Pay Waitstaff Minimum Wage and You Can Keep the Tips, Court Says

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By Lawrence E. Dubé

A Colorado caterer that pays its staff more than required by federal wage and hour laws doesn’t have to share customers’ tips with the workers, a federal appeals court held June 30 ( Marlow v. The New Food Guy, Inc. , 2017 BL 227045, 10th Cir., No. 16-1134, 6/30/17 ).

The decision by the U.S. Court of Appeals for the Tenth Circuit closes the door on tip claims cases based on both a provision in the Fair Labor Standards Act and an Obama administration regulation issued under the act.

The appeals court rejected server Bridgette Marlow’s argument that the FLSA gives employees a “property right” to tips paid as a result of their customer service. The FLSA only addresses tips in the context of a “tip credit” that didn’t apply to her employer, The New Food Guy Inc., because it paid her an hourly rate higher than the minimum wage, the court held.

The court also blocked Marlow from relying on a 2011 Labor Department rule prohibiting an employer from “using an employee’s tips.” The Justice Department defended the rule’s validity, but the court said the DOL lacked authority to adopt the rule.

Tip Credit Provision Didn’t Back Claim

The FLSA generally requires that covered employers pay employees a $7.25 minimum hourly wage and compensate them at 1.5 times the employee’s regular rate of pay for overtime work above 40 hours in a workweek.

Under Section 3(m) of the FLSA, 29 U.S.C. § 203(m), an employer may pay a tipped employee a cash wage of $2.13 an hour if the employee’s hourly wage plus the amount of tips received by the employee equals or exceeds the FLSA minimum wage and the employer complies with other statutory requirements.

Marlow, who was paid $12 an hour for straight-time work and $18 for overtime hours, sued her employer. Although her wages exceeded the FLSA’s minimum, she argued she was entitled to a share of the tips paid by catering customers. The U.S. District Court for the District of Colorado rejected her claims, and Judges Harris L. Hartz and David M. Ebel of the Tenth Circuit affirmed. Then-Judge Neil Gorsuch, now a Supreme Court justice, participated in the oral argument, but not in the appellate court’s decision.

Writing for the court, Hartz said that Section 3(m) only applies when an employer seeks to reduce its minimum wage obligation by claiming credit for the tips actually received by an employee. “If an employer pays more than the minimum wage without regard to tips,” the court wrote, “the FLSA does not restrict the employer’s use of tips.”

The court said an employer like New Food Guy that does not take the statutory tip credit “must do only what all employers must do—pay the minimum wage.” Finding the employer paid Marlow far more than the federal minimum wage, the court said her claim under the FLSA “must therefore fail.”

DOL Regulation Was Invalid

The court said the DOL’s 2011 regulation on tips, 29 C.F.R. § 531.52, supported her claim that she should receive a portion of the tips that customers paid to the employer.

The rule clearly states that tips “are the property of the employee” and that employers may not use those tips, whether they have claimed the benefit of the tip credit provision or not.

The federal government appeared as an amicus curiae in the Tenth Circuit case and argued that the regulation was a valid effort to fill a “gap” where the FLSA was silent by clarifying the obligation of an employer that received customer tips but didn’t claim a tip credit.

But Hartz said the “government does not point to any statutory language directing the DOL to regulate the ownership of tips when the employer is not taking the tip credit.”

“In sum,” the Tenth Circuit said, "§ 203(m)'s silence about employers who decline the tip credit is no ‘gap’ for an agency to fill. Instead, the text limits the tip restrictions in § 203(m) to those employers who take the tip credit, leaving the DOL without authority to regulate to the contrary.”

The court affirmed the trial court’s judgment in favor of the employer.

Attorneys for Marlow and New Food Guy Inc. were not available for comment on the decision.

Brian D. Gonzales in Fort Collins, Colo., argued the appeal for Marlow. Jennifer L. Gokenbach in Denver argued for The New Food Guy Inc. Justice Department attorney John S. Koppel in Washington argued for the DOJ.

To contact the reporter on this story: Lawrence E. Dubé in Washington at ldube@bna.com

To contact the editors responsible for this story: Peggy Aulino at maulino@bna.com; Terence Hyland at thyland@bna.com; Chris Opfer at copfer@bna.com

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

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