By invalidating a U.S. Department of Labor (DOL) regulation that states that tips are the property of employees, the 10th Circuit Court of Appeals (whose opinions apply to Wyoming, Colorado, Utah, Kansas, Oklahoma, and New Mexico) rejected an employee’s wage claim based on her employer’s practice of keeping all tips. But employers in states with an analogous state law governing ownership of tips, such as Wyoming, need to be aware that the 10th Circuit’s ruling may not change how they handle tips.

Caterer Kept Tips But Paid More Than Minimum Wage

Relish Catering regularly receives tips from its customers in the form of a gratuity added to their final catering bill at the end of an event. Relish retains those tips for itself rather than passing them along to its employees who work at the events. However, it pays its employees at or above the federal minimum wage of $7.25 per hour as well as time and a half for overtime and does not rely on any sort of tip credit to meet the minimum wage.

Bridgette Marlow believed Relish was required to turn over her share of the catering tips under the Fair Labor Standards Act (FLSA). Despite making $12 per hour (and $18 per hour for overtime), she sued Relish and Brett Tucker, a manager and part owner of the company, alleging they violated the minimum wage provisions of the FLSA by retaining the tips.

FLSA Restrictions Apply Only When Tip Credit Taken

Marlow argued that by retaining all of the tips, Relish was essentially paying employees below minimum wage. For example, she suggested that if she received her $12 hourly wage but Relish retained $11 in tips for each hour she worked, the result was the same as if Relish turned over all of the tips to her and paid her a $1 hourly wage. In essence, she argued that the company could be paying less than the required amount for tipped employees.

The 10th Circuit didn’t bite on Marlow’s rationale. The Court stated that it doesn’t matter where the money to pay wages comes from so long as the company paid at least the minimum wage required under the FLSA. The Court rejected Marlow’s argument that the FLSA’s tip-credit provision applied to her case because Relish doesn’t take a tip credit.

The FLSA tip-credit provision allows employers of “tipped employees” to pay a reduced hourly wage of $2.13 per hour so long as employees receive sufficient tips to raise their earnings to the $7.25 hourly minimum. But this provision applies only if the employer counts tips toward the minimum wage, said the Court. The tip-credit provision does not apply if the employer doesn’t count tips toward the minimum and instead pays the full hourly minimum wage.

The Court stated that the FLSA tip-credit provision does not require that employers turn over all tips to employee in all circumstances, as Marlow urged. Instead, when an employer doesn’t take the tip credit, the tip-credit provision imposes no restrictions on what it may do with tips as long as it pays an hourly wage above the $7.25.

DOL’s Tip-Ownership Regulation Invalid

Marlow relied extensively on a 2011 DOL regulation that provides:

Tips are the property of the employee whether or not the employer has

taken a tip credit under section 3(m) of the FLSA. The employer is

prohibited from using an employee’s tips, whether or not it has taken a tip

credit, for any reason other than that which is statutorily permitted in

section 3(m): As a credit against its minimum wage obligations to the

employee, or in furtherance of a valid tip pool.

From the language of that regulation, it would seem that Marlow had a valid claim. But the 10th Circuit said not so fast and looked at whether the DOL had the authority to implement the regulation in the first place.

Relying on U.S. Supreme Court precedent, the 10th Circuit pointed out that federal agencies may create rules only to fill “ambiguities” or “gaps” in statutes. In a “friend-of-the-court” brief, the federal government argued that the FLSA is silent on the issue of who “owns” tips when an employer does not take the tip credit, and therefore, the DOL had the authority to create a tip ownership rule to fill in that gap.

Despite the Ninth Circuit’s acceptance of that argument, the 10th Circuit disagreed with it, finding that nothing in the FLSA directs the DOL to regulate the ownership of tips when the employer doesn’t take the tip credit. Because the FLSA limits the tip restrictions to employers who take the tip credit, the DOL lacked the authority to regulate otherwise.

The Court invalidated the DOL’s tip-ownership regulation, finding it was beyond the DOL’s authority, and affirmed the lower court’s judgment in favor of the employer. Marlow v. The New Food Guy, Inc., No. 16-1134 (10th Cir. June 30, 2017).

Wyoming Law

The 10th Circuit’s opinion is good news for employers with tipped employees. However, Wyoming employers need to be aware that Wyoming has a statute that governs tips much like the DOL regulation the 10th Circuit rejected. The statute directs that “tips and gratuities received by an employee or employees shall be the sole property of such employee or employees and not payable in whole or in part to the employer or any other person.” Although Wyoming courts haven’t interpreted the statute, the Wyoming attorney general has issued two opinions explaining that the law permits tip-pooling or –sharing arrangements if the tips are shared only among employees who served the tipping customers, provided the employer gets no part of the tips.

Would the Wyoming statute spoil Relish’s practice of keeping tips? Maybe not, because Relish simply adds the tip or service charge to its final catering bill rather than taking tips that are left for a particular employee. As a result, the tips Relish keeps are never “received by an employee or employees,” as the Wyoming statute states, but are paid directly by the customer to Relish. Even so, because of this statute, Wyoming employers should be cautious about keeping any part of the tips paid by customers.

Bottom Line On Tips

At present, here’s what an employer may do with tips under the FLSA (at least in the states covered by the 10th Circuit’s decision with no contradictory state laws):

  • If an employer utilizes the FLSA’s tip-credit provision, it may pay a reduced hourly wage of $2.13 to tipped employees (e., those who customarily and regularly receive more than $30 per month in tips) as long as the employees earn enough in tips to bring their total hourly wage to the $7.25 minimum.
  • If tips are not sufficient to raise the total hourly wage to the minimum, the employer must pay the difference.
  • If tips exceed the amount needed to raise the total hourly wage to the minimum, the excess tips go to the employee (or to multiple tipped employees through a valid tip pool).
  • If the employer pays employees at or above the minimum wage (e., it doesn’t use a tip credit), the employer may do what it wants with the tips, including retaining the tips itself.

Wyoming employers need to pay attention to state law in addition to the FLSA. Under Wyoming law, employers with tipped employees must pay at least $2.13 per hour, provided the employees’ pay equals at least the applicable minimum hourly wage when combined with the tips they receive during a given pay period. Although the logic of the 10th Circuit’s opinion would seem to apply to Wyoming’s minimum wage statute, Wyoming employers are constrained by the separate statute that prohibits them from taking any tips from the employees who receive them.