The U.S. Department of Labor has recently issued regulations that update several important provisions of the Fair Labor Standards Act (FLSA) – including tip credits, bonus payments under fluctuating workweeks (a/k/a Chinese Overtime) and overtime for Service Advisors. The new regulations take effect May 5, 2011.

Update – May 2020: The Department of Labor issued a new rule regarding bonus and premium payments under the fluctuating workweek method.  See below for details.

Tip Credit – More Information Must Be Given to Workers

Employers must now provide employees with more information before claiming a tip credit. If proper notice is not given, the employer will not be able to use a tip credit. The notice does not have to be in writing, but smart employers will want to document that they have complied with the law.

A tipped employee must now be provided with the following information, before the employer takes a tip credit:

1. The amount of the cash wage the employer pays the employee, which must be at least $2.13 per hour;

2. The additional amount the employer is using as a credit against tips received, which cannot exceed the difference between the minimum wage ($7.25) and the actual cash wage paid by the employer to the employee;

3. That the additional amount claimed by the employer on account of tips as the tip credit may not exceed the value of the tips actually received by the employee;

4. That the tip credit cannot be applied to any tipped employee unless the employee has been informed of the tip credit provisions of the FLSA; and

5. That all tips received by the tipped employee must be retained by the employee, except for valid pooling of tips. No maximum is placed on the percentage of an employee’s tips that may be contributed to a tip pool, but employees must be advised of any required tip pool contribution amount. Employers may only take a tip credit for the amount of tips each employee ultimately receives and may not retain any of the employees’ tips for any other purpose.

Fluctuating Workweek – Bonuses & Non-Overtime Premiums Aren’t Allowed and Can Mean Time and a Half instead of Half-time for Workers

(UPDATE:  The Department of Labor issued a new rule in May 2020 lifting this restriction – see below)

Under the fluctuating workweek method, an employee agrees to be paid a fixed weekly salary for working a “fluctuating” number of hours each week. When the employee works more than 40 hours in a workweek, the weekly salary is divided by the total number of hours worked during the week to determine the “regular rate of pay” for the week. The regular rate is divided in half and this half-time rate (instead of time-and-a-half) is then paid to the worker for each hour worked in excess of 40 – in addition to the fixed weekly “salary”. This can allow an employer to avoid paying a substantial amount of overtime, but the employer must follow some strict requirements. If an employer doesn’t comply, it will have to calculate employees’ overtime rates based on 40 hours and a time and one-half overtime rate instead of as described above.

In 2011, the DOL decided against a revision that would have allowed employers to pay bonuses and other non-overtime premiums (eg. shift differentials) without invalidating the guaranteed fixed salary requirement of the fluctuating workweek pay method. The DOL explained its decision, noting that, “the proposed regulation could have had the unintended effect of permitting employers to pay a greatly reduced fixed salary and shift a large portion of employees’ compensation into bonus and premium payments, potentially resulting in wide disparities in employees’ weekly pay depending on the particular hours worked.”

The Supreme Court has specifically held that the payment of shift differentials are part of a worker’s “regular rate of pay” and even though the shift differential may be small, it means an employee does not receive a “fixed amount” for their straight-time labor each week, violating the strict requirements placed on employers who choose to use the fluctuating workweek method. Other courts have held that employees did not receive a “fixed salary” because they received lump-sum “day-off pay”, “sea pay” for working on offshore vessels and “shift premiums”, violating the requirements for use of the half-time pay calculation instead of the default time and a half calculation required by the FLSA.

Update – May 2020: 

The Department of Labor issue a new rule adopting the revision mentioned above.  This will loosen the restrictions on employers’ use of the fluctuating workweek method (a/k/a “Chinese Overtime”) to calculate overtime pay for non-exempt salaried employees.  Because this method results in employees getting less overtime pay than under any other overtime calculation, workers’ rights advocates did not want to encourage more employers to use the fluctuating workweek method. The new rule allows employers to pay additional compensation based on the number of hours worked, such as bonuses, premium pay, or differential pay, in addition to paying a fixed salary and still take advantage of the fluctuating workweek method. The Obama DOL did not allow the use of these payments if the employer wanted to use the fluctuating workweek method because it felt it would encourage employers to shift a large portion of employee compensation to bonus and premium payments which are usually only offered for less desirable shifts or working longer hours.  This new rule will likely go into effect around July 2021.

Automobile Service Managers Should be Paid Overtime

The Department of Labor decided not to adopt the proposed rule that would exempt from overtime pay service managers, service writers, service advisors, and service salesmen working for automobile dealerships. Most dealerships have considered these employees as falling under the commissioned sales exemption and have not paid these employees overtime. To comply with the new regulations, dealerships will need to change their pay practices and pay overtime based on all of the service advisor’s compensation, meaning salary + any commissions earned.

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