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Jun 6, 2011

By Patricia F. Weisberg

The U.S. Department of Labor Wage and Hour Division’s final rule amending the agency’s Fair Labor Standards Act regulations took effect on May 5.

While the DOL declined to push forward on some of the more substantive changes initially proposed in 2008, the final rule does clarify some issues. The two predominant revisions affect tipped employees, tip credits and tip pools and the fluctuating workweek method of payment.

Under the FLSA, employers are permitted to pay a tipped employee a lower minimum wage so long as the total tips and wages at least equal the hourly minimum wage. The final rule clarifies that an employer is prohibited from using an employee’s tips for any reason other than as a tip credit to make up the difference between the required cash paid and the minimum wage or in furtherance of a valid tip pool.

Clarification to reflect “longstanding” tip policy

The clarification is to “reflect long standing and settled Wage and Hour Division policy concerning ownership of tips.” The rule also clarifies that an employer is not required to provide tipped employees with written notice of its intent to use the tip credit provisions, but they are required to “inform” tipped employees of the statutory tip credit provisions.

The final rule addresses the content of the notice required before the tip credit provision may be used by employers. The final rule also clarifies that when tip pools are utilized, such pools may only include those employees who customarily and regularly receive tips. Finally, employers may only take a tip credit for the amount of tips each employee ultimately receives.

The second major clarification addresses the fluctuating workweek method of payment of wages. According to the DOL, employers may use the fluctuating workweek method for computing half-time overtime compensation if:

  • The employee works fluctuating hours from week to week;
  • The employee receives a fixed salary that remains the same no matter how little or how many hours the employee works in a given pay period;
  • The fixed salary is sufficient to provide compensation at not less than the minimum wage; and
  • The employee and the employer have a mutual understanding that the fixed salary is intended as straight-time compensation for all hours worked by the employee regardless of the number of hours.

If all of these requirements are met, employers satisfy the FLSA’s overtime requirements if they compensate the employee at least one-half of the regular rate of pay for the hours worked in excess of 40 hours in each workweek in addition to the fixed salary.

Bonuses and the fluctuating workweek

Because the employees’ hours tend to fluctuate from week to week, the regular rate typically must be determined on a week-by-week basis based on the number of hours actually worked. Employers sought clarification from the DOL after receiving inconsistent advice on the question of whether the payment of bonuses, commissions and other compensation, in addition to salary, violated the fluctuating workweek regulations.

In 2008, the DOL proposed that the payment of bona fide bonuses or premiums would not invalidate the fluctuating workweek method, even though such payments must be included in the calculation of the regular rates unless they are excluded by other provisions of the FLSA. The final rule, however, rejects this proposal.

The DOL “explained” that bonuses are incompatible because the rationale for allowing the fluctuating workweek method in the first place depends upon a mutual understanding between an employer and employee that the fixed salary constitutes all straight-time compensation. Non-discretionary bonuses are at least in part straight-time compensation, which means an agreement that the employees have already been paid all straight time compensation could not have existed.

The DOL expressed a concern, albeit unsupported by any evidence, that the proposed amendment would permit employers to reduce employees’ weekly salaries and shift the bulk of employees’ wages to bonus and premium pay potentially creating a wide disparity in employees’ weekly pay. The agency determined that the fluctuating workweek method of compensation was specifically intended to avoid such a disparity.

Accordingly, the final rule establishes the DOL’s position that employers may not use the fluctuating workweek method of payment of wages if they intend to pay employees extra compensation, such as bonuses, shift premiums, etc. Employers who intend to continue paying these types of compensation as part of an employee’s wages should stop using the fluctuating workweek method and instead consider alternative forms of compensation.

With the ever increasing scrutiny of pay practices by the DOL and plaintiffs’ lawyers, employers can be sure they will seize upon the final rules commentary in order to attack employers’ use of the fluctuating workweek method of payment and to mandate compliance with the tip credit rules.

Contact your legal advisors if you have questions or concerns about any of these clarifications to the FLSA’s final rule will affect your operations.

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