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April 07, 2011
Final Rule Clarifies Tip Credit, Comp Time, Fluctuating Workweek

The Department of Labor (DOL) has issued final regulations updating the Fair Labor Standards Act (FLSA). The final rule clarifies several confusing provisions of the law including tip credit, compensatory time for public employees, and fluctuating workweeks.

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The DOL published a notice of proposed rulemaking (NPRM) in the Federal Register in July 2008, which addressed several provisions of the FLSA that needed updating. After receiving and analyzing public comments, the DOL issued a final rule in yesterday’s Federal Register.

Here are a few highlights from the revised regulations:

Tip Credit
Employers are now required to inform an employee before implementing a tip credit. Unless an employer gives proper notice, the employer will not be eligible to use a tip credit. According to the final rule, the notice has to include the following explanation:

  1. The amount of the cash wage the employer pays the employee, which cannot be less than $2.13 per hour;
  2. The additional amount the employer is using as a credit against tips received, which cannot exceed the difference between the minimum wage ($7.25) and the actual cash wage paid by the employer to the employee;
  3. That the additional amount claimed by the employer on account of tips as the tip credit may not exceed the value of the tips actually received by the employee;
  4. That the tip credit cannot be applied to any tipped employee unless the employee has been informed of the tip credit provisions of the FLSA; and
  5. That all tips received by the tipped employee must be retained by the employee, except for valid pooling of tips.

The final regulations note that the FLSA does not set a cap on the percentage of an employee’s tips that may be contributed to a tip pool. However, employers must notify 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.

Compensatory Time for Public Employees
The DOL reminds us that it “has consistently interpreted its regulations [concerning compensatory time] as requiring that an employee's request for compensatory time on a specific date must be granted unless doing so would unduly disrupt the agency's operations.” The final rule omits a proposed change that public agencies are not required to allow the use of compensatory time on the day specifically requested, but within a reasonable period after the request is submitted by the employee. Therefore, public agencies will have to grant the compensatory time on the specific date requested, barring any major disruptions.

Fluctuating Workweek
The final rule does not implement a proposed revision to the rules regarding the fluctuating workweek method of calculating overtime. The proposed rule would have permitted payments of non-overtime bonuses and incentives “without invalidating the guaranteed salary criterion required for the half-time overtime pay computation.”

However, the DOL noted, “While the Department continues to believe that the payment of bonus and premium payments can be beneficial for employees in many other contexts, we have concluded that unless such payments are overtime premiums, they are incompatible with the fluctuating workweek method of computing overtime.”

The DOL and those commenting on the previously proposed rules stated that, “the proposed regulation could have had the unintended effect of permitting employers to pay a greatly reduced fixed salary and shift a large portion of employees' compensation into bonus and premium payments, potentially resulting in wide disparities in employees' weekly pay depending on the particular hours worked.”

Employees Engaged in Fire Protection Activities
In the 2008 NPRM, there was a proposal to narrow the term “employee in fire protection activities” that are covered by the partial overtime exemption and overtime exemption provisions. The NPRM sought to exclude rescue and ambulance service personnel, even if they were part of the fire protection services of a non-fire department public agency. This proposal was not implemented.

The final rule is effective May 5, 2011.

More Changes Coming
The Wage and Hour Division (WHD) is expected to issue a NPRM to revise the FLSA recordkeeping requirements. According to the DOL’s Regulatory Agenda, the rule will require employers to provide workers with basic information about their employment, including how their pay is calculated. Any employers that seek to exclude workers from the FLSA's coverage would be required to perform a classification analysis, disclose that analysis to the worker, and retain that analysis to give to WHD enforcement personnel who might request it. The proposed regulations are expected to be issued this month.

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