bartenders and wait staff responded affirmatively to this question, the Department assumes that they receive tips. All data tables in this analysis include estimates for the year 2016 as the baseline. Table 1 presents the estimates of the share of bartenders and wait staff in restaurants and drinking places who reported that they usually earned overtime pay, tips, or commissions in 2016. Approximately 61 percent of bartenders and 57 percent of wait staff reported usually earning overtime pay, tips, or commissions in 2016. Table 1--Share of Bartenders and Waiters/Waitresses in Restaurants and Drinking Places Who Earned Overtime Pay, Tips, or Commissions, 2016 ---------------------------------------------------------------------------------------------------------------- Number who Number of responded Yes Percent who bartenders and to earning responded Yes to Occupation waiters/waitresses overtime pay, earning overtime in restaurants and tips, or pay, tips, or drinking places commissions commissions ---------------------------------------------------------------------------------------------------------------- Total............................................... 2,265,705 1,298,231 57 Bartenders...................................... 357,727 218,989 61 Waiters and waitresses.......................... 1,907,979 1,079,243 57 ---------------------------------------------------------------------------------------------------------------- Source: 2016 Current Population Survey. The Department used DataFerrett to extract basic monthly CPS data. Occupations: Bartenders (Census Code 4040) and Waiters and Waitresses (Census Code 4110). Industries: Restaurants and other food services (Census Code 8680) and Drinking places, alcoholic beverages (Census Code 8690). The Department used data from BLS' Quarterly Census of Employment and Wages (QCEW) to estimate the familiarization cost (Section VII.B.iv). The Department believes regulatory familiarization will occur at the specific establishment level rather than the broader firm level.\22\ --------------------------------------------------------------------------- \22\ An establishment is commonly understood as a single economic unit, such as a farm, a mine, a factory, or a store, that produces goods or services. Establishments are typically at one physical location and engaged in one, or predominantly one, type of economic activity for which a single industrial classification may be applied. An establishment is in contrast to a firm, or a company, which is a business and may consist of one or more establishments, where each establishment may participate in a different predominant economic activity. See Quarterly Census of Employment and Wages: Concepts, https://www.bls.gov/opub/hom/cew/concepts.htm. --------------------------------------------------------------------------- iii. Qualitative Analysis Under this NPRM, employers that pay at least the full FLSA minimum wage directly to tipped employees could utilize some or all of the tips received by employees for purposes currently prohibited by the regulations (i.e., for purposes other than a tip pool limited to customarily and regularly tipped employees) or when employers that currently claim the section 3(m) tip credit increase the cash wages of their tipped employees to at least the full FLSA minimum wage and then utilize some or all of the tips received by employees for purposes currently prohibited by the regulations.\23\ --------------------------------------------------------------------------- \23\ Under the Department's proposed rule, employers that do take a tip credit will still be subject to section 3(m)'s restrictions on the use of employee tips. --------------------------------------------------------------------------- The Department does not attempt to definitively interpret individual state law, and is therefore unable to determine to what extent state law will affect employer behavior in light of the proposed changes. It is assumed, however, that about 30 percent of all waiters and waitresses and bartenders work in states that prohibit employers from obtaining tips received by employees.\24\ In these states, employers must continue complying with state law, and therefore tipped employees in these states may not be impacted by the changes proposed in this NPRM. The potential transfers of tips would depend on employer behavior, employee behavior, customer behavior, and other factors. The Department seeks public comments, which should include supporting data whenever possible, on ``tip pooling'' practices in workplaces where an employer pays tipped employees a direct cash wage that is equal to or greater than the Federal minimum wage. The Department uses the term ``tip pooling'' to describe any scenario in which a tip provided by a customer to an employee or group of employees is redistributed, in whole or in part, with other employees.\25\ The Department recognizes that in some workplaces or under State laws, the term ``tip pooling'' may refer to a narrower set of practices, and that employers and workers may use other terms--for example ``tip out,'' ``tip sharing,'' or ``tip jar''--to describe certain practices regarding tips. Accordingly, the Department asks commenters to define in their comments any terms they use to describe practices regarding tips. Specifically, the Department solicits comments with supporting data to the following issues: --------------------------------------------------------------------------- \24\ See, e.g., Cal. Labor Code Sec. 351 (``Every gratuity is hereby declared to be the sole property of the employee or employees to whom it was paid, given, or left for.''); N.Y. Lab. Law Sec. 196-d (``No employer . . . shall demand or accept, directly or indirectly, any part of the gratuities, received by an employee, or retain any part of a gratuity or of any charge purported to be a gratuity for an employee.''). The Department seeks comments regarding how certain state laws apply to the retention of tips when the employer pays the full minimum wage directly and does not take a tip credit. Such information may assist the Department in providing a more detailed analysis in the final rule. \25\ Under the Department's current regulations, an employer can lawfully mandate that an employee contribute a portion of her tips to a tip pool, but only if the pool is limited to ``employees who customarily and regularly receive tips.'' Public Law 93-259, 13(e), (i.e., a ``valid tip pool''). See Sec. 531.54; Field Operations Handbook 30d04(a). --------------------------------------------------------------------------- 1. Among employers that currently pay a direct cash wage of at least the Federal minimum wage and do not take a tip credit, what portion reallocate tips, with other employees? And, among that population of employers, what portion of the total tips do they retain or reallocate? 2. How prevalent are employer-required, or mandatory, tip pools? What factors determine whether an employer institutes a mandatory tip pool? What portion of the tips received by employees do employers anticipate being contributed to the tip pool? What kinds of factors might influence an employer's decision to exclude some tips from inclusion in a mandatory tip pool? 3. Do tipped employees receiving money from a mandatory tip pool typically receive a fixed dollar amount, or a fixed percentage of the pool? Is it common for some employees to receive [[Page 57406]] a larger share of the tip pool than others,\26\ or are tips typically distributed on an even basis among all participants in the tip pool? --------------------------------------------------------------------------- \26\ Woody Woo, 596 F.3d 577, addressed the legality of a tip pool where between 55 to 70 percent of the tip pool went to kitchen staff (e.g., dishwashers and cooks), with the remaining 30 to 45 percent returned to servers in proportion to their hours worked. Id. at 578-79. --------------------------------------------------------------------------- 4. If this proposed rule were adopted as proposed, what kinds of employees would employers choose to include in mandatory tip pools? 5. If this proposed rule were adopted as proposed, would customers' tipping practices change? 6. If this proposed rule were adopted as proposed, would some employers respond by reallocating tipped income to their non-tipped employees? Would such a response reduce the disparity in take-home earnings between tipped and non-tipped employees in service industry establishments? 7. If this rule were adopted as proposed, what non-regulatory limitations would employers and employees face when deciding whether and how to design a tip pooling arrangement? Are there any market norms or other behavioral reasons why some types of tip pooling are more prevalent than others? To what extent is the endowment effect (that is, customarily and regularly tipped employees potentially valuing tips more than wages of the same average amount) relevant for explaining potential tip behavior in a relatively less-regulated market? iv. Estimated Costs and Cost Savings to Employers In this subsection, the Department addresses regulatory familiarization costs and recordkeeping costs and cost savings attributable to the proposed rule. The Department also presents a qualitative discussion of potential benefits and the impacts of the proposed rule on wages and employment, as well as possible changes to customers' tipping behavior resulting from employers reallocating tips to other employees. 1. Regulatory Familiarization Costs Regulatory familiarization costs represent direct costs on businesses associated with reviewing the new regulation. It is not clear whether regulatory familiarization costs are a function of the number of establishments or the number of firms. It can be assumed that the headquarters of a firm will conduct the regulatory review for businesses with multiple restaurants, and may also require chain restaurants to familiarize themselves with the regulation at the establishment level. To be conservative, the Department used the number of establishments in its cost estimate--which is larger than the number of firms--and assumes that regulatory familiarization occurs both the headquarters and at the decentralized (i.e., establishment) level. The Department assumes that all establishments will incur some regulatory familiarization costs regardless of whether the employer decides to change its tip practices as a result of the proposed rule. There may be differences in familiarization cost by the size of establishments; however, our analysis does not compute different costs for establishments of different sizes. The estimate of regulatory familiarization cost in the analysis is assumed to be conservative. Further, the change in this regulation is quite straightforward and is unlikely to have a major burden or cost. To estimate the total regulatory familiarization costs, the Department used: (1) The number of establishments in the two industries, Drinking Places (Alcoholic Beverages) and Full-service Restaurants, employing affected workers; (2) the wage rate for the employees reviewing the rule; and (3) the number of hours that it estimates employees will spend reviewing the rule. Table 2 shows the number of establishments in the two industries. To estimate the number of affected establishments, the Department used data from BLS's QCEW. Table 2--Number of Establishments With Tipped Workers, 2016 ------------------------------------------------------------------------ Industry Establishments ------------------------------------------------------------------------ NAICS 722410 (Drinking Places (Alcoholic Beverages)). 43,152 NAICS 722511 (Full-service Restaurants).............. 238,776 ------------------ Total............................................ 281,928 ------------------------------------------------------------------------ Source: QCEW, 2016. For familiarization cost analysis, the Department assumes that a Compensation/benefits specialist (SOC 13-1141) (or a staff member in a similar position) with a median wage of $29.85 per hour in 2016 will review the rule.\27\ Given the change proposed, the Department assumes that it will take about 15 minutes to review the final rule. Assuming benefits are paid at a rate of 46 percent of the base wage, and overhead costs are 17 percent of the base wage, the reviewer's effective hourly rate is $48.66; thus, the average cost per establishment is $12.17 for 15 minutes of review time. The number of establishments in the selected industries was 281,928 in 2016. Therefore, regulatory familiarization costs in Year 1 are estimated to be $3.431 million ($12.17 x 281,928 establishments), which amounts to a 10-year annualized cost of $390,510 at a discount rate of 3 percent or $456,548 at a discount rate of 7 percent.\28\ Regulatory familiarization costs in future years are assumed to be de minimis. --------------------------------------------------------------------------- \27\ Compensation/benefits specialist ensures company compliance with federal and state laws, including reporting requirements; evaluates job positions, determining classification, exempt or non- exempt status, and salary; plans, develops, evaluates, improves, and communicates methods and techniques for selecting, promoting, compensating, evaluating, and training workers. 13-1141 Compensation, Benefits, and Job Analysis Specialists, https://www.bls.gov/oes/current/oes131141.htm (last visited on July 20, 2017). \28\ This regulatory familiarization cost cannot be subtracted from any current compliance costs because there was no Regulatory Impact Analysis in the 2011 rule. Costs incurred in 2011 are sunk from the perspective of employers in 2017. --------------------------------------------------------------------------- 2. Other Potential Costs or Cost Savings If employers that are currently taking the section 3(m) tip credit continue to do so, their recordkeeping responsibilities under the FLSA regulation, 29 CFR 516.28, would not change under the proposed rule. However, if employers decide to pay the full FLSA minimum wage in cash and do not take a section 3(m) tip credit, they may have cost savings, because they will no longer need to keep the specific records required under 29 CFR 516.28. [[Page 57407]] To the extent that some employers choose to change their practices and pay at least the full FLSA minimum wage in cash and not take a section 3(m) tip credit, they may have to revise their employee handbooks, adjust their payroll systems, and/or advise affected employees. These are generally regarded as adjustment costs that would be imposed by changes in the regulations. The Department recognizes, however, that deciding to pay at least the full FLSA minimum wage in cash and not take a section 3(m) tip credit is a choice some employers may make in responding to the proposed rule, but is not a requirement of the regulation. Due to the many variables and assumptions needed to estimate how employers will respond to the proposed regulatory changes and insufficient information at this time regarding the costs that employers may assume or not incur as a result of the proposed rule, the Department has not quantified a monetary value for any additional costs or cost savings in this NPRM. The Department invites comments regarding any potential costs or cost savings attributable to the proposed rule. v. Summary of Familiarization Costs Below the Department provides a summary table of the quantified costs for the RIA. Table 3--Regulatory Familiarization Costs ------------------------------------------------------------------------ Disc rate = 3% Disc rate = 7% ------------------------------------------------------------------------ First Year Costs ($ million)...... $3.431 $3.431 10-year Annualized Costs ($)...... 390,510 456,548 ------------------------------------------------------------------------ C. Discussion of Benefits and Other Potential Impacts of the Proposed Rule i. Benefits The purpose of section 3(m)'s tip credit provision is to allow an employer to subsidize a portion of its Federal minimum wage obligation through a credit against the tips given to employees by customers. If an employer takes a tip credit against its wage obligations, section 3(m) applies, along with its attendant provisions that restrict the employer's use of tips received by employees, including the requirement that only tipped employees be included in the tip pool. However, where an employer has paid employees a direct cash wage of at least the full Federal minimum wage, the proposed rule would allow the employer to reallocate tips received by its employees in a manner currently prohibited by regulation, including distributing tips to non-tipped employees (e.g., cooks or dishwashers) through a tip pool. The proposed rule, therefore, provides employers greater flexibility in determining the pay policies for tipped and non-tipped workers. Theoretically, it additionally allows them to reduce wage disparities among employees who all contribute to the customers' experience and incentivize all employees to improve that experience regardless of position. It is common in full-service restaurants to have a tip pool. One study suggests that tip pooling contributes to increased service quality, along with enhanced interaction and cooperation between coworkers, especially when team members rely on input or task completion from each other.\29\ From management's perspective, tip pooling may foster service that is customer-focused and promotes a setting where employees get along well, and may increase productivity.\30\ These studies suggest that expanding the tip pool to include non-tipped employees may lead to enhanced interaction and cooperation between coworkers, and increased quality of service. On the other hand, a recent meta-analysis indicates that tips may be more a function of server looks and friendliness, the customer's mood, and even the weather than they are of aspects of service quality that depend on cooks, dishwashers, or other back-of-house staff who might newly be included in tip pools as a result of this proposed policy.\31\ Under the proposed changes, the employer will be able to distribute customer tips to non-tipped employees, possibly resulting in increased earnings for those employees. --------------------------------------------------------------------------- \29\ Samuel Estreicher and Jonathan Nash, American Law & Economics Association Annual Meetings, The Law and Economics of Tipping: The Laborer's Perspective. (2004) available at http://law.bepress.com/alea/14th/art54. \30\ Ofer H. Azar, The implications of tipping for economics and management, 30 (10) International Journal of Social Economics. 1084- 1094 (2003). \31\ Michael Lynn and Michael McCall, Beyond Gratitude and Gratuity: A Meta-Analytic Review of the Predictors of Restaurant Tipping. Cornell University Working Paper (2016), available at http://scholarship.sha.cornell.edu/cgi/viewcontent.cgi?article=1021&context=workingpapers. --------------------------------------------------------------------------- Also, research demonstrates a negative correlation between earnings and employee turnover: As earnings increase, employee turnover decreases.\32\ If earnings increase for previously non-tipped employees who are newly added to a tip pool (or tip pools), then employers may see a decreased turnover rate amongst these employees. Reducing turnover may increase productivity, at least partially, because new employees have less firm-specific capital (i.e., skills and knowledge that have productive value in only one particular company) and thus are less productive and require additional supervision and training. Replacing experienced workers with new workers decreases productivity in the short term; avoiding the need to replace experienced workers may, thus, increase productivity. Reduced turnover should also reduce firms' hiring and training costs, leading to increased profitability. Although there may be increased turnover among tipped employees who would lose a portion of the tips they currently receive, thus leading to effects that are opposite in direction to the previously-discussed impacts, employers are best positioned to consider those issues and determine the optimum distribution of tipped income among their staff for the purpose of reducing employee turnover. --------------------------------------------------------------------------- \32\ Rodger W. Griffeth, Peter W. Hom, and Stefan Gaertner. A Meta-Analysis of Antecedents and Correlates of Employee Turnover: Update, Moderator Tests, and Research Implications for the Next Millennium. 26 (3) Journal of Management. 463-488 (2000). --------------------------------------------------------------------------- To the extent employers overall decrease use of the tip credit for traditionally tipped employees because of this proposed rule change, that too may provide benefits to traditionally tipped employees. A guaranteed direct cash wage of at least the full federal minimum wage will improve traditionally tipped employees' participation in various aspects of the marketplace that irregular income from changes over time from tip income may impact adversely. As with the previous paragraph, the benefits to one subset of employees (in this case, those who were previously paid a lower direct wage and received tips and now receive an increased direct wage payment from the employer) may be accompanied by harm to another subset (those who newly receive tips while experiencing an offsetting wage reduction). [[Page 57408]] To the extent employers may otherwise make an arrangement to allocate any customer tips to make capital improvements to their establishments (e.g., enlarging the dining area to accommodate more customers), lower restaurant menu prices, provide new benefits to workers (e.g., paid time off), increase work hours, or hire additional workers, these are also potential benefits to employees and the economy overall that may result under the proposed rule. The rule's transfer impacts could be approached with a model of minimum wages being made less binding by the proposed policy; as such, employment in the affected industries and occupations would, on net, be expected to increase. While some baseline workers could be harmed, due to lower overall compensation, both employers and workers who would lack jobs in the relevant occupations in the absence of the rule would experience benefits. Analysis of reduced deadweight loss would be a standard method for quantifying the gains to society of increased employment resulting from a policy such as the one proposed in this NPRM. Finally, the proposed rule may result in a reduction in litigation. As explained in Part II, above, there has been a significant amount of private litigation in recent years involving the tip pooling and tip retention practices of employers that pay a direct cash wage of at least the Federal minimum wage. Much of that litigation involves the application of the Department's 2011 tip credit regulations providing that an employer's ability to utilize tips received by its employees is restricted even when it has not taken a tip credit. In several cases, employees alleged that their employers, who had paid their tipped employees a direct cash wage of at least the Federal minimum wage, improperly retained some or all of the tips received by employees or mandated that they participate in a tip pool that included non-tipped employees. The proposed rule rescinds those portions of the 2011 regulations that restrict employer use of customer tips when the employer pays at least the full Federal minimum wage and does not claim a section 3(m) tip credit, likely reducing litigation in this area. ii. Additional Discussions Reallocation of tips may have implications on employment and earnings, as well as some impact on the tipping behavior of customers. Due to data limitations, it is difficult to quantify these impacts. Accordingly, in this section, the Department provides a qualitative discussion of the possible impacts of the proposed rule on employment and earnings and customer tipping behavior. 1. Possible Employment and Earnings Impacts of the Transfer of Tips Research on how changes in the minimum required cash wage for tipped employees affect their earnings and employment is scarce, making the effects of these policies difficult to gauge. There is need for more research as tipped employment has been growing considerably. From 1990 to 2016 private sector employment grew by 31.8 percent, while employment in full service restaurants grew by 75 percent.\33\ --------------------------------------------------------------------------- \33\ See Bureau of Labor Statistics, Current Employment Statistics, www.bls.gov/ces. The implicit assumption is that the proportion of tipped workers in these industries remained constant over time, which then implies that there was an increase in tipped employment. --------------------------------------------------------------------------- Intuitively, the effect of this proposed rule will be driven by many economic factors, such as the prevailing wages in the local area, the supply and demand elasticity for labor in the local markets, and the demand elasticity for the restaurant's product. For instance, in a given market, if the equilibrium cash wage for tipped employees is above the minimum required cash wage, an employer has less incentive to change its behavior as a result of the changes proposed in the NPRM. Given that the firm is in a perfectly competitive market, any deviation from the market wage may cause the firm to lose its staff. However, if the conditions in the market are such that the equilibrium cash wage for tipped workers is below the minimum required cash wage, and a worker earns sufficient tips that their cash wage plus the tips that they receive is equal to or greater than the applicable full minimum wage, then their employer may have an incentive to increase the wage to the applicable minimum wage and share the tips that tipped employees receive with, for instance, other lower-wage non-tipped employees. In such a case, an increase in the direct cash wage paid to the tipped workers and the transfer of tips from workers to others can be associated with changes in employment. If the employees' new wage is lower than their prior wage plus tips, and if the tips received by employees are not being redistributed to them, then there may be a decline in the quantity of supplied labor of tipped workers, and therefore in their employment. Alternatively, the employer could effectively redistribute tips to other employees and thus reduce its overall wage bill. If it now requires less direct wages to hire their workers, it may increase the employer's demand for labor.34 35 --------------------------------------------------------------------------- \34\ Daniel Hamermesh. Econometric Studies of Labor Demand and Their Application to Policy Analysis. The Journal of Human Resources, vol. 11, no. 4, 1976, pp. 507-525. JSTOR, www.jstor.org/stable/145429. \35\ Deadweight loss analysis, discussed elsewhere in this regulatory impact analysis, can be used to assess net effects where isolated partial views of the market seem to indicate opposing tendencies. --------------------------------------------------------------------------- However, for reasons such as ``sticky wages'' \36\ in the short run and inflexibility in substituting between labor and capital, the above discussion of the potential effect on employment and wages in this analysis may be only valid in the medium to long run. Further, the overall consequences of this proposed rule on employment and earnings will be driven by the employers' response to this rule; i.e., whether establishments continue taking the tip credit, and what proportion of employers switch from taking the tip credit to not taking the tip credit. --------------------------------------------------------------------------- \36\ ``Sticky wages'' refers to the situation in which workers' wages do not adjust quickly to changes in the overall economy. --------------------------------------------------------------------------- 2. Possible Change in Customers' Tipping Behavior That Could Result From the Transfer of Tips From Employees to Employers In the United States, tipping is a common practice in the eating and drinking places industries. The main reasons that a customer would tip are future service, social norms and fairness, and quality of service.\37\ The theoretical economic justification for tipping is that it incentivizes and rewards good service.\38\ From the employer's standpoint, tipping may also be considered an efficient way of monitoring the efforts of service workers, and a screening device for identifying good and motivated workers.\39\ --------------------------------------------------------------------------- \37\ Ofer H. Azar, The implications of tipping for economics and management, 30 (10) International Journal of Social Economics. 1084- 1094 (2003). \38\ Samuel Estreicher and Jonathan R. Nash, The Law and Economics of Tipping: The Laborer's Perspective, American Law & Economics Association Annual Meetings. 54 (2004). \39\ Ofer H. Azar, Optimal monitoring with external incentives: the case of tipping, Southern Economic Journal. 170-181 (2004). --------------------------------------------------------------------------- Although consideration of future service is a commonly-stated reason for tipping, evidence suggests that customers do not necessarily regard future service as the main reason for tipping. Even non-repeat customers tip. This leads to the other main cited reason for tipping: Social norms surrounding tipping. Tipping may be the result of a positive utility from feeling generous. In addition, customers often feel empathy for the workers who serve them, and they want to show their [[Page 57409]] gratitude by leaving a tip. Customers may also tip as they believe that bartenders, waiters, waitresses, and other workers earn too little for their hard work and therefore want to reward them. Moreover, customers often feel obligated to tip because tips are a major source of income for the workers.40 41 --------------------------------------------------------------------------- \40\ William E. Even and David A. Macpherson, The effect of the tipped minimum wage on employees in the US restaurant industry, 80(3) Southern Economic Journal. 633-655 (2014). \41\ PayScale's Restaurant Report: The Agony and Ecstasy of Food Service Workers, http://www.payscale.com/data-packages/restaurant-report/full-data. --------------------------------------------------------------------------- From the employer's standpoint, the theoretical economic justification for tipping is that it incentivizes and rewards good service; In other words, if workers who provide good service earn large tips, they are more likely to retain their jobs, whereas those workers who earn smaller tips are more likely to choose to quit. Tipping can also be a way of monitoring the efforts of service workers. Firms find it difficult and expensive to monitor and control the quality of intangible and highly customized services that are rendered by their employees. Therefore, tipping can allow customers to directly monitor service providers at lower cost than if employers had to directly monitor their employees.\42\ --------------------------------------------------------------------------- \42\ Ofer H. Azar, Optimal Monitoring with External Incentives: The Case of Tipping, Southern Economic Journal 170-181 (2004). --------------------------------------------------------------------------- The potential impact of the proposed rule on customers' decisions to leave tips for bartenders and servers may depend on how much information the customer has regarding the employer's tip pooling policy. Assuming customers are aware of the employer's policy, changes to tipping behavior, if they occur at all, may differ depending on whether the tips are redistributed into a tip pool that includes a broader group of employees, or otherwise utilized in part (or in full) by the employer. Tipping may also be affected if the change is not welcomed by the staff, leading to poor morale and reduced service quality. D. Analysis of Regulatory Alternatives Executive Orders 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives. Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, reducing costs, harmonizing rules, and promoting flexibility. The Department considered two alternatives as part of determining whether to issue this NPRM: (1) Making no regulatory changes; and (2) Removing the regulatory language that addresses an employers' ability to utilize employee tips even when the employer claims a section 3(m) tip credit. The alternatives are discussed in more detail below. i. Alternative 1 Under the proposed rule, employers would no longer be prohibited from utilizing tips received by employees more broadly so long as they pay at least the full Federal minimum wage in cash and do not claim a section 3(m) tip credit. For the first alternative, the Department would make no regulatory changes and leave in place the limited nonenforcement policy it announced in July 2013. In Oregon Restaurant and Lodging Association v. Solis, 948 F. Supp. 2d 1217 (D. Or. 2013), the U.S. District Court for the District of Oregon declared invalid the Department's 2011 regulations that limit an employer's use of its employees' tips when the employer has not taken a tip credit against its minimum wage obligations, and imposed injunctive relief. As discussed above, on February 23, 2016, the Court of Appeals for the Ninth Circuit reversed the judgment entered by the district court. See Oregon Restaurant and Lodging Ass'n et al. v. Perez, 816 F.3d 1080 (2016), pet. for reh'g and reh'g en banc denied 843 F.3d 355 (Sept. 6, 2016). Notwithstanding the Ninth Circuit's decision, the Department continues to be constrained by the injunctive relief entered by the district court until the Ninth Circuit issues its mandate, which formally notifies the district court of the court of appeals' decision. On September 13, 2016, the Ninth Circuit issued a Stay of the Mandate ``until final disposition [of this litigation] by the Supreme Court.'' Oregon Restaurant and Lodging Ass'n et al. v. Perez, No. 13-35765 (9th Cir., Sept. 13, 2016). For these reasons, the Department is currently prohibited from enforcing its tip retention requirements against the Oregon Restaurant and Lodging Association plaintiffs (which include several associations, one restaurant, and one individual) and members of the plaintiff associations that can demonstrate that they were a member on June 24, 2013. As a matter of enforcement policy, the Department decided at the time the injunction was issued that while the injunction is in place it would not enforce its tip retention requirements against any employer within the Ninth Circuit's jurisdiction that has not taken a tip credit.\43\ The Ninth Circuit has appellate jurisdiction over the states of California, Nevada, Washington, Oregon, Alaska, Idaho, Montana, Hawaii, and Arizona; Guam; and the Northern Mariana Islands. The injunction itself does not prevent the Department from investigating cases that are outside the scope of that limited injunctive relief. For instance, the Department can lawfully investigate such cases involving employers located outside the Ninth Circuit and that are not members of the plaintiff associations involved in the ORLA litigation. Making the Department's limited nonenforcement policy permanent without issuing the NPRM, however, would result in different requirements for different geographic regions, or different employers depending on their membership in certain associations. Such a situation, for example, could mean an employer that has locations within, and outside of, the Ninth Circuit would have different compliance requirements. Also, the limited nonenforcement policy does not impact employees' right to bring private actions under section 16(b) of the FLSA to enforce the tip retention regulations, exposing employers to an uncertain landscape. See 29 U.S.C. 216(b). Moreover, taking no regulatory action does not address the Department's concerns discussed above. See, supra, Need for Rulemaking. --------------------------------------------------------------------------- \43\ As noted in section II and footnote 6, the Department expanded the scope of this initial nonenforcement position when it decided to pursue this rulemaking. --------------------------------------------------------------------------- ii. Alternative 2 For the second alternative, the Department considered removing the regulatory language that reiterates the statutory restrictions in section 3(m) addressing an employer's ability to utilize tips received by employees even when the employer claims a tip credit. The regulations from which the Department considered removing this language include 29 CFR 531.52, 531.54, and 531.59. Under this alternative, for employers that claim a tip credit, the Department would enforce the tip retention requirements of section 3(m) based only on the text of the statute. There is a significant risk, however, that this alternative would create confusion as to tipped employees' right to retain tips when their employer claims a tip credit. The removal of the Department's current regulatory guidance could also increase the risk of employer non-compliance with the statute due to the lack of regulatory guidance. [[Page 57410]] E. Classification as a Deregulatory Action and Estimated Regulatory Cost Savings Under the current regulations, employers are prohibited from reallocating tips or including non-tipped employees in a mandatory tip pool ``whether or not the employer has taken a tip credit under section 3(m) of the FLSA.'' 29 CFR 531.52. This proposed rule would remove such restrictions on the treatment of tips when an employer does not take a tip credit, and would not introduce any new regulatory requirements in replacement of the requirements proposed for elimination. Therefore, it is expected that this proposed rule would, if finalized as proposed, qualify as a ``deregulatory action'' for the purposes of E.O. 13771. As discussed earlier, the Department estimates that this proposed rule would result in Year 1 regulatory familiarization costs of approximately $3.4 million. See, supra, Section VII.B.v. The Department expects that these relatively modest familiarization costs would be more than offset by greater cost savings for employers attributable to the elimination of existing regulatory requirements, but, due to a lack of adequate information about the costs employers presently bear in complying with the regulations identified for elimination, cost savings have not been quantified in this Notice of Proposed Rulemaking. Additionally, the Department notes that reduced deadweight loss in the affected labor markets would likely significantly outweigh the $3.4 million in estimated regulatory familiarization costs. VIII. Initial Regulatory Flexibility Analysis (IRFA) The Regulatory Flexibility Act of 1980 (RFA), 5 U.S.C. 601 et seq., as amended by the Small Business Regulatory Enforcement Fairness Act of 1996, Public Law 104-121 (March 29, 1996), requires federal agencies engaged in rulemaking to consider the impact of their proposals on small entities, consider alternatives to minimize that impact, and solicit public comment on their analyses. The RFA requires the assessment of the impact of a regulation on a wide range of small entities, including small businesses, not-for-profit organizations, and small governmental jurisdictions. Agencies must perform a review to determine whether a proposed or final rule would have a significant economic impact on a substantial number of small entities. 5 U.S.C. 603 and 604. As part of a regulatory proposal, the RFA requires a federal agency to prepare, and make available for public comment, an initial regulatory flexibility analysis that describes the impact of the proposed rule on small entities. 5 U.S.C. 603(a). The Department has conducted, and is publishing here, an initial regulatory flexibility analysis to help small entities better understand the impacts of the proposed rule. The Department invites comments on the number of small entities affected by the proposed rule's requirements, the compliance cost estimates, and whether alternatives exist that will reduce the burden on small entities. A. Why the Department Is Considering Action As explained in greater detail earlier in the analysis, the Department has serious concerns that it incorrectly construed the statute in promulgating its current tip regulations to apply to employers that have paid a direct cash wage of at least the full Federal minimum wage to their tipped employees and serious concerns about those regulations as a policy matter. The Department is therefore proposing to rescind those portions of its tip regulations at 29 CFR part 531, subpart D that impose restrictions on employers that pay a direct cash wage of at least the full Federal minimum wage and do not claim a tip credit against their minimum wage obligations. B. Statement of Objectives and Legal Basis for the Proposed Rule The Department's regulations addressing the treatment of tipped employees under federal law at 29 CFR part 531, subpart D are derived from section 3(m) of the FLSA. See 29 U.S.C. 203(m). As explained earlier, the Department now has serious concerns that it incorrectly construed the statute in promulgating its current tip regulations to apply to employers that do not take a tip credit, i.e., where an employee receives at least the full $7.25 Federal minimum wage directly from the employer, and serious concerns about the regulations as a policy matter, especially in light of changed circumstances. The purpose of Section 3(m)'s tip credit provision is to allow an employer to subsidize a portion of its Federal minimum wage obligation through a credit against the tips given to employees by customers. If an employer pays its tipped employees a direct cash wage of at least the full Federal minimum wage (currently $7.25 per hour) but reallocates equal or greater amount of the tips received by its employees, there is a question as to whether the employer is circumventing the protections of Section 3(m) because it is utilizing tips received by its employees towards its minimum wage obligations to a greater extent than permitted under the statute. Where, however, an employer has paid employees a direct cash wage of at least the full Federal minimum wage and does not reallocate the employee tips directly, but requires that employee tips be distributed to non-tipped employees through a tip pool, there is a strong argument that the statutory protections of Section 3(m) are not circumvented. C. Description of the Number of Small Entities to Which the Proposed Rule Will Apply This section describes the industry or economic sector that will be affected by the proposed rule in total and its small and large entity segments, includes a description of the industry or sector at the time of the proposal, and explains any existing dynamics, such as trends in employment or birth of entities. i. Definition of a Small Entity A ``small entity'' is one that is ``independently owned and operated and which is not dominant in its field of operation.'' \44\ The definition of ``small business'' varies from industry to industry to properly reflect industry size differences. An agency must either use the Small Business Administration (SBA) definition for a small entity or establish an alternative definition for the relevant industries to which a rule applies. --------------------------------------------------------------------------- \44\ The RFA adopts the definition of ``small business concern'' used in the Small Business Act, 15 U.S.C. 632(a)(1). --------------------------------------------------------------------------- In our analysis, the Department uses the Small Business Administration (SBA) size standards, which determine when a business qualifies for small business status.\45\ According to the 2017 standards, Full-service Restaurants (NAICS 722511) and Drinking Places (Alcoholic Beverages) (NAICS 722410) have a size standard of $7.5 million in annual revenue.\46\ The Department used this number to estimate the number of small entities in this analysis. Any firms with annual sales revenue less than this [[Page 57411]] amount will be considered a small business entity in this analysis. --------------------------------------------------------------------------- \45\ U.S. Small Business Administration, Summary of Size Standards by Industry Sector, February 2016. Retrieved June 21, 2017 from https://www.sba.gov/contracting/getting-started-contractor/make-sure-you-meet-sba-size-standards/summary-size-standards-industry-sector. See also full US SBA Size Standard listings at https://www.sba.gov/contracting/getting-started-contractor/make-sure-you-meet-sba-size-standards/table-small-business-size-standards. \46\ Id., Subsector 722. --------------------------------------------------------------------------- ii. Data Sources and Methods The Department used data from several different sources to estimate the number of small entities to which the rule will apply, i.e., affected firms. The Department used the U.S. Census Bureau, 2012 Economic Census \47\ to obtain the number of firms, total number of paid employees, and annual sales/receipts for the two industries in the analysis: Full-service Restaurants (NAICS 722511) and Drinking Places (Alcoholic Beverages) (NAICS 722410). --------------------------------------------------------------------------- \47\ U.S. Census Bureau, 2012 Economic Census https://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2012_US_72SSSZ1&prodType=table. --------------------------------------------------------------------------- From annual receipts/sales, the Department can estimate how many firms fall under the size standard. Table 4 below shows the number of private firms in the two industries by revenue. The number of firms and number of employees are obtained directly from the U.S. Economic Census (2012) data.\48\ --------------------------------------------------------------------------- \48\ The small business size standard for the two industries is $7.5 million in annual revenue. However, the final size category reported in the table is $5 million-$9 million. This is a data limitation because the 2012 Economic Census reported this category of $5 million-$9 million and not $5 million-$7.5 million. Thus, the total number of firms used in the calculation may be slightly higher. --------------------------------------------------------------------------- To obtain the number of bartenders & waiters/waitresses in the two industries, the Department used the BLS industry-occupation mix (2014).\49\ Using the staffing mix of industries to estimate bartenders and wait staff allows for use of the very latest industry data, which builds on the highly-regarded QCEW data set. About 42.9 percent of workers in the Full-service Restaurant industry (NAICS 722511) are bartenders or waiters/waitresses (5 percent are bartenders; 37.9 percent are waiters/waitresses). In Drinking Places (Alcoholic Beverages) (722410), about 63.5 percent are bartenders and waiters/ waitresses (46.1 percent are bartenders; 17.4 percent are waiters/ waitresses). The Department applied these percentages uniformly to total paid employees in these two industries to obtain the number of bartenders and waiters/waitresses across all firm sizes. --------------------------------------------------------------------------- \49\ BLS Industry-Occupation Matrix Data, By Industry, https://www.bls.gov/emp/ep_table_109.htm. --------------------------------------------------------------------------- To determine the number of tipped bartenders & waiters/waitresses, the Department used 57 percent of all bartenders and waiters/waitresses in both industries, based on the share in the CPS data that report usually receiving tips.\50\ --------------------------------------------------------------------------- \50\ As noted above, see, supra, section VII.B.ii, approximately 57 percent of waiters/waitresses and bartenders in the 2016 CPS-MORG survey responded affirmatively when asked if they usually receive tips or commissions. The Department considers employees who responded affirmatively to this question to be tipped employees. --------------------------------------------------------------------------- The annual cost per firm is calculated based on the regulatory familiarization cost ($3.4 million), which amounts to $12.17 per establishment. The Department applied this cost to all sizes of firms since this will be incurred by each firm regardless of the number of affected workers. Finally, the impact of this provision is calculated as the ratio of annual cost per firm to receipts per firm. As shown, the per-firm cost incurred in the first year ($12.17) is less than one percent of annual receipts per small firm under this proposed rule; thus, it does not have any significant burden on small entities. Table 4--Annual Cost to Small Entities -------------------------------------------------------------------------------------------------------------------------------------------------------- Average Number of Number of Number of Number of annual bartenders tipped Annual cost Annual cost per firm as Annual revenue/sales/receipts (2012) firms paid sales per and servers bartenders per firm percent of sales/receipts employees firm ($) \a\ and servers ($) \b\ -------------------------------------------------------------------------------------------------------------------------------------------------------- Firms with revenue less than $100,000.... 10,071 24,455 $61,885 10,491 5,246 $12.17 Less than 0.1%. Firms with revenue of $100,000 to 28,344 129,413 175,461 55,518 27,759 12.17 Less than 0.1%. $249,999. Firms with revenue of $250,000 to 38,105 324,566 366,027 139,239 69,620 12.17 Less than 0.1%. $499,999. Firms with revenue of $500,000 to 40,970 652,792 714,479 280,048 140,024 12.17 Less than 0.1%. $999,999. Firms with revenue of $1,000,000 to 32,965 1,066,544 1,514,178 457,547 228,774 12.17 Less than 0.1%. $2,499,999. Firms with revenue of $2,500,000 to 7,806 499,989 3,330,922 214,495 107,248 12.17 Less than 0.1%. $4,999,999. Firms with revenue of $5,000,000 to 2,021 237,316 6,653,982 101,809 50,905 12.17 Less than 0.1%. $9,999,999. Firms with revenue less than $100,000.... 4,584 N/A - - - 12.17 Firms with revenue of $100,000 to 11,517 44,508 171,075 28,263 14,132 12.17 Less than 0.1%. $249,999. Firms with revenue of $250,000 to 8,873 60,159 350,496 38,201 19,101 12.17 Less than 0.1%. $499,999. Firms with revenue of $500,000 to 5,029 65,124 689,494 41,354 20,677 12.17 Less than 0.1%. $999,999. Firms with revenue of $1,000,000 to 3,046 82,871 1,492,272 52,623 26,312 12.17 Less than 0.1%. $2,499,999. Firms with revenue of $2,500,000 to 668 36,013 3,370,838 22,868 11,434 12.17 Less than 0.1%. $4,999,999. Firms with revenue of $5,000,000 to 156 13,785 6,740,077 8,753 4,377 12.17 Less than 0.1%. $9,999,999. -------------------------------------------------------------------------------------------------------------------------------------------------------- \a\ ``Servers'' stands for waiters & waitresses; `N/A' Not available in Economic census, 2012, withheld to avoid disclosing data for individual companies; data are included in higher level totals; `-' value not calculated as one or more inputs are missing. \b\ The Annual Cost per firm is the regulatory familiarization cost per firm calculated in Section VII.B.iv.i. D. Projected Reporting, Recordkeeping, and Other Compliance Requirements of the Proposed Rule The FLSA sets minimum wage, overtime pay, and recordkeeping requirements for employment subject to its provisions. The FLSA allows an employer to claim a tip credit, as defined by section 3(m) of the statute, toward meeting its minimum wage obligation for employees who customarily and regularly receive more than $30.00 per month in tips. FLSA section 11(c) requires all covered employers to make, keep, and preserve records of employees and of wages, hours, and other conditions of employment. Employers use the records to document compliance with the FLSA, including showing the tips received is not less than the tip credit claimed. The Department has promulgated regulations at 29 CFR part 516 to establish the basic FLSA recordkeeping requirements; this proposal does not alter these recordkeeping requirements. The recordkeeping regulation at 29 CFR 516.28 applies to tipped employees. Since the employees who may be impacted by the proposed changes to the regulations are those for whom the employer pays a direct cash wage of at least the FLSA minimum wage under section 6(a)(1)(C) with no tip credit taken, such employers would not face additional recordkeeping requirements within the scope of 29 CFR 516.28. Therefore, there are no additional recordkeeping requirements beyond those required by other sections of the FLSA under the proposed rule. Similarly, the proposed rule does not [[Page 57412]] have reporting or other compliance requirements. i. Costs to Small Entities The direct costs to employers, specifically, regulatory familiarization, are quantified in the Regulatory Impact Analysis. Regulatory familiarization costs are the costs incurred to read and become familiar with the requirements of the rule. Regardless of business size, the Department estimates that each establishment will spend 15 minutes for regulatory familiarization. As a direct result of this proposed rule, the Department expects total direct employer costs (regulatory familiarization) of $2,362,866 will be incurred by all small entities combined in the first year after the promulgation of the proposed rule: $12.17--the cost of 15 minutes of work by a Compensation/benefits specialist (SOC 13-1141), see, supra, VII.B.iv-- multiplied by 194,155, the number of small entities (see below). Regulatory familiarization costs are only incurred in the first year. The per-firm costs incurred in the first year ($12.17) are less than one percent of the annual average revenue per firm for the small entities shown in Table 4 in Section VIII.C.ii. ii. Number of Small Entities Impacted by the Proposed Rule As noted above, the SBA size standard for Full-service Restaurants (722511) and Drinking Places (Alcoholic Beverages) (722410) is $7.5 million in annual revenue.\51\ There are 194,155 small entities that fall below this size standard in these two selected industries, which accounts for 78 percent of total number of firms in these industries, employing about 3,237,535 employees. As per the calculation in Section VIII.C, the Department estimates the proposed rule would have no significant negative impact. --------------------------------------------------------------------------- \51\ Because of the limitations of the size-class data, the analysis looks at firms with annual revenues up to $9,999,999. --------------------------------------------------------------------------- E. Regulatory Alternatives That Minimize the Impact on Small Entities Section 603(c) of the RFA requires that each initial regulatory flexibility analysis contain a description of any significant alternatives to the proposal that accomplish the statutory objectives and minimize the significant economic impact of the proposal on small entities. The Department considered the following alternatives: i. Differing compliance or reporting requirements that take into account the resources available to small entities. This NPRM makes no changes to existing recordkeeping and reporting requirements. Accordingly, it is not necessary to establish different compliance or reporting requirements for small businesses. ii. The clarification, consolidation, or simplification of compliance and reporting requirements for small entities. The proposed rule imposes no new compliance or reporting requirements. The Department makes available a variety of resources to employers for understanding their obligation and for achieving compliance. iii. The use of performance rather than design standards. Under the proposed rule, employers may achieve compliance through a variety of means. Employers may elect to continue (or not) to take a tip credit under section 3(m) of the FLSA. For those employers who take such a tip credit, the statutory restrictions on employer use of customer tips continue to apply. However, for those employers who pay at least the Federal minimum wage and do not take a section 3(m) tip credit, the proposed rule rescinds those regulatory restrictions. The Department makes available a variety of resources to employers for understanding their obligation and for achieving compliance. iv. An exemption from coverage of the rule, or any part thereof, for such small entities. Creating an exemption from coverage of the NPRM for small businesses is not necessary as this proposed rule proposes to rescind employer restrictions on employer use of customer tips when the employer pays at least the Federal minimum wage in cash and does not take a section 3(m) tip credit. F. Differing Compliance and Reporting Requirements for Small Entities Due to the deregulatory nature of this rulemaking, the Department does not believe that different compliance and reporting requirements for small entities are required. G. Identification, to the Extent Practicable, of All Relevant Federal Rules That May Duplicate, Overlap, or Conflict With the Proposed Rule The Department is not aware of any federal rules that duplicate, overlap, or conflict with this NPRM. IX. Unfunded Mandates Reform Act Analysis The Unfunded Mandates Reform Act of 1995 (UMRA), 2 U.S.C. 1532, requires that agencies prepare a written statement, which includes an assessment of anticipated costs and benefits, before proposing any Federal mandate that may result in excess of $100 million (adjusted annually for inflation) in expenditures in any one year by state, local, and tribal governments in the aggregate, or by the private sector. This rulemaking is not expected to affect state, local, or tribal governments. While this rulemaking would affect employers in the private sector, it is not expected to result in expenditures greater than $100 million in any one year. Please see Section VII.B-C for an assessment of anticipated costs and benefits to the private sector. X. Executive Order 13132, Federalism The Department has (1) reviewed this proposed rule in accordance with Executive Order 13132 regarding federalism and (2) determined that it does not have federalism implications. The proposed rule would not have substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. XI. Executive Order 13175, Indian Tribal Governments This proposed rule would not have substantial direct effects on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes. XII. Effects on Families The undersigned hereby certifies that the proposed rule would not adversely affect the well-being of families, as discussed under section 654 of the Treasury and General Government Appropriations Act, 1999. XIII. Executive Order 13045, Protection of Children This proposed rule would have no environmental health risk or safety risk that may disproportionately affect children. XIV. Environmental Impact Assessment A review of this proposed rule in accordance with the requirements of the National Environmental Policy Act of 1969 (NEPA), 42 U.S.C. 4321 et seq.; the regulations of the Council on Environmental Quality, 40 CFR part 1500 et seq.; and the Departmental NEPA procedures, 29 CFR part 11, indicates that the rule would not have a significant impact on the quality of the human environment. There is, thus, no corresponding environmental [[Page 57413]] assessment or an environmental impact statement. XV. Executive Order 13211, Energy Supply This proposed rule is not subject to Executive Order 13211. It will not have a significant adverse effect on the supply, distribution, or use of energy. XVI. Executive Order 12630, Constitutionally Protected Property Rights This proposed rule is not subject to Executive Order 12630 because it does not involve implementation of a policy that has takings implications or that could impose limitations on private property use. XVII. Executive Order 12988, Civil Justice Reform Analysis This proposed rule was drafted and reviewed in accordance with Executive Order 12988 and will not unduly burden the Federal court system. The proposed rule was: (1) Reviewed to eliminate drafting errors and ambiguities; (2) written to minimize litigation; and (3) written to provide a clear legal standard for affected conduct and to promote burden reduction. XVIII. Summary of Proposed Changes The Department proposes to remove or amend the portions of Sec. Sec. 531.52, 531.54, and 531.59 that impose restrictions on employers that pay a direct cash wage of least the Federal minimum wage and do not claim the section 3(m) tip credit. The proposed rule deletes the fourth sentence of section 531.52, which currently states that ``[t]ips are the property of the employee whether or not the employer has taken a tip credit under section 3(m) of the FLSA.'' The proposed rule also revises the fifth sentence of sections 531.52, the last sentence of section 531.54, and the final sentence of section 531.59(b) to remove language placing restrictions on an employer's use of tips when that employer has not taken a tip credit while retaining language that reflects the statutory restrictions on an employer's use of tips received by its employees when it does take a tip credit. List of Subjects in 29 CFR Part 531 Employment, Labor, Minimum wages, Wages. Bryan L. Jarrett, Acting Administrator, Wage and Hour Division. For the reasons set forth above, the Department proposes to amend Title 29, part 531 of the Code of Federal Regulations as follows: PART 531--WAGE PAYMENTS UNDER THE FAIR LABOR STANDARDS ACT OF 1938 0 1. The authority citation for part 531 continues to read as follows: Authority: Sec. 3(m), 52 Stat. 1060; sec. 2, 75 Stat. 65; sec. 101, 80 Stat. 830; sec. 29(B), 88 Stat. 55, Pub. L. 93-259; Pub. L. 95-151, 29 U.S.C. 203(m) and (t); Pub. L. 104-188, 2105(b); Pub. L. 110-28, 121 Stat. 112. 0 2. Revise Sec. 531.52 to read as follows: Sec. 531.52 General characteristics of ``tips.'' A tip is a sum presented by a customer as a gift or gratuity in recognition of some service performed for him. It is to be distinguished from payment of a charge, if any, made for the service. Whether a tip is to be given, and its amount, are matters determined solely by the customer, who has the right to determine who shall be the recipient of the gratuity. An employer that takes a tip credit is prohibited from using an employee's tips for any reason other than that which is statutorily permitted in section 3(m): As a credit against its minimum wage obligations to the employee, or in furtherance of a valid tip pool. Only tips actually received by an employee as money belonging to the employee may be counted in determining whether the person is a ``tipped employee'' within the meaning of the Act and in applying the provisions of section 3(m) which govern wage credits for tips. * * * * * 0 3. Revise the last sentence of Sec. 531.54 to read as follows: Sec. 531.54 Tip pooling. * * * However, an employer that takes a tip credit must notify its employees of any required tip pool contribution amount, may only take a tip credit for the amount of tips each employee ultimately receives, and may not retain any of the employees' tips for any other purpose. 0 4. In Sec. 531.59, revise the last sentence of paragraph (b) to read as follows: Sec. 531.59 The tip wage credit. * * * * * (b) * * * With the exception of tips contributed to a valid tip pool as described in Sec. 531.54, the tip credit provisions of section 3(m) also require employers that take a tip credit to permit employees to retain all tips received by the employee. [FR Doc. 2017-25802 Filed 12-4-17; 8:45 am] BILLING CODE 4510-27-P
![Federal Register / Vol. 82, No. 232 / Tuesday, December 5, 2017 / Proposed Rules 57395
Signed: October 30, 2017. All comment submissions must include Federal minimum wage, which is
John J. Manfreda, the agency name and Regulatory currently $7.25 per hour. See 29 U.S.C.
Administrator. Information Number (RIN 1235–AA21) 206(a)(1). Under section 3(m) of the
Approved: November 30, 2017. for this NPRM. Response to this NPRM FLSA, which defines the term ‘‘wage,’’
Timothy E. Skud, is voluntary. The Department requests an employer of tipped employees can
that no business proprietary satisfy its obligation to pay those
Deputy Assistant Secretary (Tax, Trade and
Tariff Policy). information, copyrighted information, employees the Federal minimum wage
or personally identifiable information be by paying a lower direct cash wage and
[FR Doc. 2017–26283 Filed 12–4–17; 8:45 am]
submitted in response to this NPRM. counting a limited amount of the tips
BILLING CODE 4810–31–P
Submit only one copy of your comment received by its employees as a partial
by only one method (e.g., persons credit to satisfy the difference between
submitting comments electronically are the direct cash wage paid and the
DEPARTMENT OF LABOR encouraged not to submit paper copies). Federal minimum wage (known as a
Please be advised that comments ‘‘tip credit’’), if it follows certain
Wage and Hour Division
received will become a matter of public statutory requirements. See 29 U.S.C.
record and will be posted without 203(m).
29 CFR Part 531 In 1966, Congress created a tip credit
change to http://www.regulations.gov,
RIN 1235–AA21 including any personal information provision within the definition of a
provided. All comments must be ‘‘wage’’ in section 3(m) of the statute
Tip Regulations Under the Fair Labor received by 11:59 p.m. on the date that permitted an employer to utilize
Standards Act (FLSA) indicated for consideration in this tips received by its employees to
NPRM; comments received after the subsidize up to 50 percent of its
AGENCY: Wage and Hour Division,
comment period closes will not be minimum wage obligations. See Public
Department of Labor.
considered. Commenters should Law 89–601, 101(a), 80 Stat. 830 (1966);
ACTION: Notice of proposed rulemaking; 76 FR 18,832, 18,838.1 In 1974,
request for comments. transmit comments early to ensure
timely receipt prior to the close of the Congress again amended section 3(m) by
SUMMARY: The Department of Labor comment period. Electronic submission providing that an employer could not
(Department) is proposing to rescind via http://www.regulations.gov enables utilize tips received by its employees
portions of its tip regulations issued prompt receipt of comments submitted toward its Federal minimum wage
pursuant to the Fair Labor Standards as DOL continues to experience delays obligation unless, among other things:
Act that impose restrictions on in the receipt of mail in our area. For (1) [its] employee has been informed by the
employers that pay a direct cash wage access to the docket to read background employer of the provisions of this subsection
of at least the full federal minimum documents or comments, go to the and (2) all tips received by such employee
have been retained by the employee, except
wage and do not seek to use a portion Federal eRulemaking Portal at http:// that this subsection shall not be construed to
of tips as a credit toward their minimum www.regulations.gov. prohibit the pooling of tips among employees
wage obligations. This Notice of FOR FURTHER INFORMATION CONTACT: who customarily and regularly receive tips.
Proposed Rulemaking (NPRM) seeks the Melissa Smith, Director of the Division Public Law 93–259, 13(e), 88 Stat. 55
views of the public on the Department’s of Regulations, Legislation, and (1974). Thus, section 3(m) permits an
proposed rescission of those portions of Interpretation, Wage and Hour Division, employer to take a partial credit against
the regulations. U.S. Department of Labor, Room S– its minimum wage obligations on
DATES: Comments must be received on 3502, 200 Constitution Avenue NW., account of tips received by its
or before January 4, 2018. Washington, DC 20210, telephone: (202) employees but only if, among other
ADDRESSES: To facilitate the receipt and 693–0406 (this is not a toll-free things, its tipped employees retain all of
processing of written comments on this number). Copies of this NPRM may be their tips. Section 3(m), however, does
NPRM, the Department encourages obtained in alternative formats (Large not preclude an employer that takes a
interested persons to submit their Print, Braille, Audio Tape or Disc), upon tip credit from implementing a tip pool
comments electronically. You may request, by calling (202) 693–0675 (this in which tips are shared only among
submit comments, identified by is not a toll-free number). TTY/TDD those employees who ‘‘customarily and
Regulatory Information Number (RIN) callers may dial toll-free 1 (877) 889– regularly receive tips.’’ Id.
1235–AA21, by either of the following 5627 to obtain information or request The Department first promulgated
methods: materials in alternative formats. regulations implementing the section
Electronic Comments: Follow the Questions of interpretation and/or 3(m) tip credit in 1967. See 32 FR
instructions for submitting comments enforcement of the agency’s regulations 13,575 (Sept. 28, 1967). In 2011, the
on the Federal eRulemaking Portal may be directed to the nearest WHD Department updated those regulations
http://www.regulations.gov. district office. Locate the nearest office to reflect its then-existing view that the
Mail: Address written submissions to by calling the WHD’s toll-free help line statutory conditions in section 3(m) of
Melissa Smith, Director of the Division at (866) 4US–WAGE ((866) 487–9243) the FLSA require that tipped employees
of Regulations, Legislation, and between 8 a.m. and 5 p.m. in your local retain all of their tips, except for those
Interpretation, Wage and Hour Division, time zone, or log onto WHD’s Web site tips distributed through a tip pool
U.S. Department of Labor, Room S– at http://www.dol.gov/whd/ limited to customarily and regularly
sradovich on DSK3GMQ082PROD with PROPOSALS
3502, 200 Constitution Avenue NW., america2.htm for a nationwide listing of tipped employees, regardless whether
Washington, DC 20210. WHD district and area offices. such employees work for an employer
Instructions: This NPRM is available SUPPLEMENTARY INFORMATION: that takes a tip credit. See, e.g., § 531.52.
through the Federal Register and the
http://www.regulations.gov Web site. I. Executive Summary 1 As discussed further below, Congress changed
You may also access this document via the amount of tips received by employees that an
The Fair Labor Standards Act of 1938 employer can credit against its minimum wage
the Wage and Hour Division’s (WHD) (FLSA) generally requires covered obligation in subsequent amendments to the FLSA.
Web site at http://www.dol.gov/whd/. employers to pay employees at least a See, infra, Sec. III.
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As discussed below, since 2011 there employees for tip sharing among a larger regulatory changes, which in turn
has been a significant amount of private tip pool of employees. This change would affect total tipped income and
litigation involving the tip pooling and could result, for example, in tips being employer behavior. The Department
tip retention practices of employers that shared with employees who are not currently lacks data to quantify possible
pay a direct cash wage of at least the customarily and regularly tipped, such reallocations of tips through newly
Federal minimum wage and do not take as back-of-the-house employees in expanded tip pools to employees who
a tip credit. There has also been restaurants. This type of tip sharing was do not customarily and regularly receive
litigation directly challenging the at issue in Cumbie v. Woody Woo, Inc., tips. The Department presents a
Department’s authority to promulgate 596 F.3d 577 (9th Cir. 2010) (employer primarily qualitative approach to
the 2011 Final Rule as it applies to paid its tipped employees a direct wage assessing the benefits and transfers of
employers that pay a direct cash wage payment that exceeded the Federal the new rule.
of at least the Federal minimum wage. minimum wage and instituted a tip pool The Department estimated the
At the same time, there have been that included back-of-the-house regulatory familiarization costs
changes in state laws that require employees who did not customarily and associated with this proposed rule on an
employers to pay their tipped regularly receive tips, such as establishment basis and calculated the
employees a direct cash wage of at least dishwashers and cooks). If the first year cost to be $3.431 million. The
the Federal minimum wage, which have Department’s rule were adopted as Department discussed other impacts
resulted in more employers being proposed herein, it would expressly and benefits of the proposed rule
unable to claim a tip credit. allow such tip sharing. Employers in qualitatively. For the purposes of E.O.
In part because of these other industries could also adopt 13771, it is expected that this proposed
developments, the Department is similarly varied tip pooling rule would, if finalized as proposed,
concerned about the scope of its current arrangements among tipped and non- qualify as an ‘‘E.O. 13771 deregulatory
tip regulations as applied to employers tipped employees. E.g., Cesarz v. Wynn action.’’
that pay the full Federal minimum wage Las Vegas, 2014 WL 117579 (D. Nev. II. Recent Developments in Tip Pooling
to their tipped employees. The 2014), rev’d and remanded by Oregon Regulations and Litigation; Proposed
Department is also seriously concerned Rest. & Lodging Ass’n v. Perez, 816 F.3d Changes to Regulations; and
that it incorrectly construed the statute 1080 (9th Cir. 2016), reh’g and reh’g en Nonenforcement Policy
in promulgating the tip credit banc denied, 843 F.3d 355 (9th Cir.
2016), pet. for cert. filed (Aug. 1 2016) As noted above, the FLSA’s tip credit
regulations that apply to such
(employer instituted a tip pool through provision was enacted in 1966. WHD
employers. Additionally, the
which dealers’ tips were shared with promulgated regulations implementing
Department seeks to consider whether it
other casino employees in jobs that have the FLSA’s tip credit provision in 1967.
is unnecessary to prohibit the sharing of
not traditionally been customarily and See 29 U.S.C. 203(m), Public Law 89–
tips with employees who do not
regularly tipped). Promulgation of the 601, 101(a), 80 Stat. 830 (1966); 32 FR
customarily receive tips, including
regulation would also make clear that 13,575 (Sept. 28, 1967). Among other
restaurant cooks, dishwashers, and things, the 1967 regulations
other traditionally lower-wage job where an employer does not claim the
tip credit under section 3(m) and pays acknowledged that employers and
classifications, when their employer employees could agree that tips received
does not take a tip credit under FLSA a direct wage that satisfies the FLSA’s
minimum wage requirements, the would belong to the employer, which
section 3(m) and its employees are paid might then use the tips to satisfy the
at least the full Federal minimum wage. treatment and disposition of tips is a
entirety of its minimum wage
The Department is therefore matter of agreement between the
obligations, thus exceeding the then-50
proposing to rescind the parts of its tip employer and employees or of state law.
To estimate the impact of the percent limitation on an employer’s
regulations that bar tip-sharing crediting of tips received by its
arrangements in establishments where proposed rule, the Department looked at
two occupations that constitute a large employees against its minimum wage
the employers pay full Federal obligations. See, e.g., § 531.55(b) (1967)
minimum wage and do not take a tip percentage of tipped workers (waiters,
waitresses, and bartenders) and focused (‘‘[I]f pursuant to an employment
credit against their minimum wage agreement the tips received by an
obligations. This proposed rule applies on two industries (drinking places and
employee must be credited or turned
only to employers that pay direct cash full-service restaurants). Based on the
over to the employer, such sums may,
wages of at least the Federal minimum data used in the regulatory impact
after receipt by the employer, be used by
wage and do not take a tip credit. It does analysis below, the Department
the employer to satisfy the monetary
not apply to employers who pay less estimated that there are up to 1,298,231
requirements of the Act. In such
than the Federal minimum wage and tipped workers in the selected
instances there is no applicability of the
take a tip credit. occupations, and 206,770 full-service
50-percent limitation on tip credits
The proposed removal of the restaurants, and 40,095 drinking places.
There are labor market forces that will provided by section 3(m).’’).
regulatory limitation on an employer’s The 1967 regulations were consistent
ability to utilize tips if it pays a direct affect decisions concerning employer
with Williams v. Jacksonville Terminal
wage of at least the full FLSA minimum use or reallocation of tips. For example,
Co., 315 U.S. 386 (1942), and the
wage will allow for employers to there are certain market factors that may
legislative history of the 1966
provide in their agreements 2 with discourage any changes in tip-sharing
amendments. In Jacksonville Terminal,
sradovich on DSK3GMQ082PROD with PROPOSALS
practices, such as employee resistance
the Supreme Court held that an
2 Similar references to agreements in this notice and heightened turnover among the
employer had complied with the FLSA’s
refer to agreements, whether written or otherwise, customarily tipped employees. The
between an employer and its employees regarding minimum-wage requirements by paying
Department is unable to quantify how
the treatment and disposition of tips received by its employees only those tips that the
such employees. Cf. Williams v. Jacksonville customers will respond to proposed
employees received from customers
Terminal Co., 315 U.S. 386, 397 (1942) (determining
that, ‘‘[i]n businesses where tipping is customary, ‘‘an arrangement [may be] made by which the
and, if tips received by any employee
the tips, in the absence of an explicit contrary employee agrees’’ to a different disposition of such did not satisfy the minimum wage, by
understanding, belong to the recipient,’’ but that tips). paying the difference to that employee.
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Id. at 388–389, 397–398, 403–408. The the 1974 amendments to the FLSA. See Restaurant Association, Washington
Court reasoned that such tips ‘‘belong to 73 FR 43,654, 43,659 (July 28, 2008). Restaurant Association, Alaska Cabaret,
the recipient’’ employee ‘‘in the absence Before it had finalized that rulemaking, Hotel, Restaurant & Retailers
of an explicit contrary understanding,’’ the Department participated as amicus Association, and others (the ORLA
but that an employer and its employees curiae in support of a tipped employee Plaintiffs), challenged the Department’s
could agree that the employer would challenging her employer’s tip pooling authority to promulgate the 2011 Final
‘‘take the compensation paid by arrangement in Cumbie v. Woody Woo, Rule as it applies to employers that do
[customers] for the service [provided by a case before the Ninth Circuit. 596 F.3d not take a tip credit and that pay a direct
the employees], whether paid as a fixed 577. Woody Woo involved an employer cash wage of at least the Federal
charge or as a tip.’’ Id. at 397–398. The that paid its tipped employees a direct minimum wage. See Compl., July 12,
Court ultimately concluded that the wage payment that exceeded the Federal 2012, Oregon Rest. & Lodging Ass’n v.
parties in the case had entered, and the minimum wage and instituted a Solis, 948 F.Supp.2d 1217 (D. Or. 2013).
FLSA did not prohibit, such an mandatory tip pool that included back- The ORLA Plaintiffs sought to have
agreement to ‘‘transfer the tips of-the-house employees who do not those parts of the Department’s 2011 tip
[collected by the employees] . . . to the customarily and regularly receive tips, regulations that apply to employers that
credit of the [employer].’’ Id. at 403; see such as dishwashers and cooks. Id. at do not take a tip credit against their
id. at 403–408. The 1966 legislative 578–79. The district court in Woody minimum wage obligations declared
history similarly reflected that the new Woo had concluded that section 3(m)’s invalid and vacated. See id. at 33–34
statutory ‘‘tip provisions [we]re restrictions on tip pooling apply only (identifying §§ 531.52, 531.54, and
sufficiently flexible to permit the when an employer takes a tip credit 531.59).
continuance of existing practices with against its minimum wage obligations. The plaintiffs alleged, inter alia, that
respect to tips,’’ including practices See Cumbie v. Woody Woo, Inc., 2008 such tip regulations are contrary to the
under which ‘‘an employer and his WL 2884484, at *3 (D. Or. July 25, FLSA’s clear statutory language in
tipped employees . . . agree that all tips 2008). The Department argued before section 3(m), which places restrictions
are to be turned over or accounted for the Ninth Circuit that the district court’s on an employer’s use of tips only when
to the employer to be treated by him as interpretation would permit an the employer takes a tip credit. See id.
part of his gross receipts.’’ S. Rep. 1487, employer to use tips received by its at 18–21. The Department responded by
89th Cong., 2d Sess. 12 (1966). In that employees to a greater extent than that arguing that the FLSA does not address
circumstance, however, ‘‘the employer permitted in section 3(m), since it an employer’s use of tips when the
must pay the employee the full would permit an employer to use tips to employer does not take a tip credit, and
minimum hourly wage, since for all meet its entire minimum wage that the Department appropriately used
practical purposes the employee is not obligation or to subsidize the wages of its rulemaking authority to address that
receiving tip income.’’ Id. non-tipped employees. See Br. of the statutory gap through the 2011 tip
When it amended section 3(m) in Sec’y of Labor as Amicus Curiae, Apr. regulations. See Reply Br. of the Sec’y
1974, Congress added the requirement 29, 2009, at 8, 2009 WL 2609879, of Labor, Dec. 7, 2012, at 5–8, Oregon
that an employer taking a tip credit Cumbie v. Woody Woo, Inc., 596 F.3d Rest. & Lodging Ass’n v. Solis, 948
must permit its tipped employees to 577 (9th Cir. 2010). On February 23, F.Supp.2d 1217 (D. Or. 2013). On June
retain all of their tips, except for those 2010, the Ninth Circuit issued an 7, 2013, the district court granted the
tips distributed through a mandatory tip opinion in Cumbie v. Woody Woo, plaintiffs’ motion for summary
pool that includes only employees who which held in the context of an judgment, ruling that the 2011 tip
customarily and regularly receive tips. employer that did not use tips to pay its regulations were invalid. Oregon Rest. &
See Public Law 93–259, 13(e). employees the minimum wage, that Lodging Ass’n v. Solis, 948 F.Supp.2d
Immediately after the 1974 section 3(m)’s tip retention 1217, 1227 (D. Or. 2013). The court
amendments, WHD stated that its requirements apply only to employers concluded that the regulations were
existing regulations were superseded by that avail themselves of the tip credit contrary to the clear intent of Congress
the amendments to the extent that they provision. 596 F.3d 577, 581 (9th Cir. to limit the use or pooling of tips only
were in conflict with those 2010). to employers that elect to take a tip
amendments, in particular, those The Department finalized its revisions credit. See id. at 1226.
provisions that permitted an employer to the tip regulations in 2011. See 76 FR On August 21, 2013, the Department
to use tips received by its employees 18,832, 18,854–56 (revising, among appealed the district court’s decision to
toward its minimum wage obligations to other provisions, §§ 531.52, 531.54, and the Ninth Circuit. See Br. of the Sec’y
a greater extent than permitted by 531.59). Those regulations, among other of Labor, Dec. 27, 2013, at 8, Oregon
section 3(m). See Wage and Hour things, bar all employers from sharing Rest. & Lodging Ass’n v. Perez, 816 F.3d
Opinion Letter FLSA–626, 1974 WL tips with employees who do not 1080 (9th Cir. 2016) (ORLA). In its brief,
422051 (June 21, 1974), at *2; Wage and customarily and regularly receive tips— the Department argued that the 1974
Hour Opinion Letter WH–310, 1975 WL regardless whether the employers take a amendments to the FLSA expressly
40934, at *1 (Feb. 18, 1975); Wage and tip credit. See, e.g., § 531.52. The delegated broad authority to the
Hour Opinion Letter WH–321, 1975 WL Department’s regulations thus provide Department to implement the terms of
40945, at *1–2 (Apr. 30, 1975). that an employer is prohibited from the amendments and that the
However, although the statutory tip using tips received by employees, Department properly used this authority
credit provision was significantly whether or not it has taken a tip credit, to promulgate the 2011 tip regulations,
sradovich on DSK3GMQ082PROD with PROPOSALS
amended in 1974 and thereafter, WHD except as a credit against its minimum which address a gap in the statutory
did not revise its 1967 tip credit wage obligations to the employee to the scheme: Whether an employer that does
regulations until 2011. See 76 FR extent permitted by that section, or in not take a tip credit is subject to section
18,832, 18,854–56 (Apr. 5, 2011). furtherance of a tip pool that is 3(m)’s restrictions. See id. at 24–28. The
In 2008, the Department published a permissible under that section. Id. Department further argued that the
Notice of Proposed Rulemaking that On July 12, 2012, the Oregon regulations were necessary to prevent a
proposed, among other things, to amend Restaurant and Lodging Association circumvention of section 3(m)’s
WHD’s tip credit regulations to reflect (ORLA), along with the National limitations on an employer’s ability to
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![57398 Federal Register / Vol. 82, No. 232 / Tuesday, December 5, 2017 / Proposed Rules
use or require the pooling of tips. See rehearing en banc. See Pet. for Panel retention practices of employers that
id. at 32–33. The Ninth Circuit Reh’g and Reh’g En Banc, Apr. 6, 2016, pay a direct cash wage of at least the
consolidated the case with Cesarz v. ORLA v. Perez, 816 F.3d 1080 (9th Cir. Federal minimum wage. Much of that
Wynn Las Vegas—a private FLSA action 2016). The ORLA Plaintiffs argued that litigation involves the application of the
in which the plaintiffs-employees, the Ninth Circuit’s decision in ORLA Department’s 2011 tip credit regulations
relying on the Department’s 2011 cannot be reconciled with Woody Woo that bar employers from retaining and
regulations, alleged that the employer and reiterated their contention that the from sharing tips with employees who
violated the FLSA when it required its 2011 tip pooling regulation is an do not customarily and regularly receive
tipped employees to share their tips impermissible interpretation of the tips, even when the employers have not
with non-tipped employees, see 2014 FLSA. See id. at 11, 13. taken a tip credit. For example, in Trejo
WL 117579, at *1 (D. Nev. 2014)— for On September 6, 2016, the ORLA v. Ryman Hospitality Properties, the
purposes of oral argument and panel denied the plaintiffs’ request for employees alleged that their employer,
disposition. See 816 F.3d 1080 n.* (9th panel rehearing, and a majority of the which had paid its tipped employees a
Cir. 2016).3 non-recused active judges voted to direct cash wage of at least the Federal
On February 23, 2016, the Ninth decline en banc review. See ORLA v. minimum wage, improperly required its
Circuit, reversing the district court, Perez, 816 F.3d 1080, reh’g and reh’g en tipped employees to contribute to a tip
upheld the validity of the 2011 tip banc denied, 843 F.3d 355, 356 (9th Cir. pool including employees who were not
regulations in ORLA v. Perez, 816 F.3d 2016). customarily and regularly tipped.
1080, 1090 (9th Cir. 2016). In deciding Judge O’Scannlain, joined by nine Sazzad v. Ryman Hosp. Properties, No.
ORLA, the Ninth Circuit concluded that other judges, dissented. See id. 8:13–cv–02911 (D. Md., April 21, 2014),
Woody Woo held only that section 3(m) (O’Scannlain, J., dissenting). Judge aff’d sub nom, Trejo, 795 F.3d 442 (4th
does not prohibit employers that do not O’Scannlain concluded that the Cir. 2015); see also Malivuk, 2016 WL
take a tip credit from instituting an Department’s tip pooling regulation is 3999878, aff’d on other grounds,—F.
invalid tip pool. See id. at 1088. Having precluded because the Ninth Circuit App’x —, 2017 WL 2491498 (11th Cir.
found that the FLSA is silent with previously held in Woody Woo that the June 9, 2017); see also Brueningsen v.
respect to employers that do not take a FLSA ‘‘clearly and unambiguously Resort Express Inc., 2015 WL 339671 (D.
tip credit, the Ninth Circuit concluded permits employers who forgo a tip Utah Jan. 26, 2015), recons. denied,
that the 2011 tip regulations were a credit to arrange their tip-pooling affairs 2016 WL 1181683 (D. Utah Mar. 25,
reasonable application of the agency’s however they see fit.’’ See id. at 358 2016), appeal filed (10th Cir., Nov. 16,
authority to fill gaps left by the text of (citing Cumbie v. Woody Woo, 596 F.3d 2016). Wynn, 2014 WL 117579 (D. Nev.
the FLSA, because the ‘‘purpose of the at 579 n.6, 581, 581 n.11, 582, 583; Nat’l 2014) (employees alleged that the
Act does not support the view that Cable & Telecomms. Ass’n v. Brand X employer improperly required them to
Congress intended permanently to allow Internet Servs., 545 U.S. 967, 984
contribute to a tip pool that included
employers that do not take a tip credit (2005)). Based on this statutory
their supervisors), rev’d and remanded
to do whatever they wish with their construction, Judge O’Scannlain wrote,
by ORLA, 816 F.3d 1080 (9th Cir. 2016),
employees’ tips.’’ See id. at 1089–1090. ‘‘[T]he Department has not been
reh’g and reh’g en banc denied, 843
On April 6, 2016, the ORLA Plaintiffs delegated authority to ban tip pooling
F.3d 355 (9th Cir. 2016), pet. for cert.
filed a petition for panel rehearing and by employers who forgo the tip credit,
filed (Aug. 1 2016). Therefore, the
and [as such] the Department’s assertion
application of the Department’s
3 While ORLA was pending before the Ninth of regulatory jurisdiction is manifestly
Circuit, the Fourth Circuit heard Trejo v. Ryman regulations to employers who do not
contrary to the statute and exceeds [its]
Hospitality Properties, Inc., an appeal from a take a tip credit has gained increasing
statutory authority.’’ Id. at 363–64
district court’s dismissal of a private FLSA action
(internal quotation marks omitted). importance in recent years.
in which plaintiffs—whose employer did not claim
the tip credit—sought to recoup tips that their The National Restaurant Association Additionally, the Tenth Circuit
employer required them to pay into an allegedly (and other plaintiffs in the OLRA recently ruled in Marlow v. The New
invalid tip pool. 795 F.3d 442 (4th Cir. 2015). The litigation) filed a petition for certiorari Food Guy, a private FLSA case in which
Department submitted a brief as amicus curiae
arguing that the 2011 tip-pooling regulation was with the Supreme Court, asking for the United States participated as amicus
valid and entitled to deference, but also pointing review of the Ninth Circuit’s decision in curiae, that the Department’s 2011 tip
out that the FLSA provides a cause of action only ORLA, and that petition is pending. See regulations are invalid to the extent that
to recover unpaid minimum wages or overtime Sup. Ct. No. 16–920 (certiorari petition they bar an employer from using or
compensation under sections 6 and 7 of the FLSA,
rather than to recover tips in and of themselves filed Jan. 19, 2017). The Wynn sharing tips with employees who do not
under section 3(m), and that plaintiffs had Defendants filed their own petition for customarily and regularly receive tips
expressly disclaimed any minimum wage violation. certiorari with the Supreme Court on when the employer pays a direct cash
See Br. of the United States as Amicus Curiae, Jan. August 1, 2016, which is also still wage of at least the Federal minimum
2015, at *12, *13, 2015 WL 191535, Trejo, 795 F.3d
442 (4th Cir. 2015). In other words, and as pending. Sup. Ct. No. 16–163 (certiorari wage and does not claim a section 3(m)
explained further in footnote 10, infra, Plaintiffs did petition filed (Aug. 1 2016)). tip credit. See Marlow v. New Food Guy,
not argue that the effect of the invalid tip pool was As explained further in Part IV, Inc., 861 F.3d 1157 (10th Cir. 2017). In
to reduce their wages below the minimum wage, below, more employers are unable to Marlow, the plaintiff alleged that the
which would present a valid cause of action under
the FLSA. See id. at *12 (citing 29 U.S.C. 216(b)
claim a tip credit in 2017 than when the employer, which paid the plaintiff a
(private right of action limited to enforcing the Department’s regulations were direct wage of at least the Federal
FLSA’s minimum wage and overtime compensation promulgated in 2011 due to the minimum wage and did not claim a
sradovich on DSK3GMQ082PROD with PROPOSALS
provisions); see also 29 U.S.C. 216(c) (imposing increased number of states that require section 3(m) tip credit, violated section
similar limitations on the Secretary’s ability to
enforce the FLSA)). The Fourth Circuit concluded
employers to pay their tipped 3(m) and the Department’s 2011
that section 3(m) ‘‘simply does not contemplate a employees a direct cash wage of at least regulations by retaining the tips
claim for wages other than minimum wage or the Federal minimum wage. Perhaps employees received from customers. Id.
overtime wages.’’ Trejo, 795 F.3d at 448 (internal because of these changes to state law, at 1158–59. The district court dismissed
quotation marks omitted). See also Malivuk v.
Ameripark, 2016 WL 3999878, aff’d on other
there has been a significant amount of the plaintiff’s claim, concluding that the
grounds,—F. App’x —, 2007 WL 2491498, (11th Cir. private litigation in recent years employer satisfied its obligations under
June 9, 2017). involving the tip pooling and tip the FLSA and that section 3(m) does not
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provide a cause of action for lost tips. matter. In particular, the Department Department moves forward with
Marlow v. New Food Guy, Inc., No. 15– seeks to remove prohibitions on sharing rulemaking.
CV–01327, 2016 WL 4920980, at *1 (D. tips with employees who do not
III. Legislative and Regulatory History
Colo. Feb. 17, 2016).4 On appeal, the customarily and regularly receive tips—
of the Section 3(m) Tip Credit
United States, while also defending the including restaurant cooks,
validity of the Department of Labor’s dishwashers, and other traditionally As discussed above, Congress
2011 tip regulations, argued as a lower-wage job classifications—when amended the FLSA’s tip credit
threshold matter that the plaintiff failed their employer does not take a tip credit provision in 1974 to require an
to plead a claim under the FLSA under FLSA section 3(m) and all employer that elects to take a tip credit
because she did not allege that her employees are paid at least the full against its minimum wage obligations to
employer’s retention of her tips resulted Federal minimum wage. In light of all permit its tipped employees to retain all
in a minimum wage or overtime of these factors, the Department is tips they receive, except for those
violation. See Br. of the United States as proposing to rescind the parts of its tip distributed through a tip pool limited to
Amicus Curiae, Oct. 2016, 2016 WL regulations that apply to employers that customarily and regularly tipped
6566326, at *10. The Tenth Circuit pay a direct cash wage of at least the full employees. See Public Law 93–259,
affirmed the district court’s dismissal of Federal minimum wage and do not take § 13(e). The legislative history
the plaintiff’s claim, holding that the a tip credit against their minimum wage emphasizes that the employee-tip-
text of the FLSA limits an employer’s obligations. The Department also issued retention requirement was not
use of tips only when the employer a nonenforcement policy on July 20, ‘‘intended to discourage the practice of
takes a tip credit, ‘‘leaving [the 2017, whereby WHD will not enforce pooling, splitting, or sharing tips with
Department] without authority to the Department’s regulations on the employees who customarily and
regulate to the contrary.’’ See Marlow, retention of tips received by employees regularly receive tips—e.g., waiters,
861 F.3d at 1163–64.5 with respect to any employee who is bellhops, waitresses, countermen,
The Department has taken into paid a cash wage of not less than the full busboys, [and] service bartenders, etc.’’
account the changed landscape and FLSA minimum wage ($7.25) and for S. Rep. No. 93–690, at 43 (1974). ‘‘On
extensive litigation since promulgating whom their employer does not take an the other hand,’’ the Report explains,
its 2011 Final Rule. In that regard, the FLSA section 3(m) tip credit either for ‘‘the employer will lose the benefit’’ of
dissent to the denial of the petition for 18 months or until the completion of the tip credit if tipped employees are
rehearing en banc in ORLA is notable, this rulemaking, whichever comes first.6 required to share their tips with
not only because of the force of that This nonenforcement policy provides employees who do not customarily and
opinion but also because it drew the nationwide consistency while the regularly receive tips—e.g., janitors,
support of nine other judges in the dishwashers, chefs, laundry room
Ninth Circuit. After considering the 6 This nonenforcement policy extends the attendants, etc.’’ Id. 7
ORLA rehearing dissent and the Tenth agency’s partial nonenforcement policy already in The language from the 1974
Circuit’s decision in Marlow, both of effect. In Oregon Restaurant and Lodging Ass’n v. amendments to section 3(m) is
which state that the Department’s 2011 Solis, 948 F. Supp. 2d 1217 (D. Or. 2013), the U.S. essentially the same as the current
District Court for the District of Oregon declared the
Final Rule exceeded the agency’s Department’s 2011 regulations that limit an
version of the law. See 29 U.S.C.
authority under section 3(m), the employer’s use of tips received by its employees 203(m). Although section 3(m)’s tip
Department is reconsidering its when the employer has not taken a tip credit credit provision has been amended
regulations to the extent that they apply against its minimum wage obligations to be invalid, three times since 1974—in 1977, 1989,
and imposed injunctive relief, as described below.
to employers that pay a direct wage of Notwithstanding the Ninth Circuit’s decision in
and 1996—these amendments changed
at least the Federal minimum wage and ORLA reversing that decision, the Department only the applicable amount of tips
do not claim a credit based on tips to continues to be constrained by the injunctive relief received by employees that could be
satisfy their minimum wage obligation. entered by the district court until the Ninth Circuit used as a credit against an employer’s
issues its mandate, which formally notifies the
The Department has serious concerns district court of the court of appeals’ decision;
minimum wage obligations. See Public
that it incorrectly construed the statute issuance of that mandate has been stayed ‘‘until Law 95–151, § 3(b), 91 Stat. 1245 (1977);
in promulgating its current regulations, final disposition [of this litigation] by the Supreme Public Law 101–157, § 5, 103 Stat. 938
the scope of which extends to Court.’’ ORLA v. Perez, No. 13–35765 (9th Cir. Sept. (1989); and Public Law 104–188,
13, 2016). For these reasons, the Department is
employers that have paid the full currently prohibited from enforcing its tip retention
§ 2105(b), 110 Stat. 1755 (1996).8 In
Federal minimum wage to their tipped requirements against the Oregon Restaurant and
employees, particularly insofar as those Lodging Association plaintiffs (which include 7 The Department has concluded that employer-
employers, rather than taking the tips several associations, one restaurant, and one mandated tip pools described in section 3(m) may
individual) and members of the plaintiff also include employees in occupations with duties
for their own purposes, provide for such associations that can demonstrate that they were a analogous to those of the Senate’s list of
tips to be shared with other employees member on June 24, 2013. The plaintiff associations ‘‘employees who customarily and regularly receive
through a tip pool. The Department also in the Oregon litigation were the National tips’’ (‘‘waiters, bellhops, waitresses, countermen,
has independent and serious concerns Restaurant Association, Washington Restaurant busboys, service bartenders’’), such as barbacks. See
Association, Oregon Restaurant and Lodging Field Operations Handbook 30d04(b). Likewise, the
about those regulations as a policy Association, and Alaska Cabaret, Hotel, Restaurant, Department has concluded that employees who do
and Retailer Association. As a matter of not customarily and regularly receive tips, and
4 Following the Ninth Circuit’s decision in ORLA, therefore may not be included in an employer-
enforcement policy, the Department decided that
the plaintiff moved for reconsideration of the while the injunction is in place it will not enforce mandated tip pool described in § 3(m), include
district court’s decision. See Marlow, 861 F.3d at its tip retention requirements against any employer employees in occupations with duties analogous to
sradovich on DSK3GMQ082PROD with PROPOSALS
1159. The district court denied the plaintiff’s that has not taken a tip credit in jurisdictions the Senate’s list of non-customarily tipped
motion, expressing its agreement with the ORLA within the Ninth Circuit. The Ninth Circuit has occupations (‘‘janitors, chefs or cooks, dishwashers,
dissent. See id.; Order on Plaintiff’s Motion for appellate jurisdiction over the states of California, laundry room attendants’’), such as salad preparers
Reconsideration, Marlow, No. 15–CV–01327 (D. Co. Nevada, Washington, Oregon, Alaska, Idaho, and prep cooks. See Field Operations Handbook
Apr. 4, 2016). Montana, Hawaii, and Arizona; Guam; and the 30d04(f).
5 The plaintiff in Marlow petitioned for panel Northern Mariana Islands. See WHD, Fact Sheet 8 The 1977 amendments to the FLSA decreased
rehearing of the Tenth Circuit’s decision, which the #15: Tipped Employees Under the Fair Labor the section 3(m) tip credit to a maximum of 40
Court denied on July 20, 2017. See Order on Standards Act (FLSA), https://www.dol.gov/whd/ percent of the Federal minimum wage, while the
Appellant’s Petition for Panel Rehearing, Marlow, regs/compliance/whdfs15.pdf (last accessed June 1989 amendments returned it to a maximum of 50
No. 16–1134 (10th Cir. July 20, 2017). 12, 2017). Continued
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amendments to the FLSA in 2007, over to the employer for use by the reasoning 9 and, on that premise,
Congress increased the minimum wage employer in satisfying the monetary concluded that a tipped employee who
in three steps to $7.25 per hour requirements of the Act.’’ See Wage and is required to participate in a tip pool
beginning July 2009, but did not change Hour Opinion Letter FLSA–626, 1974 that does not satisfy the criteria in
the definition of ‘‘wage’’ in section 3(m) WL 422051, at *2 (June 21, 1974). section 3(m) is effectively required to
for purposes of applying the tip credit ‘‘contribute part of his or her property
The Department opined shortly after
formula. Public Law 110–28, § 8102(a), to the employer or to other persons for
the 1974 amendments that ‘‘an
121 Stat. 112 (2007). Thus, the the benefit of the employer.’’ Id. at *2.
maximum tip credit that an employer is employer may not take advantage of
Thus, under the erroneous reasoning
permitted to claim under section 3(m) Section 3(m) by using any part of his
reflected in that letter, even when an
today is $5.12 per hour—the current employee’s tips as a credit to meet his employer does not claim a tip credit to
Federal minimum wage, $7.25 per hour, monetary obligation unless the reduce the direct cash wage it pays and
29 U.S.C. 206(a)(1), minus $2.13—or 71 employee is permitted to keep all tips’’ does not use tips to fulfill any part of
percent of the current Federal minimum and, if an employer takes tips received its minimum wage obligation to its
wage. See 76 FR 18,832, 18,839. by an employee, ‘‘then, in order to come tipped employees, mandating that a
As explained above, the Department into compliance, such employer must tipped employee contribute to a pool
promulgated its initial tip regulations in return the tips and pay the full statutory that includes employees in occupations
1967, one year after Congress created minimum wage.’’ Wage and Hour that do not customarily and regularly
the tip credit in section 3(m), and Opinion Letter WH–310, 1975 WL receive tips ‘‘would become an issue
several years before the 1974 40934, at *1 (Feb. 18, 1975); see Wage under the minimum wage provisions of
amendments to section 3(m)’s tip and Hour Opinion Letter WH–386, 1976 the Act,’’ if the ‘‘employer does not pay
provisions. 32 FR 13,575 (Sept. 28, WL 41739, at *3 (July 12, 1976) a sufficiently high cash wage to
1967). Consistent with the Department’s (‘‘[E]mployers must pay tipped reimburse such employee for such loss,
understanding of the 1966 amendments, employees at least half of the applicable plus at least the minimum wage.’’ Id.10
the 1967 tip regulations permitted minimum wage (from their own In 2011, the Department issued a
agreements under which tips received pockets) for each hour worked, and may Final Rule addressing tip pooling and
by employees would be turned over to take a tip credit of no more than 50 other uses of tips. See 76 FR 18,832,
the employer, which could then use the percent of the required minimum 18,842. Revised § 531.52 provides in
tips to pay the Federal minimum wage. wage.’’). To conclude otherwise, the
Cf. S. Rep. 1487, 89th Cong., 2d Sess. 12 relevant part that:
Department reasoned, would enable an
(1966) (explaining that such practices employer to circumvent section 3(m)’s 9 The opinion letter, in the context of an employer
could continue under the 1966 restriction that employers use no more that did not take a 3(m) tip credit, stated that ‘‘[t]he
amendments). than a limited portion of tips received courts have made clear that tips are the property of
Shortly after the 1974 statutory the employee to whom they are given.’’ 1989 WL
by employees to satisfy their Federal
amendments, however, the Department 610348, at *2 (citing Barcellona v. Tiffany English
minimum wage obligations. Cf. Woody Pub, Inc., 597 F.2d 464, 466–467 (5th Cir. 1979)).
addressed the impact of the
amendments on its tip regulations and Woo, 596 F.3d at 579 n.7. The Department acknowledges that that statement
is incorrect. Barcellona concluded that ‘‘[i]f there
stated that its then-existing regulations The opinion letters issued shortly was no agreement as to ownership, then the tips
were superseded by the amendments to after the 1974 amendments were were the property of the recipient,’’ and that the
the extent tha they were in conflict. primarily focused on whether it would trial evidence in that particular case supported the
factual finding that no such agreement existed. 597
Specifically, when asked about the constitute an impermissible F.2d at 467 (emphasis added) (citing Williams v.
legality of an agreement under which circumvention of section 3(m) of the Act Jacksonville Terminal Co., 315 U.S. 386, 397
‘‘the employer would retain all monies for an employer to utilize tips received (1940)); cf. Richard v. Marriott Corp., 549 F.2d 303,
generated by tips’’ and directly pay its by its employees to satisfy its minimum 304–305 (4th Cir. 1977) (concluding that ‘‘tips
belong to the employee to whom they are left’’ in
employees at the minimum wage rate, wage obligations to a greater extent than circumstances in which no contrary agreement
the Department stated that ‘‘[t]he Congress expressly permitted in the existed and the employer simply undertook to pay
amendments to section 3(m) of the Act,’’ Act’s tip credit provision. In a 1989 ‘‘the difference between the tips and the [minimum]
which specified that an employer’s opinion letter, however, the Department hourly wage’’).
10 The Department similarly stated in the
wage credit for tips (up to 50% of the opined that merely requiring tipped preamble to the 2011 Final Rule that, if, by
minimum wage) could not exceed the employees to participate in a tip pool requiring tipped employees to participate in a tip
amount of tips actually received by the that is not limited to employees in pool that does not satisfy the standards in section
employee, ‘‘would have no meaning or customarily and regularly tipped 3(m) or by claiming and using the tips itself, such
effect unless they prohibit agreements an employer deducts sufficient tips to ‘‘reduce the
occupations—i.e., a tip pool in a form employer’s direct wage payment to an amount
under which tips are credited or turned not expressly authorized by section below the minimum wage,’’ the employer would
3(m)—may also violate the FLSA, even violate section 6 of the FLSA and be subject to suit
percent of the Federal minimum wage. See Public under section 16 or 17. 76 FR 18,832, 18,842; see
Law 95–151, §§ 2(a), 3(b), 91 Stat. 1245 (1977);
when an employer has paid all of the also Notice of Proposed Rulemaking, 73 FR 43,654,
Public Law 101–157, §§ 2, 5, 103 Stat. 938 (1989). tipped and non-tipped employees in the 43,659 (July 28, 2008) (explaining that if an
The 1996 amendments ‘‘froze’’ the direct cash wage pool a direct cash wage equal to or ‘‘employer paid the employee a direct wage in
that an employer must pay its tipped employees greater than the Federal minimum wage. excess of the minimum wage’’ it ‘‘would be able to
under section 3(m) at a minimum of 50 percent of make deductions [from the employee’s tips] so long
the minimum wage in effect on the date of their
See Wage and Hour Opinion Letter WH– as they did not reduce the direct wage payment
sradovich on DSK3GMQ082PROD with PROPOSALS
enactment, or $2.13 per hour. See Public Law 104– 536, 1989 WL 610348, at *3 (Oct. 26, below the minimum wage’’); Br. of the United
188, §§ 2104(b), § 2105(b), 110 Stat. 1755 (1996). 1989). In that letter, the Department States as Amicus Curiae, Jan. 2015, at 2, 2015 WL
This change shifted the amount of the maximum tip stated that tips are an employee’s 191535, Trejo v. Ryman Hospitality Indus., 795 F.3d
credit from a fixed percentage of the current Federal 442 (4th Cir. Jan. 2015) (pointing out that private
minimum wage to the difference between the property even when an employer pays plaintiffs who did not allege that the effect of their
current Federal minimum wage and the frozen a direct cash wage of at least the full employers’ tip pool was to reduce their wages
minimum direct cash payment, thus allowing the Federal minimum wage and does not below the minimum wage in violation of section 6
percentage of the Federal minimum wage covered failed to plead a cause of action under the FLSA
by the tip credit to increase as the minimum wage
claim a tip credit against its minimum because section 3(m) of the Act does not provide
rose. wage obligations based on erroneous a freestanding right to recover tips).
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Tips are the property of the employee Commission, 46 Cal. 3d 1262, 1275–76 $9.35 in January 2018. Haw. Rev. Stat.
whether or not the employer has taken a tip (Cal. 1988) (holding that Labor Code Ann. § 387–2. In December 2015, New
credit under section 3(m) of the FLSA. The section 351, as amended in 1975, ‘‘bar[s] York increased the direct cash wage
employer is prohibited from using an the establishment of a minimum wage employers that take a tip credit must
employee’s tips, whether or not it has taken
a tip credit, for any reason other than that
for tipped employees lower than the pay tipped food service employees and
which is statutorily permitted in section generally applicable minimum wage.’’); other service employees to at least $7.50
3(m): As a credit against its minimum wage Moen v. Las Vegas Int’l Hotel, Inc., 402 per hour. See 12 NY ADC 146–1.3 (Dec.
obligations to the employee, or in furtherance F. Supp. 157, 158 (D. Nev. 1975) 4, 2015).12 And in November 2016,
of a valid tip pool. (outlining requirements of Nev. Rev. Arizona and Colorado enacted ballot
Stat. § 608.160); Wash. Att’y Gen. Op. measures that will increase the direct
Id. at 18,855 (emphasis added). Under
1974 No. 18, 1974 WL 168752 cash wage employers that take a tip
the current regulations an employer that
(concluding that hotels and restaurants credit must pay tipped employees to at
pays a direct cash wage equal to or
must pay the full Washington minimum least the current Federal minimum wage
greater than the Federal minimum
wage to their tipped employees, and by January 2020. See Ariz. Proposition
wage—just like an employer that claims
may not take advantage of the section 206, approved Nov. 8, 2016 (amending
a tip credit to reduce the direct cash
3(m) tip credit, since, ‘‘as it has long Ariz. Rev. Stat. Ann. § 23–363(C)); 2016
wage it pays—may require tipped
been administratively construed by the Colo. Legis. Serv. Init. Pet. 101
employees to participate in a tip pool
department of labor and industries, tips (amending Colo. Const. art. XVIII, § 15).
that is limited to employees in Due to these changes, the share of
customarily and regularly tipped are . . . not included as a part of an
employee’s wages for the purposes of servers, bellhops and porters, counter
occupations, but it may not require attendants, bartenders, and dining room
tipped employees to participate in a tip the Washington law.’’); WHD, Minimum
Wages for Tipped Employees, January 1, attendants and bartender helpers 13 with
pool that includes employees who are employers that are or will be required
not in customarily and regularly tipped 2003, https://www.dol.gov/whd/state/
tipped2003.htm.11 under state law to pay a direct cash
occupations. Nor may an employer that wage of at least the Federal minimum
pays a direct cash wage equal to or Since the Department promulgated
the 2011 Final Rule, a number of wage to all or a portion of their tipped
greater than the Federal minimum wage employees has almost doubled, from
use its tips received by its employees for additional states have increased the
direct cash wage an employer must pay approximately 17 percent in 2011 to
any other purpose. approximately 31 percent today. See
some or all tipped employees under
IV. Recent Changes in State Tip Pooling state law. In August 2014, Minnesota— Table A: WHD Analysis of BLS Data
Laws which prohibits employers from taking Regarding States that Require Employers
a tip credit against the state minimum to Pay Tipped Employees a Direct Cash
As a result of market forces and Wage At Least Equal to the Federal
changes in state wage laws, the number wage—increased its minimum wage for
large employers from $6.15 per hour to Minimum Wage.
of employers paying tipped employees a
direct cash wage that is equal to or $8.00 per hour (it was increased on V. The Department Is Proposing To
greater than the Federal minimum wage August 1, 2016 to $9.50 per hour) and Rescind Portions of Its Tip Regulations
(and thus not claiming a section 3(m) tip increased its minimum wage for small The Department seeks public
credit) has increased since the employers from $5.25 per hour to $7.25 comments, which should include
Department promulgated the 2011 Final per hour beginning in August 2015 (it is supporting data whenever possible, on
Rule. The Department believes that currently $7.75 per hour). See Minn. the proposed rescission of those
these changes also merit reconsideration Stat. Ann. § 177.24, subd. 1, 2; 2014 portions of its 2011 tip regulations that
of the tip pooling restrictions imposed Minn. Sess. Law Serv. Ch. 166. As a apply to employers that pay tipped
on employers that do not claim a tip result, employers in Minnesota now employees a direct cash wage that is
credit under section 3(m). must pay tipped employees a direct equal to or greater than the Federal
Historically, six western states cash wage that is greater than the minimum wage and that do not claim a
(Alaska, California, Montana, Nevada, Federal minimum wage. In January tip credit. The Department’s current
Oregon, and Washington) have 2015, Hawaii—which permits regulations require that tipped
prohibited employers from using tips employers to take a tip credit but employees retain all tips they receive
received by employees as a credit requires that the combined cash wage regardless whether the employer takes a
against their state minimum wages—all and tips must equal at least $7.00 more
of which today equal or exceed the than the state minimum wage— 12 Effective December 31, 2016, New York has
Federal minimum wage—thereby increased the direct cash wage four schedules of direct cash wages that employers
preventing employers in these states employers must pay tipped employees must pay tipped service workers and food service
to $7.25 per hour (the current Federal workers based on employer size and geographic
from claiming a section 3(m) tip credit location. See N.Y. Comp. Codes R. & Regs. tit. 12,
to reduce the direct cash wage they pay minimum wage). Haw. Rev. Stat. Ann. § 146–1.3. Currently, the lowest direct cash wage an
without incurring liability under state § 387–2. The minimum direct cash wage employer can pay to a tipped food service worker
law. See Alaska Stat. § 23.10.065(a); Cal. an employer must pay a tipped in any part of the state is $7.50 per hour and the
employee in Hawaii is currently $8.50 lowest direct cash wage an employer can pay a
Lab. Code § 351 (amended 1975); Mont. tipped service employee in any part of the state is
Code Ann. §§ 39–3–402, 39–2–404 per hour and is scheduled to increase to $8.10 per hour. See id.
(originally enacted Sec. 2, Ch. 417 13 The BLS occupational categories of ‘‘Waiters
sradovich on DSK3GMQ082PROD with PROPOSALS
11 Additionally, Connecticut has required and Waitresses,’’ ‘‘Baggage Porters and Bellhops,’’
(1971)), Mont. Admin. R. 24.16.1508(1);
employers to pay bartenders a direct cash wage of ‘‘Counter Attendants, Cafeteria, Food Concession,
Nev. Rev. Stat. § 608.160(1)(b); Or. Rev. at least the Federal minimum wage since 2001. See and Coffee Shop,’’ ‘‘Bartenders,’’ and ‘‘Dining Room
Stat. § 653.035; Rev. Code Wash. Conn. Gen. Stat. Ann. 31–58, 31–60; Conn. Pub. and Cafeteria Attendants and Bartender Helpers’’
49.46.020, Wash. Admin. Code 296– Act. No. 00–144 (May 26, 2000). Connecticut most closely correspond to the illustrative list of
126–022 (effective 1974); see also currently requires bartenders to be paid a direct ‘‘customarily and regularly tipped’’ occupations in
cash wage of at least $8.23 per hour. See Conn. Gen. the Senate Report accompanying the 1974
Alaska School Bus Safety Act, 1990 Stat. Ann. 31–58, 31–60. It permits employers to amendments to the FLSA: ‘‘waiters, bellhops,
Alaska Laws Ch. 12, § 23.10.065 (1990); pay other tipped employees a minimum direct cash waitresses, countermen, busboys, [and] service
Henning v. Industrial Welfare wage of $6.38. See id. bartenders.’’ See S. Rep. No. 93–690, at 43 (1974).
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gratitude by leaving a tip. Customers employers’ ability to utilize employee jurisdiction over the states of California,
may also tip as they believe that tips even when the employer claims a Nevada, Washington, Oregon, Alaska,
bartenders, waiters, waitresses, and section 3(m) tip credit. The alternatives Idaho, Montana, Hawaii, and Arizona;
other workers earn too little for their are discussed in more detail below. Guam; and the Northern Mariana
hard work and therefore want to reward Islands. The injunction itself does not
i. Alternative 1
them. Moreover, customers often feel prevent the Department from
obligated to tip because tips are a major Under the proposed rule, employers investigating cases that are outside the
source of income for the workers.40 41 would no longer be prohibited from scope of that limited injunctive relief.
From the employer’s standpoint, the utilizing tips received by employees For instance, the Department can
theoretical economic justification for more broadly so long as they pay at least lawfully investigate such cases
tipping is that it incentivizes and the full Federal minimum wage in cash involving employers located outside the
rewards good service; In other words, if and do not claim a section 3(m) tip Ninth Circuit and that are not members
workers who provide good service earn credit.
large tips, they are more likely to retain of the plaintiff associations involved in
their jobs, whereas those workers who For the first alternative, the the ORLA litigation. Making the
earn smaller tips are more likely to Department would make no regulatory Department’s limited nonenforcement
choose to quit. Tipping can also be a changes and leave in place the limited policy permanent without issuing the
way of monitoring the efforts of service nonenforcement policy it announced in NPRM, however, would result in
workers. Firms find it difficult and July 2013. In Oregon Restaurant and different requirements for different
expensive to monitor and control the Lodging Association v. Solis, 948 F. geographic regions, or different
quality of intangible and highly Supp. 2d 1217 (D. Or. 2013), the U.S. employers depending on their
customized services that are rendered District Court for the District of Oregon membership in certain associations.
by their employees. Therefore, tipping declared invalid the Department’s 2011 Such a situation, for example, could
can allow customers to directly monitor regulations that limit an employer’s use mean an employer that has locations
service providers at lower cost than if of its employees’ tips when the within, and outside of, the Ninth Circuit
employers had to directly monitor their employer has not taken a tip credit would have different compliance
employees.42 against its minimum wage obligations, requirements. Also, the limited
The potential impact of the proposed and imposed injunctive relief. As nonenforcement policy does not impact
rule on customers’ decisions to leave discussed above, on February 23, 2016, employees’ right to bring private actions
tips for bartenders and servers may the Court of Appeals for the Ninth under section 16(b) of the FLSA to
depend on how much information the Circuit reversed the judgment entered enforce the tip retention regulations,
customer has regarding the employer’s by the district court. See Oregon exposing employers to an uncertain
tip pooling policy. Assuming customers Restaurant and Lodging Ass’n et al. v. landscape. See 29 U.S.C. 216(b).
are aware of the employer’s policy, Perez, 816 F.3d 1080 (2016), pet. for
Moreover, taking no regulatory action
changes to tipping behavior, if they reh’g and reh’g en banc denied 843 F.3d
does not address the Department’s
occur at all, may differ depending on 355 (Sept. 6, 2016). Notwithstanding the
concerns discussed above. See, supra,
whether the tips are redistributed into a Ninth Circuit’s decision, the Department
Need for Rulemaking.
tip pool that includes a broader group continues to be constrained by the
of employees, or otherwise utilized in injunctive relief entered by the district ii. Alternative 2
part (or in full) by the employer. court until the Ninth Circuit issues its
Tipping may also be affected if the mandate, which formally notifies the For the second alternative, the
change is not welcomed by the staff, district court of the court of appeals’ Department considered removing the
leading to poor morale and reduced decision. On September 13, 2016, the regulatory language that reiterates the
service quality. Ninth Circuit issued a Stay of the statutory restrictions in section 3(m)
Mandate ‘‘until final disposition [of this addressing an employer’s ability to
D. Analysis of Regulatory Alternatives
litigation] by the Supreme Court.’’ utilize tips received by employees even
Executive Orders 12866 and 13563 Oregon Restaurant and Lodging Ass’n et when the employer claims a tip credit.
direct agencies to assess all costs and al. v. Perez, No. 13–35765 (9th Cir., The regulations from which the
benefits of available regulatory Sept. 13, 2016). For these reasons, the Department considered removing this
alternatives. Executive Order 13563 Department is currently prohibited from language include 29 CFR 531.52, 531.54,
emphasizes the importance of enforcing its tip retention requirements and 531.59. Under this alternative, for
quantifying both costs and benefits, against the Oregon Restaurant and employers that claim a tip credit, the
reducing costs, harmonizing rules, and Lodging Association plaintiffs (which Department would enforce the tip
promoting flexibility. The Department include several associations, one
considered two alternatives as part of retention requirements of section 3(m)
restaurant, and one individual) and based only on the text of the statute.
determining whether to issue this members of the plaintiff associations
NPRM: (1) Making no regulatory that can demonstrate that they were a There is a significant risk, however,
changes; and (2) Removing the member on June 24, 2013. As a matter that this alternative would create
regulatory language that addresses an of enforcement policy, the Department confusion as to tipped employees’ right
decided at the time the injunction was to retain tips when their employer
40 William E. Even and David A. Macpherson,
claims a tip credit. The removal of the
sradovich on DSK3GMQ082PROD with PROPOSALS
The effect of the tipped minimum wage on issued that while the injunction is in
employees in the US restaurant industry, 80(3) place it would not enforce its tip Department’s current regulatory
Southern Economic Journal. 633–655 (2014). retention requirements against any guidance could also increase the risk of
41 PayScale’s Restaurant Report: The Agony and
employer within the Ninth Circuit’s employer non-compliance with the
Ecstasy of Food Service Workers, http:// statute due to the lack of regulatory
www.payscale.com/data-packages/restaurant-
jurisdiction that has not taken a tip
report/full-data. credit.43 The Ninth Circuit has appellate guidance.
42 Ofer H. Azar, Optimal Monitoring with External
Incentives: The Case of Tipping, Southern 43 As noted in section II and footnote 6, the nonenforcement position when it decided to pursue
Economic Journal 170–181 (2004). Department expanded the scope of this initial this rulemaking.
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assessment or an environmental impact part 531 of the Code of Federal DEPARTMENT OF HOMELAND
statement. Regulations as follows: SECURITY
XV. Executive Order 13211, Energy PART 531—WAGE PAYMENTS UNDER Coast Guard
Supply THE FAIR LABOR STANDARDS ACT
This proposed rule is not subject to OF 1938 33 CFR Part 165
Executive Order 13211. It will not have [Docket Number USCG–2017–0964]
a significant adverse effect on the ■ 1. The authority citation for part 531
supply, distribution, or use of energy. continues to read as follows: RIN 1625–AA00
Authority: Sec. 3(m), 52 Stat. 1060; sec. 2,
XVI. Executive Order 12630, 75 Stat. 65; sec. 101, 80 Stat. 830; sec. 29(B), Safety Zone; Oregon Inlet, Dare
Constitutionally Protected Property 88 Stat. 55, Pub. L. 93–259; Pub. L. 95–151, County, NC
Rights 29 U.S.C. 203(m) and (t); Pub. L. 104–188,
2105(b); Pub. L. 110–28, 121 Stat. 112.
AGENCY: Coast Guard, DHS.
This proposed rule is not subject to ACTION: Notice of proposed rulemaking.
Executive Order 12630 because it does ■ 2. Revise § 531.52 to read as follows:
not involve implementation of a policy SUMMARY: The Coast Guard proposes to
§ 531.52 General characteristics of ‘‘tips.’’ establish a temporary safety zone on the
that has takings implications or that
could impose limitations on private A tip is a sum presented by a navigable waters of Oregon Inlet in Dare
property use. customer as a gift or gratuity in County, North Carolina in support of
recognition of some service performed construction of the new Herbert C.
XVII. Executive Order 12988, Civil for him. It is to be distinguished from Bonner Bridge. This temporary safety
Justice Reform Analysis payment of a charge, if any, made for zone is intended to protect mariners,
This proposed rule was drafted and the service. Whether a tip is to be given, vessels, and construction crews from the
reviewed in accordance with Executive and its amount, are matters determined hazards associated with installing the
Order 12988 and will not unduly solely by the customer, who has the navigation span, and will restrict vessel
burden the Federal court system. The right to determine who shall be the traffic from the bridge’s navigation span
proposed rule was: (1) Reviewed to recipient of the gratuity. An employer as it is under construction by preventing
eliminate drafting errors and that takes a tip credit is prohibited from vessel traffic on a portion of Oregon
ambiguities; (2) written to minimize using an employee’s tips for any reason Inlet. Entry of vessels or persons into
litigation; and (3) written to provide a other than that which is statutorily this safety zone is prohibited. We invite
clear legal standard for affected conduct permitted in section 3(m): As a credit your comments on this proposed
and to promote burden reduction. against its minimum wage obligations to rulemaking.
the employee, or in furtherance of a
XVIII. Summary of Proposed Changes DATES: Comments and related material
valid tip pool. Only tips actually
must be received by the Coast Guard on
The Department proposes to remove received by an employee as money
or before December 20, 2017.
or amend the portions of §§ 531.52, belonging to the employee may be
counted in determining whether the ADDRESSES: You may submit comments
531.54, and 531.59 that impose identified by docket number USCG–
restrictions on employers that pay a person is a ‘‘tipped employee’’ within
the meaning of the Act and in applying 2017–0964 using the Federal
direct cash wage of least the Federal eRulemaking Portal at http://
minimum wage and do not claim the the provisions of section 3(m) which
govern wage credits for tips. www.regulations.gov. See the ‘‘Public
section 3(m) tip credit. The proposed Participation and Request for
rule deletes the fourth sentence of * * * * * Comments’’ portion of the
section 531.52, which currently states ■ 3. Revise the last sentence of § 531.54
SUPPLEMENTARY INFORMATION section for
that ‘‘[t]ips are the property of the to read as follows: further instructions on submitting
employee whether or not the employer comments.
has taken a tip credit under section 3(m) § 531.54 Tip pooling.
of the FLSA.’’ The proposed rule also * * * However, an employer that FOR FURTHER INFORMATION CONTACT: If
revises the fifth sentence of sections takes a tip credit must notify its you have questions about this proposed
531.52, the last sentence of section employees of any required tip pool rulemaking, contact Petty Officer
531.54, and the final sentence of section contribution amount, may only take a Matthew Tyson, Waterways
531.59(b) to remove language placing tip credit for the amount of tips each Management Division, U.S. Coast Guard
restrictions on an employer’s use of tips employee ultimately receives, and may Sector North Carolina, Wilmington, NC;
when that employer has not taken a tip not retain any of the employees’ tips for telephone: (910) 772–2221, email:
credit while retaining language that any other purpose. Matthew.I.Tyson@uscg.mil.
reflects the statutory restrictions on an ■ 4. In § 531.59, revise the last sentence SUPPLEMENTARY INFORMATION:
employer’s use of tips received by its of paragraph (b) to read as follows:
I. Table of Abbreviations
employees when it does take a tip
§ 531.59 The tip wage credit. CFR Code of Federal Regulations
credit.
* * * * * DHS Department of Homeland Security
List of Subjects in 29 CFR Part 531 (b) * * * With the exception of tips FR Federal Register
sradovich on DSK3GMQ082PROD with PROPOSALS
contributed to a valid tip pool as NPRM Notice of proposed rulemaking
Employment, Labor, Minimum wages, § Section
Wages. described in § 531.54, the tip credit
U.S.C. United States Code
provisions of section 3(m) also require COTP Captain of the Port
Bryan L. Jarrett, employers that take a tip credit to
Acting Administrator, Wage and Hour permit employees to retain all tips II. Background, Purpose, and Legal
Division. received by the employee. Basis
For the reasons set forth above, the [FR Doc. 2017–25802 Filed 12–4–17; 8:45 am] On October 10, 2017, the North
Department proposes to amend Title 29, BILLING CODE 4510–27–P Carolina Department of Transportation
VerDate Sep<11>2014 18:01 Dec 04, 2017 Jkt 244001 PO 00000 Frm 00031 Fmt 4702 Sfmt 4702 E:\FR\FM\05DEP1.SGM 05DEP1](https://thefederalregister.org/doc/82_FR_57627/page/19.svg)
Document Created: 2017-12-04 23:44:43
Document Modified: 2017-12-04 23:44:43
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Proposed Rules | |
| Action | Notice of proposed rulemaking; request for comments. | |
| Dates | Comments must be received on or before January 4, 2018. | |
| Contact | Melissa Smith, Director of the Division of Regulations, Legislation, and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S-3502, 200 Constitution Avenue NW., Washington, DC 20210, telephone: (202) 693-0406 (this is not a toll-free number). Copies of this NPRM may be obtained in alternative formats (Large Print, Braille, Audio Tape or Disc), upon request, by calling (202) 693-0675 (this is not a toll-free number). TTY/TDD callers may dial toll-free 1 (877) 889-5627 to obtain information or request materials in alternative formats. | |
| FR Citation | 82 FR 57395 | |
| RIN Number | 1235-AA21 | |
| CFR Associated | Employment; Labor; Minimum Wages and Wages |
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