The U.S. Department of Labor ("DOL") issued revisions to the Fair Labor Standards Act ("FLSA") regulations designed to implement various statutory amendments to the FLSA not previously reflected in the regulations. The new rules took effect on May 5, 2011. The most significant changes are to payments to tipped employees and on fluctuating workweek requirements:

Tipped Employees

An employer who wishes to apply tip credit allowances are required to inform its tipped employees, before utilizing the tip credit, of the following:

1. The amount of wage the employer will pay the employee, which cannot be less than $2.13 per hour;

2. The additional amount the employer will credit against tips received, which cannot exceed the difference between the minimum wage of the FLSA and the actual cash wage paid by the employer to the employee;

3. That the tip credit claimed will be not exceed the value of tips actually received;

4. That the tip credit will not apply 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 the valid pooling.

The new rules clarify that there is no cap on the amount an employer can require an employee to contribute to a valid tip pool. Further, in order for the employee to claim the maximum tip credit, the employer must show that the employee received at least that amount in tips. If the employee did not, the employer must pay the balance so that the employee receives at least the minimum wage when wages and tips are combined. See 29 C.F.R. § 531.59.

Fluctuating Workweek Method of Calculating Overtime

Except for certain employees properly classified as exempt employees, under the FLSA all other workers must be paid time and one half for all hours worked in excess of 40 hours within a given work week. For employers who compensate non-exempt employees on a salaried basis, the employer is still obligated to pay overtime pay. When a salaried nonexempt employee's hours fluctuate from week to week, the employer may use the "fluctuating workweek" method of calculating overtime under the FLSA, so long as there is a clear and mutual agreement between the employee and employer that the fixed salary is compensation for all hours worked in each work week, the salary amount is sufficient to meet applicable minimum wage rate for every hour worked, and the agreed-upon salary is paid even when a full schedule of hours is not worked by the employee.

The new rules finally shine a light on a question that had often been pondered by those working with the FLSA – how do incentive-based bonuses and commissions apply to the fluctuating workweek calculation? In defining "fixed salary", the revised regulations specifically prohibit receipt of bonuses (other than purely discretionary bonuses such as a Christmas Bonus), commissions, or any other compensation in addition to salary stating that such payments are inconsistent with the concept and would invalidate the fluctuating workweek methodology.

This narrow definition has been adopted effective May 5th, and reveals the DOL's dislike of the fluctuating workweek method. The new rule appears intended to deter the expanding use of the fluctuating workweek method of computing overtime beyond the scope of the current regulation.

Employers who want to continue using the fluctuating workweek method will need to revise their pay practices so that bonuses and premium pay are not paid to employees who are compensated using the fluctuating workweek method.

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