Some California employers may have noticed that the federal Department of Labor (“DOL”) recently issued new regulations applicable to the Fair Labor Standards Act (“FLSA”). The DOL’s stated purpose is to provide clarification on certain regulations and to align the FLSA with other federal statutes. The following is an overview of the revisions pertaining to overtime and tips, as well as the corresponding law in California.

For a full list of the DOL’s changes, employers should review the Final Rule, or consult with legal counsel to ensure full compliance with the law.

Bonuses and Premium Pay Not Available Under Fluctuating Workweek

Under federal law, employees who are not “exempt” from minimum wage and overtime law may be paid a fixed salary, with overtime calculated based on the hours worked in the workweek. Under the federal “fluctuating workweek” method, the calculation of overtime pay rate may be based on the total hours worked rather than the “standard” 40-hour week. For example, assume a non-exempt employee who receives a weekly salary of $1000 works 50 hours. The overtime due would be based on $20/hour as the “regular rate” of pay. If the same employee works 60 hours the next week, the “regular rate” would go down to $1000/60 = $16.67. The overtime due would be one-half of the regular rate: $10/overtime hour for the 50-hour week, and $8.34/overtime hour for the 60-hour week.

The DOL adopted new regulations regarding the use of the fluctuating workweek calculation. To qualify, employees must work fluctuating hours from week-to-week, though the DOL does not define how much of a fluctuation is required. Significantly, employees who receive additional payments in the form of non-overtime bonuses, premium payments, or other additional incentives may not be paid overtime based on the “fluctuating workweek” calculation. The DOL intends to prevent employers from reducing employees’ fixed weekly salaries in favor of bonus and premium pay, because doing so could lower the overtime pay calculations.

For those employers who wish to institute a fluctuating workweek, there must be a clear, mutual understanding by the employer and employee that the fixed salary is compensation independent of overtime premiums for the hours worked each workweek. The fixed salary amount must be sufficient to provide compensation at a rate not less than the minimum wage for all hours worked during the week.

The employee must also receive extra compensation in addition to the fixed salary for overtime hours worked at a rate not less than one-half the regular rate of pay. Because the employee’s hours change from week-to-week, the regular rate would be determined separately each week based on the number of hours actually worked. Unlike California law, which provides for both daily and weekly overtime requirements, federal law provides for weekly overtime requirements only.

In California, though, the fluctuating workweek method for determining the regular rate of salaried employees is not permitted. Instead, pursuant to California Labor Code section 515, the regular rate of pay is determined by dividing a nonexempt full-time salaried employee’s work salary by 40, regardless of how many hours the employee worked. In the example above, the base rate for overtime would be $1000/40 = $25 per hour. Additionally, the employee working 50 hours per week would receive 1.5 * $25 = $37.50 for each overtime hour worked.

Stock Options Not Considered Wages

The DOL’s final rule excludes from the computation of an employee’s regular rate of pay stock options, stock appreciation rights, or bona fide employee stock purchase programs. The regulation effectively prohibits employers from counting stock options towards the minimum wage or overtime pay. However, it also benefits employers by not including such compensation in the calculation of overtime rates. Similarly, under California Labor Code section 200, stock options are not considered wages, and should not be counted towards the minimum wage or overtime pay.

Service Advisors Working for Automobile Dealerships and Boat Salespersons

The DOL’s new regulations include a provision exempting boat salespersons from minimum wage and overtime law. The FLSA itself has contained that exemption since 1974 amendments.

In California, there is no special exemption for vehicle salespersons. Therefore, automobile or boat salespersons are not exempt from overtime law unless they qualify under the “inside sales” exemption. This exemption may apply when more than 50% of compensation comes from commission and when the employee earns at least one and one-half times the state minimum wage. Application of this exemption can be tricky when the employee receives guaranteed compensation (such as a base salary) or bonuses that do not qualify as “commissions.” These payments may make it difficult for salespersons to reach the 50% commission threshold.

The DOL also decided not to consider employees described as service advisors, service managers, service writers or service salesmen automatically exempt under FLSA Section 13(b)(10)(A). A few courts had so found; the DOL under the Bush administration had proposed to expressly recognize service advisors, etc. as exempt. Upon further review, however, the DOL decided not to proceed. Therefore, service advisors, managers, writers, etc. are non-exempt, unless another general exemption applies (such as the “executive” exemption).

California law does not provide for a specific exemption applicable to service advisors, writers, etc. either. These employees must qualify under the executive or administrative exemption. Because California’s “white collar” exemptions require employees to devote more than 50% of their time to exempt activities, it will be difficult to qualify service advisors as exempt under California law.

Tips Belong to Employees

For purposes of the federal tip regulations, “tipped employees” are those in occupations where employees customarily and regularly receive more than $30 per month in tips. For those tipped employees, the FLSA regulations state that tips are the property of the employee, and that an employer’s only valid uses of an employee’s tips are for a tip credit or a valid tip pool.

Similarly, under California law, tips belong to employees. However, California and federal law differ considerably with respect to tip credits and tip pooling.

Notice Must Be Provided For Tip Pooling

Federal law allows the practice of tip pooling, otherwise known as tip-sharing, “among employees who customarily and regularly receive tips.” The recent amendments to the FLSA clarify that there is no specified maximum contribution to a tip pool, but requires that an employer notify its employees of any required tip pool contribution amount. The notice does not have to be in writing.

California law is more specific as to the requirements for tip pooling. California Labor Code section 351 allows employers to mandate tip pooling among its employees if the employer does not “collect, take, or receive” as its own any part of a gratuity left by a patron, and it does not credit tips or deduct tip income from employee wages. The California Court of Appeal in Budrow v. Dave & Buster’s of Cal, Inc. found that the decision about which employees are to participate in the tip pool must be based on a reasonable assessment of the patrons’ intentions as to whom the patron is tipping. The participants in the tip pool will be based on the intentions of the patron and not merely mandated by those who “customarily and regularly receive tips.”

Tip Credit Requirements

The FLSA permits the employers of tipped employees to credit tips received from patrons toward the minimum wage obligation to those employees. Employers covered by the FLSA are required to pay the “cash wage” in effect at the time 29 U.S.C. section 203(m) was enacted, which is $2.13, plus an additional amount on account of tips received by the employee that is equal to the difference between $2.13 and the federal minimum wage currently in effect; which is $7.25. That amount, however, may not exceed the value of the tips actually received by the employee. For tipped employees whose wages and tips do not equal the minimum wage, the employer will be responsible for making up the difference.

The recent amendments to the DOL rules state that employers taking a tip credit must inform their employees in advance of the employer’s use of the tip credit. The notice requirement is satisfied if the employer explains the following to the employee: (1) the direct cash wage the employer is paying the tipped employee, at least $2.13 per hour; (2) the additional amount the employer is using as a tip credit, which cannot exceed the difference between the minimum wage specified by the FLSA and the actual cash wage paid by the employer to the employee; (3) the tip credit cannot exceed the value of the tips actually received by the employee; (4) the tip credit cannot apply unless the employer has informed the employee of the relevant provision in the FLSA, and; (5) all tips received by the tipped employee must be retained by the employee except for any applicable tip pooling arrangements.

Moreover, although the DOL specifically stated that the above notice does not have to be in written form, the FLSA requires that an employer report, in writing, to the employee, the amount per hour that the employer takes as tip credit each time it is changed from the amount per hour taken in the preceding week.

Notably, California law does not permit an employer to take a tip credit, and does not permit tip credits against the minimum wage or a lower minimum wage for tipped employees. California Labor Code section 351 prohibits an employer from sharing in any tips left for employees or making deductions from an employee’s wages because of those tips. The gratuity remains the sole property of the employee or employees to whom it was given.

Conclusion

The overlapping, and sometimes conflicting, federal and state regulations are complicated and require careful analysis. California employers should review their current overtime and tip policies to ensure compliance with both the revised DOL regulations and California law, as they are not exempt from DOL regulations and can be audited for compliance.

Moreover, when a conflict exists between the DOL regulations and California law, the law establishing the more employee-friendly standard applies. Thus, an employer must be aware of both federal and state law.

Finally, if an employer is subject to the revised DOL regulations, even though the DOL specifically states that written notice is not required for the fluctuating workweek and tip pooling and credits, employers should provide notice in writing. The writing would be evidence of the notice requirement, especially the specific notice requirements for tip credits.