During the first half of 2018, all three branches of the federal government took actions involving the Fair Labor Standards Act—the United States Supreme Court announced a new standard for evaluating the law’s exemptions, the Department of Labor rolled out a voluntary reporting procedure to resolve potential violations, and Congress amended the law’s rules about tip pooling.

U.S. Supreme Court Mandates “Fair Reading” of FLSA Exemptions

Traditionally, courts have been hostile to employer efforts to classify employees as exempt by narrowly construing the law’s exemptions. That changed on April 2, when the Supreme Court decided Encino Motorcars LLC vs. Navarro. While the case involved an exemption applying to car dealerships in particular, the Court broadly rejected the “narrow construction” principle “as a useful guidepost for interpreting the FLSA.” Justice Thomas wrote that because the “exemptions are as much a part of the FLSA’s purpose as the overtime-pay requirement,” the Court has “no license to give the exemption anything but a fair reading.”

Encino Motorcars mostly will help employers with legal arguments after employees sue over an alleged exemption misclassification. But to ultimately prevail in such a suit, the employer still must have the facts to support the exemption. Thus, to take full advantage of the Encino Motorcars “fair reading” analysis, employers should regularly engage in self-audits of their compliance with the FLSA.

DOL’s Payroll Audit Independent Determination (PAID) Program

In March, the DOL rolled out a formal program to help businesses quickly resolve potential FLSA violations without litigation. By promising to limit liability and the financial impact of claims or DOL investigations, the DOL is encouraging self-audits and voluntary disclosure of potential FLSA violations by employers. To be eligible to participate, a business must be seeking to resolve inadvertent minimum wage and overtime violations (presumably discovered by a self-audit) and not currently under DOL investigation or involved in litigation for the same issues.

Employers might ask, “Why involve the DOL?” The answer is quite simple: FLSA claims cannot be settled privately. If an employer pays back wages to employees without supervision by the DOL or a court, the employees do not waive their rights to sue under the FLSA.

One upside of the PAID program is the non-adversarial, streamlined process to resolve potential violations. The employer can avoid liquidated damages or civil penalties which the DOL might impose following an investigation. And the employer might avoid paying plaintiff attorneys’ fees in litigation.

But employers should also understand the potential downsides. Participation in the PAID program does not waive the DOL’s right to conduct future investigations of the employer. Employee participation in the program is not mandatory, which means they might reject offered payments and retain all rights to sue. And being offered back pay might prompt some employees to contact a lawyer to file suit.

U.S Congress Passes New Tip-Pooling FLSA Amendment

The FLSA has a special sub-minimum wage for tipped employees, which allows the employer take a tip credit to make up the difference between that special wage and the regular minimum wage, so long as the employees keep their tips. DOL regulations have long permitted employers to require tip-pooling or tip-sharing with other workers who customarily interact with customers and often receive tips (such as bussers, food runners, bartenders, and hostesses). But the DOL regulations also prohibited tip-pooling with management and employees who are not customarily tipped, such as back-of-the-house workers like cooks, dishwashers, and janitors.

In 2011, the DOL issued new regulations prohibiting employers from back-of-the-house tip-pooling or management tip-sharing even if the employer paid the full minimum wage and did not take the tip credit. Many courts pushed back and rejected that rule as beyond the scope of the FLSA, and in 2017, the DOL reversed the 2011 regulations. Employee advocacy groups and some members of Congress railed against this “fix” because the new regulation was silent about managers or business owners sharing in tips.

In the Consolidated Appropriations Act passed in March 2018, Congress amended the FLSA to rescind the 2011 DOL regulations, but also prohibited the employer and “managers or supervisors” from keeping any tips. Those who do so may be compelled to disgorge the tips as damages in a lawsuit or DOL investigation.

The DOL has announced it would define “supervisor” and “manager” by using the “duties test” of the executive overtime exemption. Under that standard, any employee who does not have the power to hire and fire or make recommendations about significant employment decisions, but otherwise has significant supervisory responsibility, can lawfully participate in a tip pool if the employer pays the full minimum wage to otherwise tipped employees.