DOL Clarifies FLSA Section 7(i) Exemption for Tipped Employees

Quick Hits

• The DOL explained in a recent opinion letter that an employee of a qualifying retail or service establishment must be paid more than one and one-half times the federal minimum wage in order to satisfy the minimum pay standard in section 7(i)(1) of the Fair Labor Standards Act.
• The DOL explained that tips are not commissions under section 7(i) unless the employee is located in certain jurisdictions or if the employer takes a tip credit, in which case the portion of an employee’s tips used to satisfy the tip credit would be considered compensation.

The inquiry to the DOL was twofold: (1) does an employer use the federal minimum wage or the higher state minimum wage in satisfying the requirement that the employee’s regular rate of pay must exceed one and one-half times the applicable minimum wage for every hour worked in a workweek in which overtime hours are worked; and (2) must tips qualify as compensation in satisfying the requirement that more than half of the employee’s total compensation in a representative period must consist of commissions.

The employer requesting the clarification indicated that it operates restaurants in a jurisdiction with higher minimum wage and tipped wage rates than those required under federal law. The restaurant classifies its servers and server assistants (who receive tips) as 7(i) exempt employees. The DOL assumed without analysis that the requesting employer qualifies as a retail or service establishment and that the correct representative period was used to calculate whether the employee is primarily a commission-paid employee (the DOL also assumed the commissions consist of service charges, which are wages and not tips, and tips).

In response to the first question, the DOL explained Section 7(i)(1) expressly refers to the rate “applicable … under section 206 of this title” and as such, under “the plain language of the statute,” “explicitly incorporates the federal minimum wage established at 29 U.S.C. § 206 (currently $7.25 per hour), and not any other higher applicable minimum wage.” Therefore, the employee must receive a regular rate of pay greater than $10.88 per hour for any workweek in which the employer claims the exemption. “It is irrelevant under 7(i)(1) whether [an employee’s] regular rate also meets the state minimum wage or exceeds one and one-half times the state minimum wage.”

As to the second question, the DOL concluded tips are not compensation in determining what is considered compensation for employment under 7(i) because tips are discretionary sums presented by customers as “a gift or gratuity in recognition of some service performed for the customer,” which is not compensation from the employer for employment. The exception to this occurs when an employer uses tips to satisfy the permissible tip credit (the maximum tip credit permitted under federal law is $5.12 per hour). Tips used to satisfy the tip credit do qualify as compensation under 7(i). The DOL also recognized that under a 2020 ruling by the U.S. Court of Appeals for the Fourth Circuit, employers in Maryland, North Carolina, South Carolina, Virginia, and West Virginia may be required to count all tips as compensation based on common law precedent holding all tips constituted compensation under section 7(i).

This opinion letter offers more clarity for employers that are, or are considering, relying on the 7(i) overtime exemption. However, employers may want to take into account state laws that may be different or more restrictive than federal law and federal guidance.

Ogletree Deakins’ Hospitality Industry Group and Wage and Hour Practice Group will continue to monitor developments and will post updates on the Hospitality and Wage and Hour blogs as additional information becomes available.

Follow and Subscribe
LinkedIn | Instagram | Webinars | Podcasts