My argument is that potential complete control of tips by employers is an unjust misinterpretation of the FLSA.

I
would suggest that language in the CFR designed to undermine employee ownership of tips should be removed.
I agree that tip pools should be less restrictive in environments where wages are higher than the minimum, but
that regulations should require such arrangements to be transparent, fair, and agreed upon by employees As a
foundation for my argument, there are three important definitions in the FLSA that we must first understand. After
that, we will look at some portions of the CFR. We will then look at a Senate Report from 1974 and a number of
ensuing opinion letters. Finally, we will refer to 2008-2011 regulation changes and a few cases before Circuit
courts.

First, the FLSA Definitions:

(d) “Employer” includes any person acting directly or indirectly in the interest of an employer in relation
to an employee and includes a public agency, but does not include any labor organization (other than
when acting as an employer) or anyone acting in the capacity of officer or agent of such labor
organization.

(t) “Tipped employee” means any employee engaged in an occupation in which he customarily and
regularly receives more than $30 a month in tips.

(m) In determining the wage an employer is required to pay a tipped employee, the amount paid such
employee by the employee’s employer shall be an amount equal to—

(1) the cash wage paid such employee which for purposes of such determination shall be not less than
the cash wage required to be paid such an employee on August 20, 1996; and

(2) an additional amount on account of the tips received by such employee which amount is equal to the
difference between the wage specified in paragraph (1) and the wage in effect under section 206(a)(1) of
this title.

The additional amount on account of tips may not exceed the value of the tips actually received by an
employee. The preceding 2 sentences shall not apply with respect to any tipped employee unless such
employee has been informed by the employer of the provisions of this subsection, and all tips received
by such employee have been retained by the employee, except that this subsection shall not be
construed to prohibit the pooling of tips among employees who customarily and regularly receive tips.

While definitions of employer (employer or manager) and tipped employee (anyone receiving over $30 a month)
are fairly straightforward, the definition of wages is a little dense, so let me break it down for you. (m) An
employer must pay a tipped employee: (1) a cash wage of at least $2.13 and (2), a credited amount for
employee tips equal to minimum wage minus (1) cash wage paid. The credited amount cannot be more than tips
actually made.

The final sentence is awkwardly written and has led to some confusion in courts, but either possible
interpretation invalidates the retention of tips by employers. One reading says that the tip credit and subminimum
wage are not allowed unless the tipped employee is informed of the rules of the subsection and is allowed to
keep their tips, though they may be required to participate in a tip pool among tipped employees. However, the
comma after subsection could create an independent clause or parenthetical, making the only employer
requirement informing the employee of the subsection, the comma ensuring retention of tips by the employee
while allowing for a tip pool among tipped employees despite the employer’s inability to take a tip credit.

Bearing in mind the definitions for employer and tipped employee and that the tip credit is the only way for an
employer to count tips as a wage, there is no provision that allows for the employer to reallocate tips for any
other purpose, since the only amount usable by the employer is that which they account for as a wage in the tip
credit. All other tips belong to employees, notably tipped employees. Management, businesses, and employers
would necessarily be excluded from tips while in their role as employers because such a role would supersede
their role as an employee and only employees may be counted as tipped employees in (t).

Now on to the CFR. I have included proposed amendments in parentheses, color coded to note addition or
deletion. I have also commented on the proposed changes and their effect on the interpretation of the CFR,
including points which would undermine the FLSA. Bear in mind that the CFR is only allowed to interpret the
wording of the FLSA, not create laws itself.

§ 531.52 General characteristics of “tips.”

A tip is a sum presented by a customer as a gift or gratuity in recognition of some service performed for
him. It is to be distinguished from payment of a charge, if any, made for the service. Whether a tip is to
be given, and its amount, are matters determined solely by the customer, who has the right to determine
who shall be the recipient of the gratuity. (-Tips are the property of the employee whether or not the
employer has taken a tip credit under section 3(m) of the FLSA.-) The employer (+that takes a tip credit+)
is prohibited from using an employee's tips(-, whether or not it has taken a tip credit,-) for any reason
other than that which is statutorily permitted in section 3(m): As a credit against its minimum wage
obligations to the employee, or in furtherance of a valid tip pool. Only tips actually received by an
employee as money belonging to the employee may be counted in determining whether the person is a
“tipped employee” within the meaning of the Act and in applying the provisions of section 3(m) which
govern wage credits for tips.

The proposed amendments would breach customer faith that they are able to determine recipients of tips. By
deleting the 2011 protection and adding the wording that takes a tip credit, the CFR would tacitly allow
employers that do not take a tip credit to use tips (which belong to tipped employees) for purposes other than
use as tips. My proposed amendment, in order to maintain the FLSA protection that tips belong to employees
rather than the employer or business, would not delete the entire 2011 protection but instead amend “the
employee” to read “employees”. This would allow for tip pooling among all employees when the employer does
not take take a tip credit. It would also prevent the creation of dangerously broad loopholes that could open
employers up to litigation through misunderstanding of regulations and would prevent regulations from
undermining the definitions of tipped employees and employers as legislated in the FLSA.

§ 531.53 Payments which constitute tips.

In addition to cash sums presented by customers which an employee keeps as his own, tips received by
an employee include, within the meaning of the Act, amounts paid by bank check or other negotiable
instrument payable at par and amounts transferred by the employer to the employee pursuant to
directions from credit customers who designate amounts to be added to their bills as tips.

Many of the proposed amendments would undermine this definition of payments received as tips. It requires the
transference of tips from the employer to the employees.

§ 531.54 Tip pooling.

Where employees practice tip splitting, as where waiters give a portion of their tips to the busboys, both
the amounts retained by the waiters and those given the busboys are considered tips of the individuals
who retain them, in applying the provisions of section 3(m) and 3(t). Similarly, where an accounting is
made to an employer for his information only or in furtherance of a pooling arrangement whereby the
employer redistributes the tips to the employees upon some basis to which they have mutually agreed
among themselves, the amounts received and retained by each individual as his own are counted as his
tips for purposes of the Act. Section 3(m) does not impose a maximum contribution percentage on valid
mandatory tip pools, which can only include those employees who customarily and regularly receive
tips. However, an employer (+that takes a tip credit+) must notify its employees of any required tip pool
contribution amount, 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.

There is no need to add that takes a tip credit to this section as any tip pooling arrangement must be mutually
agreed upon as noted earlier in the definition and such an employer wouldn’t be able to take a tip credit anyway.
The only portion affected, then, would be the retention of tips for other purposes, which is clearly disallowed as
an employer can, by definition, not receive tips according to the FLSA.

§ 531.59 The tip wage credit

...With the exception of tips contributed to a valid tip pool as described in § 531.54, the tip credit
provisions of section 3(m) also require employers (+that take a tip credit+) to permit employees to retain
all tips received by the employee.
This amendment is clearly unnecessary and would only stand to be interpreted as allowing employers that don’t
take a tip credit to retain tips designated for employees, which clearly violates the FLSA.

As you can see, I believe that most of the suggested amendments would lead employers and the DOL into
dangerous misinterpretations of the law, which could lead to an increase in litigation instead of the expected
decrease. I do agree that the 2011 amendment of 531.52 could be used to prohibit wider tip pool arrangements
among employees, but deleting it could undermine the FLSA. I believe that my suggested change to the 2011
protection would ensure that tips remain property of employees, while allowing for wider tip pools and upholding
the legislative intent of the FLSA.

Speaking of legislative intent of the FLSA, many of the 2011 amendments were crafted to update the CFR to
reflect 1974 amendments to the FLSA. In 1974, the Senate amended the law to add the requirement that the
employer could not overreport tips received by the employee and that the tip credit and subminimum wage
would not be applicable unless the employee had been informed of the rules of the subsection and all tips had
been received by the employee, except for in the case of a tip pool among tipped employees. This amendment
was to provide protections for employees as outlined by the Senate's committee on labor and public welfare in
Senate report 93-690 and interpreted by a number of DOL opinion letters, which we will look at now

SR 93-690 says
"the original intent of Congress to place on the employer the burden of proving the amount of tips
received by tipped employees and the amount of tip credit, if any, which such employer is entitled to
claim as to tipped employees.”

“the bill specifically requires that the employer must explain the tip provision of the Act to the employee
and that all tips received by such employee must be retained by the employee. This latter provision is
added to make clear the original Congressional intent that an employer could not use the tips of a
"tipped employee" to satisfy more than 50 percent of the Act's applicable minimum wage."

“the employer will lose the benefit of this exception if tipped employees are required to share their tips
with employees who do not customarily and regularly receive tips e.g., janitors. dishwashers, chefs.
laundry room attendants, etc.”

As you can see, the legislative intent was to create a limited exception for tip credits that would be lost if the
employer required tip pools be shared with employees that are not customarily tipped. Again, I remind you that
managers and employers are not considered employees when they are in positions of control over employees,
which precludes their ability to be included in tip pools when they are in such positions.

FLSA-26 (6/21/1974) said

the 1974 amendments would have no meaning or effect unless they prohibited agreements that allowed
for employer retention of tips, saying,

“Under the amended Act, a tip becomes the property of the "tipped employee" in recognition of whose
service it is presented by the customer. The tip is given to the employee, not the employer. Thus, where
an employer acquires the tips of a tipped employee in contravention of section 3(m) and uses such tips
to pay the employee, the employee has in effect waived his rights to the minimum wage. However, an
employee, including a tipped employee, cannot waive his rights to be paid the applicable statutory
minimum wage or required overtime compensation. Moreover, no part of any tip repayments may be
counted towards satisfaction of the statutory minimum since the employee has been paid nothing by the
employer. It cannot be said that an employee has been paid by his employer when the money used is the
employee's own money.

Where the employee is a tipped employee under the definition in section 3(t) but the terms of either
section 3(m)(1) or (2) are not fully met, such an employee is excluded from the application of the tip
credit provision and, therefore, must receive payment from the employer of not less than the full
statutory minimum wage. Proper payment to the employee where this has been the case would require
the return to the employee of the tips which have been given to the employer plus payment of the full
statutory minimum wage (and overtime pay where applicable) for all hours worked in the workweek.

WH-310 (2/18/1975) echoed much of what was said in FLSA-626, noting:

An interpretation of the law permitting the use of a system [that, forgoing a tip credit, turns over tips to
an employer in exchange for a minimum wage] would have the effect of nullifying Section 3(m) as
amended. Under the proposed plan, instead of using the employee's tips for paying a maximum of 50%
of the minimum statutory rate, the employer would use his employee's tips to satisfy as much as 100%
of the monetary requirements of the Act. Thus, if the employee received $2.00 an hour or more in tips,
the employer would pay him simply by returning to him his tips. The amendments to section 3(m) of the
Act would have no meaning or effect unless they prohibit agreements whereby tips are credited or
turned over to the employer for use by the employer in satisfying the monetary requirements of the Act.
The 1974 amendments were added to make it clear that an employee who receives $20 a month in tips is
a "tipped employee" under Section 3(t), and that the parties may not agree to an arrangement where the
employee's tips are used to satisfy the employer's minimum wage obligation.

an employer may not take advantage of Section 3(m) by using any part of his employee's tips as a credit
to meet his monetary obligation unless the employee is permitted to keep all tips. If the employer
requires his employee to turn all or part of his tips over to him, then, in order to come into compliance,
such employer must return the tips and pay the full statutory minimum wage. As pointed out above,
such portions of 29 CFR 531.55, which seem to permit a system such as that proposed, have been
superseded by the 1974 amendments.

Under the prototype employment agreement the employee does not retain his tips and, as spelled out in
the opinion letter and reiterated in the paragraph preceding, the tip credit allowed to the employer of a
tipped employee can not be taken. Nor will the intent of the Act be satisfied by the employer's use of the
employee's income to meet his statutory obligation to pay wages at a rate not less than the minimum
standard.

WH-321 (4/30/1975) added to the preceding two, saying:

[Legislative] history makes it clear that the term "wages" as defined in Section 3(m) does not include
"tips'," except to the extent that employers having tipped employees may, under certain circumstances,
count tips as wages but only up to 50 percent of the applicable minimum.

To understand the significance of the 1966 and 1974 amendments to Section 3(m), it is helpful to review
the situation as it existed with respect to tipped employees before' that section was amended. Thus, as
early as 1942, it had been held that employers having tipped employees could require them to make a
daily accounting of their tips in exchange for which the employer would guarantee them at least the
minimum prescribed by the Act. See, for example, Williams v. Jacksonville Terminal Company, 315 U.S.
386, where, in so holding, the Supreme Court noted that Section 3(m) made no reference to "tips."

Now, however, the situation of a "tipped" employee is far different. As pointed out in the Senate Report
which accompanied the Fair Labor Standards Amendments of 1974, the Congressional purpose in
amending Section 3(m) was to·', make it clear "that an employer could not use the tips of a 'tipped
employee' to satisfy more than 50 percent of·the Act's applicable minimum wage" and to insure "that all
tips received by such employee must be retained by the employee"except to the extent that there is an
arrangement for the "pooling of tips among employees who customarily and regularly receive tips"

Although, as you suggest, Section '3(m) now provides an exception from the Act's minimum wage
requirements, it is a limited exception which permits employers to take a tip credit against the applicable
minimum in an amount not to exceed 50 percent of such minimum. If an employer should elect not to
avail himself of this limited exception, he would have to pay his tipped employees in accordance with
the Act '.s minimum wage standards and, in addition, allow them to keep their tips since, as pointed out
in 29 CFR 531, “A tip is a sum presented by a customer as a gift or gratuity in recognition of some
service performed for him.” This section of our interpretation bulletin was expressly approved in S.Rept.
93-690, p. 42.

It is realized that our position as expressed in certain other parts of 29 CFR 531 is not in line with the
opinion given you in my letter of October 3, 1974, and reaffirmed in this communication, but those parts
of our interpretative bulletin have been superseded by Section 3(m) as modified in 1974 and the
Department is in the process of revising its bulletin.

We see the same message in all the opinion letters in different words.
1)Tips are not wages except for when applied as a tip credit.
2) Tips belong to employees, not employers.
3) The CFR should be updated to reflect the amendment’s intent.

Unfortunately, the DOL did not revise the CFR to reflect the 1974 amendments in a timely manner, leading to a
number of outdated regulations remaining on the books and a lack of clear understanding as to proper
implementation of 3(m) and (t). I will now address the DOL’s rule changes as commenced in 2008 and finalized
in 2011. Because their causes and effects are interwoven, I will address a court decision between the two.

In 2008, the DOL finally sought to update those portions of the CFR to "eliminate references to employment
agreements providing either that tips are the property of the employer or that employees will turn tips
over to their employers, and clarify that the availability of the tip credit provided by section 3(m) requires
that all tips received must be paid out to tipped employees in accordance with the 1974 amendments."

Meanwhile, In 2010, while the DOL was still receiving opinions on the proposed CFR changes, the 9th Circuit
Court of Appeals made a decision in the case of Cumbie v. Woody Woo, Inc., in which servers receiving Oregon
minimum wage were required to contribute their tips to a tip pool. The servers subsequently received 30-45% of
the tips while the kitchen staff received 55-70%. The court found in favor of the employer.

The opinion of Judge Diarmuid F. O’Scannlain is that the decision was made based on supposed
statutory silence of the unamended text of § 531.52 (“In the absence of an agreement to the contrary between
the recipient and a third party, a tip becomes the property of the person in recognition of whose service it is
presented by the customer.”), noting Williams v. Jacksonville. The court refused the DOL’s amici brief on proper
interpretation of the FLSA and upcoming rule changes. In the footnotes, he recognized: “Although the parties
and amici debate whether this and other Department of Labor regulations governing tips are still valid,
we note that the Secretary of Labor has not bothered to amend them in over forty years. At any rate,
because we conclude that the meaning of the FLSA’s tip credit provision is clear, we need not decide
whether these regulations are still valid and what level of deference they merit.” (Chevron Deference)
Cumbie, the employee, argued that 203(m) had overruled Williams, rendering tip redistribution agreements
invalid. The court preferred a plain text interpretation of the FLSA definition, stating that it defined conditions on
taking a tip credit rather than requirements pertaining to all tipped employees. Cumbie then argued that the court
decision nullified legislation by functionally taking a tip credit by using a tip-pooling arrangement to subsidize the
wages of its non-tipped employees. The money saved in wage payments is more money in Woo’s pocket, which
is financially equivalent to confiscating Cumbie’s tips via a tip credit (with the added benefit that this “de facto” tip
credit allows Woo to bypass section 203(m)’s conditions). The court said “we do not find [this] possibility... so
absurd or glaringly unjust as to warrant a departure from the plain language of the statute.”

The DOL in 2011, however, did find it absurd. They addressed the Cumbie decision by noting: “The Ninth
Circuit did not read section 3(m) as imposing any limitations on the use of an employee's tips when a tip
credit is not taken. The court thus rejected the Department's position in its amici brief that Woody Woo
made improper deductions from the cash wage paid when it required its employees to contribute their
tips to an invalid tip pool, and that this improper deduction resulted in a minimum wage violation
because the tipped employees did not receive the full minimum wage plus all tips received.”

The Department believes the Ninth Circuit incorrectly concluded that the 1974 amendments to the FLSA
did not alter what it characterized as Jacksonville Terminal's default rule. The fact that section 3(m) does
not expressly address the use of an employee's tips when a tip credit is not taken leaves a “gap” in the
statutory scheme, which the Department has reasonably filled through its longstanding interpretation of
section 3(m). The Ninth Circuit's “plain meaning” construction is unsupportable. Congress would not
have had to legislatively permit employers to use their employees' tips to the extent authorized in
section 3(m) unless tips were the property of the employee in the first instance. In other words, if tips
were not the property of the employee, Congress would not have needed to specify that an employer is
only permitted to use its employees' tips as a partial credit against its minimum wage obligations in
certain prescribed circumstances because an employer would have been able to use all of its
employees' tips for any reason it saw fit. If, as the Ninth Circuit held, the FLSA places limitations on an
employer's use of its employees' tips only in the context of a tip credit, an employer could simply
eschew the tip credit and use a greater part of its employees' tips toward its minimum wage obligations
than permitted under section 3(m). This would stand the 1974 amendment “on its head” and would mean
it has “accomplished nothing.” If an employer could avail itself of this loophole, it would have no reason
to ever elect the tip credit because, instead of using only a portion of its employees' tips to fulfill its
minimum wage obligation, it could use all of its employees' tips to fulfill its entire minimum wage
obligation to the tipped employees or other employees. This is essentially what the panel's decision
permits, because if there are no restrictions on an employer's use of its employees' tips when it does not
utilize a tip credit, the employer can institute a mandatory tip pool that requires employees to contribute
all of their tips regardless of how much they receive back, or mandate that employees turn over all of
their tips and use those tips to pay the minimum wage or for any other purpose.

In the same document, the DOL finally revised regulations to curtail abuse of improperly executed tip pools,
mainly by stating (as outlined in the 1974 amendments and Senate Report 93-690) that tips belong to the
employees regardless of whether the employer takes advantage of the tip credit, reminding us that:

1) "Prior to the 1974 amendments, the compensation of tipped employees was often a matter of
agreement. Tipped employees could agree, for example, that an employer was only obligated to pay
cash wages when an employee's tips were less than the minimum wage, or that the employee's tips
would be turned over to the employer, who could then use the tips to pay the full minimum wage."

2) "The Department's current regulations, which were in effect prior to the 1974 amendments and
allowed an employer to require employees to turn over all their tips to the employer, were therefore
superseded by the statutory amendment to the extent that they permitted employers to utilize
employees' tips to satisfy more than 50% of their minimum wage obligation."

3) “An employer's only options under section 3(m) are to take a credit against the employee's tips up to
the statutory differential, or to pay the entire minimum wage directly.”

As a result of the Cumbie decision, the subsequent rule changes, and the DOL’s harsh critique of the Cumbie
ruling and refusal of the department’s amicus curie brief, there has been an increase in litigation over tip pooling
and a variety of contradictory opinions.

10th Circuit’s Marlow v. New Food Guy, Inc., was decided to allow the employer to retain all tips so long as no tip
credit is taken.

11th Circuit dismissed Malivuk v. Ameripark, which involved a valet driver who, having been promised an hourly
wage plus tips, discovered that their employer diverted a portion of the tip money to offset other business
expenses including valet employee hourly wages.

Another important case is ORLA v. Perez, which invalidated the Cumbie decision in the 9 th Circuit, citing the
2011 regulation changes and the DOL’s opinion. In Cesarz v. Wynn, the 9th Circuit found in favor of casino
dealers that had been required to share tips with supervisors.

Currently, both ORLA and Cesarz are being represented by the National Restaurant Association against the
DOL in the Supreme Court (Sup. Ct. No. 16-163). They are seeking a writ of certiorari on past decisions,
including Williams v. Jacksonville Terminal Co. and Cumbie v. Woody Woo, the 1974 amendments to the FLSA,
and the resultant 2011 Regulation Changes. It is my personal opinion, given the variety of contradictions by
lower courts and the Department of Labor, that an opinion from the Supreme Court would help to clarify
legislative intent and the past 70 years of opinions and court decisions.
The current administration and National Restaurant Association would prefer that the Department of Labor
amend the current regulations to remove protections of employees to receive gifts from customers when said
employee is given a minimum wage instead of their employer taking advantage of the tip credit.

This brings us full circle to the proposed 2017 amendments to the Code of Federal Regulations. As I said before,
I believe that there are good reasons to allow for more lenient applications of tip pools when all employees are
paid a full minimum wage but such regulations should be carefully crafted to prevent abuse. Also, the idea that
forgoing the allowance for a tip credit could somehow transfer ownership of tips from employees to an employer
is absurd and an unsupportable misinterpretation of the FLSA, legislative intent, and court rulings. While
opponents of this rule change will suggest that would reduce litigation surrounding tip pools, I believe that it
would do exactly the opposite by attempting to nullify legislation through court decisions and administrative
deregulations.

In closing, I feel it is appropriate to mention that I believe this entire discussion is a result of a misapplication of
the Chevron Deference. For this reason, I quote Justice Murphy's Supreme Court decision in Tennessee Coal
Co. v. Muscoda (1944): These provisions, like the other portions of the Fair Labor Standards Act, are
remedial and humanitarian in purpose. We are not here dealing with mere chattels or articles of trade,
but with the rights of those who toil, of those who sacrifice a full measure of their freedom and talents to
the use and profit of others. Those are the rights that Congress has specially legislated to protect. Such
a statute must not be interpreted or applied in a narrow, grudging manner.