Executive Summary: On June 30, 2017, the U.S. Court of Appeals for the Tenth Circuit ruled in Marlow v. The New Food Guy, Inc. d/b/a Relish Catering (Relish) that neither the Fair Labor Standards Act (FLSA) nor a Department of Labor (DOL) regulation requires an employer to share customers’ tips with employees so long as the employees are paid more than minimum wage.

Relish paid Marlow $12 an hour and $18 an hour for overtime. At the end of catering events, Relish accepted tips from customers paying their final bill. Marlow argued that Relish was required to turn over to her a share of all tips paid by catering customers. She relied on the tip-credit provision of the FLSA, which permits employers to satisfy their minimum-wage obligations in part with tips retained by their employees, and a regulation promulgated by the DOL interpreting that provision.

The Tenth Circuit rejected both arguments holding that the tip-credit provision did not apply in this case and that the regulation was beyond the DOL’s authority. The Court stated that Relish had the right to make it a condition of employment that it would own all tips paid by catering customers. The Court said that restrictions on an employer’s use of tips only apply when the employer uses tips received by employees as a credit against the employees’ minimum wage. When an employer pays more than the minimum wage without regard to tips, then the FLSA does not restrict the employer’s use of tips.

The Court ruled that the DOL regulation categorically barring employees from retaining tips is invalid because it exceeds the DOL’s authority. The DOL’s position is that tips are the property of employees even if the employer does not take a tip credit. The Court said the language of the FLSA was not ambiguous. Nor was there a gap or silence with respect to a specific task assigned to the DOL. The FLSA’s silence about employers that do not use a tip credit is not a “gap” for the DOL to fill.

The Tenth Circuit covers Colorado, Kansas, New Mexico, Oklahoma, Utah and Wyoming. The ruling conflicts with the Ninth Circuit decision in Oregon Restaurant & Lodging Ass’n v. Perez. A petition for writ of certiorari is pending before the U.S. Supreme Court to accept the Ninth Circuit case for review.

Employers’ Bottom Line:

This ruling permits employers (at least in the Tenth Circuit) that pay employees a set wage more than the minimum wage to retain tips paid by customers without violating the FLSA. A number of lawsuits have been filed against employers relying on the DOL regulation. This ruling provides employers outside the Tenth Circuit with good legal authority to defend such cases. The Tenth Circuit ruling creates a conflict among the circuit courts that may increase the likelihood that the Supreme Court will agree to review the Ninth Circuit case.