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DOL's Final Rule Will Impact Employers That Use Fluctuating Workweek or Tip Credit

Publisher: Day Pitney Alert
April 19, 2011
Day Pitney Author(s) Patrick J. McCarthy

On April 5, 2011, the United States Department of Labor ("DOL") published a Final Rule amending the regulations to the Fair Labor Standards Act ("FLSA") and other related legislation. The Final Rule contains several important developments. Two in particular impact private sector employers that pay employees based on the fluctuating workweek method of payment or utilize the tip credit. The Final Rule will take effect on May 5, 2011.

Important Change to the Fluctuating Workweek Regulation

A regulation to the FLSA has for more than 40 years provided an alternative method of paying overtime for nonexempt employees whose hours vary from week to week. Under this method of payment, the employee is paid a fixed weekly salary that is intended to compensate the employee for all hours worked, no matter how many or how few. In addition, the employer must pay the employee an additional premium for any overtime hours that must be at least 50 percent of the employee's regular rate of pay for that week. To utilize this method of payment, an employer must satisfy a number of other requirements set forth in the regulation.

For several years, the DOL has been considering "clarifying" the fluctuating workweek regulation as to whether an employer could pay bonuses or other premium payments to employees who were paid based on the fluctuating workweek method of calculating overtime. In its Final Rule, the DOL has taken the position that bonuses and premium payments (except for overtime premiums) are inconsistent with the fluctuating workweek method of payment.

The Final Rule states: "[W]hile we 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." Overtime premiums are defined as "certain premium payments made by employers for work in excess of or outside of specified daily or weekly standard work periods or on certain special days." Accordingly, an employer risks losing the benefit of the fluctuating workweek regulation if it pays bonuses or other premium payments (such as a shift differential) to employees who are paid based on that method of calculating overtime.

Changes to Rules for Tipped Employees

The Final Rule also contains changes that will affect employers that have employees who receive tips. The regulations to the FLSA allow employers to pay a tipped employee less than the minimum wage, provided that the employee's wages and tips are equal to or greater than the minimum wage. The Final Rule increases the amount that an employer can claim as a tip credit to $5.12 to correspond to the increase in the federal minimum wage to $7.25 per hour. Accordingly, an employer that seeks to use the tip credit must pay its employees at least $2.13 per hour in cash wages. The Final Rule also reverses the DOL's position that there is a maximum amount an employer may require an employee to contribute to a tip pool. Tip pooling is the practice of gathering gratuities or a partial amount of those gratuities received from customers in a central pool for distribution to a group of employees. The Final Rule explains that the FLSA does not impose a maximum tip-pool contribution percentage. However, employers are required to notify employees of any required tip-pool contribution amount.