By Travis Hanson

Under the Fair Labor Standards Act (FLSA), employers must pay their employees at least $7.25 an hour. However, an employer can pay tipped employees as little as $2.13 an hour and then factor in a portion of the employees' tips to make up the difference between the hourly cash wage and the federal minimum wage, as long as the total weekly wage it pays meets the weekly requirements of the FLSA.

That's called the "tip credit." Two recent decisions from the U.S. 10th Circuit Court of Appeals—which covers Colorado, Kansas, New Mexico, Oklahoma, Utah, and Wyoming—provide new guidance for employers with tipped employees.

Whose Tips Are They Anyway?

Bridgette Marlow sued her employer, Relish Catering, alleging violations of the FLSA. The catering company paid Marlow $12 an hour, and it accepted tips when customers paid their final bill. Relish kept the tips, reasoning it had no obligation to give employees a share because it paid them more than the minimum wage.

Marlow, citing a 2011 U.S. Department of Labor (DOL) regulation declaring tips employee property regardless of whether the employer has taken the tip credit, argued that despite paying more than the minimum wage, the catering company violated the FLSA by retaining all the tips.

The 9th Circuit previously upheld the DOL regulation, giving support to Marlow's position. In this case, however, the 10th Circuit agreed with the catering company and invalidated the DOL regulation.

The court reasoned that the FLSA protects against "substandard wages"; it doesn't matter where the wages come from. That line of thinking is why employers with tipped employees can pay less than the federal minimum wage as long as employees' overall compensation, including tips, meets the minimum wage. This practice is known as using a tip credit.

The 10th Circuit found that the DOL exceeded its authority when it enacted the regulation stating that tips always belong to employees because the FLSA isn't ambiguous on the matter. Specifically, the court held that the FLSA's failure to address what happens when an employer doesn't use a tip credit wasn't a "gap" for the DOL to fill. Thus, the 10th Circuit ruled, the regulation wasn't lawful, and Marlow wasn't legally entitled to the tips Relish kept.

Rejecting the DOL regulation, the court reasoned that if the minimum wage requirement is satisfied without using a tip credit, how tips are allocated is between the employer and the employee. Further, the court held that the FLSA doesn't require an employer to always give all tips to employees. Rather, the Act simply allows the employer to consider tips retained by employees for minimum wage purposes.

In sum, the court held that if an employer pays its employees a set wage that's higher than the minimum wage, it doesn't violate the FLSA by keeping tips paid by customers. Marlow v. New Food Guy, Inc., 861 F.3d 1157 (10th Cir., 2017).

No Tip Credit for Nontipped Work

Tip credits were the subject of another recent 10th Circuit case as well. Aarica Romero worked as a server for Top-Tier Colorado LLC. Rather than paying Romero the federal minimum wage of $7.25 an hour, Top-Tier took advantage of the tip credit by paying her $4.98 an hour and then using some of the tips she earned to satisfy its minimum wage obligations.

Naturally, the tip credit applies only to tipped employees. Romero argued that she engaged in nontipped work—such as rolling silverware, brewing coffee, and wiping down tables—for which she was entitled to the full $7.25 an hour. The district court sided with her employer because she didn't allege that she didn't receive at least minimum wage for all the hours she worked when all of her tips were included in the calculation. Romero appealed, and the 10th Circuit reversed in her favor.

The district court treated the tips Romero earned and the wages Top-Tier paid as two distinct concepts. The 10th Circuit disagreed with that notion, finding Romero's entire argument was based on the fact that her employer impermissibly treated a portion of her tips as wages for minimum wage purposes by using the tip credit for hours she contended weren't eligible for the tip credit.

The 10th Circuit reasoned that if it accepted Top-Tier's position, an employer could pay a tipped employee nothing as long as she earned enough in tips to satisfy the minimum wage requirement. The court held that the threshold question in determining if an employer satisfied the minimum wage requirement in cases like Romero's is whether the employer can treat tips as wages under the tip credit.

The court's ruling means that if an employee spends more than 20 percent of her time performing nontipped work, her employer may use the tip credit only for the hours when she is actually performing tipped work. For nontipped hours, the employer must pay at least the full minimum wage. Romero v. Top-Tier Colorado LLC, 849 F.3d 1281 (10th Cir., 2017).

Bottom Line

These cases highlight some important considerations for employers with tipped employees:

• First, when an employee is paid a set wage that's higher than the minimum wage in Kansas, it won't violate the FLSA if it retains some or all of the tips paid by customers.
• Second, an employer with tipped employees who perform nontipped work more than 20 percent of the time may use the tip credit only during the hours employees are actually performing tipped work.

The FLSA is a complex set of laws, and the penalties for getting it wrong can be steep. We recommend that you consult an employment law attorney to audit your pay practices under these new decisions from the 10th Circuit to confirm you're complying with the law.

Travis Hanson is an employment lawyer with Foulston Siefkin. You can reach him at thanson@foulston.com.