Hunton Employment & Labor Perspectives

The United States Court of Appeals for the Tenth Circuit recently held in Marlow v. The New Food Guy, Inc. that an employer that pays its employees a set wage over the minimum wage can retain tips for itself and does not have to share them with employees. No. 16-1134 (10th Cir. June 30, 2017).

The New Food Guy, Inc., a Colorado company doing business as Relish Catering, employed Bridgette Marlow to provide catering services. Relish paid Marlow a base wage of $12 an hour and $18 an hour for overtime. Although this was well above the $7.25 federal minimum required by the Fair Labor Standards Act (FLSA), Marlow sued Relish because it did not increase her wage with a share of the tips paid by customers. Relish moved for a judgment on the pleadings and the United States District Court for the District of Colorado held in its favor. After failing to get the Colorado court to reconsider the judgment, Marlow appealed.

Marlow argued that Section 203(m) of the FSLA applied and entitled her to a share of the tips. Section 203(m), known as the “tip-credit” provision, gives some employers (like hotels and restaurants) the option of paying a reduced wage of $2.13 so long as their workers receive enough tips to reach the $7.25 federal minimum, and any excess tips must go to employees.

The Tenth Circuit held that the tip-credit provision did not apply because Relish did not invoke it in the first place.  Contrary to Marlow’s argument that Section 203(m) requires employers with tipped employees to always give all tips to the employees, the provision merely permits employers to use the limited tip credit. The court stated, “[w]hen the employer does not take the tip credit, it must do only what all employers must do—pay the full minimum wage.”  That was easily satisfied by the $12 an hour that Relish paid.

Next, the court addressed Marlow’s second argument, that according to a United States Department of Labor (DOL) regulation “[t]ips are the property of the employee whether or not the employer has taken a tip credit under [Section 203(m)] of the FLSA.” The court acknowledged that Congress had empowered the DOL to promulgate “necessary” rules and regulations to fill “ambiguities” or “gaps” in statutes, but it held that the DOL had no such authority where there was no ambiguity or gap to fill, as in this case.

More specifically, the court wrote that Section 203(m) is not ambiguous because it clearly applies only when employers choose to use tips as credit against their employees’ minimum wage (as mentioned above).  The Tenth Circuit found that Section 203(m)’s silence about employers that decline the tip credit is not a “gap” that the DOL was authorized to fill.  That conclusion directly contradicts the Ninth Circuit’s decision in Oregon Restaurant & Lodging Ass’n v. Perez, which upheld the DOL’s regulation on the basis that the silence was a “gap.”

In sum, the Tenth Circuit gives employers the flexibility to pay above the minimum wage and retain customer-given tips without violating the FLSA.  Crucially, it also conflicts with the Ninth Circuit regarding the limits of the DOL’s authority with respect to tips.  The Supreme Court may resolve this split; a petition for writ of certiorari for Oregon Restaurant is currently pending.